[Bugs]

This trend will be working for years, not months. Between now and the time the trend truly reverses there probably will be at least a couple mini-rallies.

I would urge everyone to stop looking at prices as the primary measure of “progress” and keep an eye of the ratio of sales to listings. It’s okay to watch price trends for the entertainment value, but that’s just the egg – the chicken is the supply/demand dynamic.

There is a chance the pricing may decline less than some of us may think, but there is also the chance that the declines may be greater than we think too. The 50% correction a lot of us talk about only reaches the long term trend without passing it. So far, all corrections have had a corresponding overcorrection, which in this cycle would point to price declines well in excess of 50% off peak.

My opinion only – stop watching prices as the barometer and use supply/sales instead. When they approach a more reasonable level the price declines will slow and eventually reverse.

[Bugs]

There is no such thing as a “static” market; it’s either going to be expanding or contracting. Right now we’re in contraction and headed toward a correction of some extreme distortions.

Those distortions were enabled by the east credit, but that wasn’t the primary cause – the primary cause was the investors and flippers and ladder-climbing home buyers who saw short term profits to be made. This is where the additional demand came from, and when this additional demand left the market there were no GF buyers to take their place – hence the current surplus of inventory.

The only way the current contraction reverses is if these investors come back into the market and the only way they’ll do that is if they can see there is a buck to be made over the short term. In other words, even if we could “stabilize”, it couldn’t hold because stable isn’t increasing and without increasing there is no upside, and hence no investors to absorb all that surplus inventory and create shortages that would lead to further increases.

Even if we could get back to the profit incentive necessary to reverse course, an increasing trend cannot continue indefinitely – sooner or later it will have to correct to correspond to the underlying fundamentals. Many people (myself included) would argue that this current trend wouldn’t be so bad for so many people had it happened 4 years ago when we were only 25% above the long term trends. It was the hyperextension of that uptrend that led to the extreme distortions that are only now being reversed.

I’m sure everyone here is familiar with the term “The bigger they are the harder they fall” ??? We have had an unprecedented spike, who here can envision anything other than a correspondingly extreme correction to that spike?

[Bugs]

There is no such thing as a “static” market; it’s either going to be expanding or contracting. Right now we’re in contraction and headed toward a correction of some extreme distortions.

Those distortions were enabled by the east credit, but that wasn’t the primary cause – the primary cause was the investors and flippers and ladder-climbing home buyers who saw short term profits to be made. This is where the additional demand came from, and when this additional demand left the market there were no GF buyers to take their place – hence the current surplus of inventory.

The only way the current contraction reverses is if these investors come back into the market and the only way they’ll do that is if they can see there is a buck to be made over the short term. In other words, even if we could “stabilize”, it couldn’t hold because stable isn’t increasing and without increasing there is no upside, and hence no investors to absorb all that surplus inventory and create shortages that would lead to further increases.

Even if we could get back to the profit incentive necessary to reverse course, an increasing trend cannot continue indefinitely – sooner or later it will have to correct to correspond to the underlying fundamentals. Many people (myself included) would argue that this current trend wouldn’t be so bad for so many people had it happened 4 years ago when we were only 25% above the long term trends. It was the hyperextension of that uptrend that led to the extreme distortions that are only now being reversed.

I’m sure everyone here is familiar with the term “The bigger they are the harder they fall” ??? We have had an unprecedented spike, who here can envision anything other than a correspondingly extreme correction to that spike?

[Bugs]

There is no such thing as a “static” market; it’s either going to be expanding or contracting. Right now we’re in contraction and headed toward a correction of some extreme distortions.

Those distortions were enabled by the east credit, but that wasn’t the primary cause – the primary cause was the investors and flippers and ladder-climbing home buyers who saw short term profits to be made. This is where the additional demand came from, and when this additional demand left the market there were no GF buyers to take their place – hence the current surplus of inventory.

The only way the current contraction reverses is if these investors come back into the market and the only way they’ll do that is if they can see there is a buck to be made over the short term. In other words, even if we could “stabilize”, it couldn’t hold because stable isn’t increasing and without increasing there is no upside, and hence no investors to absorb all that surplus inventory and create shortages that would lead to further increases.

Even if we could get back to the profit incentive necessary to reverse course, an increasing trend cannot continue indefinitely – sooner or later it will have to correct to correspond to the underlying fundamentals. Many people (myself included) would argue that this current trend wouldn’t be so bad for so many people had it happened 4 years ago when we were only 25% above the long term trends. It was the hyperextension of that uptrend that led to the extreme distortions that are only now being reversed.

I’m sure everyone here is familiar with the term “The bigger they are the harder they fall” ??? We have had an unprecedented spike, who here can envision anything other than a correspondingly extreme correction to that spike?

[Bugs]

I wonder how a lender goes about foreclosing on one of these loans? Leave the performing borrower(s) intact while attributing their losses only to the borrower that is in default?

I could see how such a program might work for a 2-4 property. Get two households together to purchase a duplex or a 2/lot property. Kinda like a condo.

[Bugs]

I wonder how a lender goes about foreclosing on one of these loans? Leave the performing borrower(s) intact while attributing their losses only to the borrower that is in default?

I could see how such a program might work for a 2-4 property. Get two households together to purchase a duplex or a 2/lot property. Kinda like a condo.

[Bugs]

I wonder how a lender goes about foreclosing on one of these loans? Leave the performing borrower(s) intact while attributing their losses only to the borrower that is in default?

I could see how such a program might work for a 2-4 property. Get two households together to purchase a duplex or a 2/lot property. Kinda like a condo.

[Bugs]

AfF,

re: Morro Hills, I completely agree. I think that area’s better proximity to 76 makes a lot of difference. I didn’t mention it before ’cause – sight unseen – I didn’t want to come across as dogpiling on to what appears to be a marginal situation. Everything else I mentioned is bad enough.

BTW, if your house was at $810k before you’re probably a fair bit better off now than the low $600s. It’s tough out in 92028, but 3,250/1.19 is still pretty marketable.

[Bugs]

AfF,

re: Morro Hills, I completely agree. I think that area’s better proximity to 76 makes a lot of difference. I didn’t mention it before ’cause – sight unseen – I didn’t want to come across as dogpiling on to what appears to be a marginal situation. Everything else I mentioned is bad enough.

BTW, if your house was at $810k before you’re probably a fair bit better off now than the low $600s. It’s tough out in 92028, but 3,250/1.19 is still pretty marketable.

[Bugs]

“I think we’re moving past the point of talking about BUMPY rides.”

I type faster than I spell.

[Bugs]

“I think we’re moving past the point of talking about BUMPY rides.”

I type faster than I spell.

[Bugs]

The Fallbrook property is in the MLS. According to the listing it was listed in 12/2006 at $654,900 and later reduced to $474,900. It took 134 days exposure before it did sell. I’d call the final sales price well tested in the market. It’s not like there was a line of buyers for it at $475k.

The photos in the MLS listing and the description from the article depict a home of very average quality and below average condition. On the plat map the lot looks almost square and it may have a little topography, but it possibly 100% usable (if so, that’s good). I’ve seen tons of properties like this throughout Fallbrook over the years – I don’t see anything noteworthy about it.

I ran an MLS search for homes in a comparable age range (1960 – 1986) based on it’s design, comparable size (1,700 – 2,600), and lot area 0.80 – 2.00 acres), in a 2-mile radius and came up with a total of 12 sales (including the subject) since 01/2007; Of these, 6 went down in 06/2007 or 07/2007.

Of the 12, our property was the lowest sale. The next one up was also a foreclosure sale, at $480k – larger house but the usable lot area may be less.

The next 6 sales include the properties that on paper would appear to reflect generally similar design and features; they range from $525k – $585k, and include at least two homes with refurbish/remodel at that upper end. The last 4 sales range from $640k – $725k and include remodeled homes and MUCH nicer homes that most people would probably consider as being superior to our property. I don’t see where an $800k value could come from in this area for a 1974 property of this type design on a 1 acre lot.

I’d question how “conservative” the $580,000 appraisal is and/or whether that appraisal may have been based on the “as repaired” condition. The property that looks most indicative of our property after a minor remodel/refurbish on that list is the following property:

25** Havencrest Dr
2,000 SqFt 3/2 on 1.12 acres;

Very similar construction with workshop and room for a horse (stalls and corrals do not convey). Remodeled kitchen and Travertine floors, dual pane windows, spa tubs, etc. This is the property I think might be most similar to our property after he gets done spending $80k on it. It sold for $585,000 in 06/2007.

There is another property I like quite a bit:

*** Park Ridge

2258 SqFt 4/2 on 1.07 acres “relaxing pool”, but nothing special beyond that. It sold in 06/2007 for $580,000 and is the closest sale to out property, being just north off of Live Oak. I’d rate this as a little inferior to the Havencrest property overall because of condition but it is larger and it does have the pool, so that pretty much demonstrates how the market reacts to the different features between these two properties. I’d rate it a lot superior to the what is being described for our property’s “as is” condition.

The break even point for this flip would probably be somewhere around $585k ($470,000 purchase + $80k refurbish + 5% cost of sales). That would net zero profits for the seller and indeed it would represent a net loss when considering the labor. He might end up with a house that’s a bit better than Havencrest by virtue of it being a little newer, but I can see no way how it would be better than the fully remodeled home on Morro Hills Rd (1977yb 2157 SqFt on 1.17 ac) that sold in 07/2007 for $640,000.

Of course, a lot would depend on what he’s doing with that $80k. The article includes a photo of him digging for a pad for a propane tank – that’s not the type of improvement that buyers would normally pay for. Ditto for the yard cleanup. I doubt that flooring, paint, baseboards and door casings would make this house competitive with either of the properties I listed above. I assume he’s going to include a reasonable kitchen/bath remodel, but I wouldn’t assume that dual paned windows, A/C or other upgrades would be included. Maybe so, though – you never know.

I hope this seller has a day job.

[Bugs]

The Fallbrook property is in the MLS. According to the listing it was listed in 12/2006 at $654,900 and later reduced to $474,900. It took 134 days exposure before it did sell. I’d call the final sales price well tested in the market. It’s not like there was a line of buyers for it at $475k.

The photos in the MLS listing and the description from the article depict a home of very average quality and below average condition. On the plat map the lot looks almost square and it may have a little topography, but it possibly 100% usable (if so, that’s good). I’ve seen tons of properties like this throughout Fallbrook over the years – I don’t see anything noteworthy about it.

I ran an MLS search for homes in a comparable age range (1960 – 1986) based on it’s design, comparable size (1,700 – 2,600), and lot area 0.80 – 2.00 acres), in a 2-mile radius and came up with a total of 12 sales (including the subject) since 01/2007; Of these, 6 went down in 06/2007 or 07/2007.

Of the 12, our property was the lowest sale. The next one up was also a foreclosure sale, at $480k – larger house but the usable lot area may be less.

The next 6 sales include the properties that on paper would appear to reflect generally similar design and features; they range from $525k – $585k, and include at least two homes with refurbish/remodel at that upper end. The last 4 sales range from $640k – $725k and include remodeled homes and MUCH nicer homes that most people would probably consider as being superior to our property. I don’t see where an $800k value could come from in this area for a 1974 property of this type design on a 1 acre lot.

I’d question how “conservative” the $580,000 appraisal is and/or whether that appraisal may have been based on the “as repaired” condition. The property that looks most indicative of our property after a minor remodel/refurbish on that list is the following property:

25** Havencrest Dr
2,000 SqFt 3/2 on 1.12 acres;

Very similar construction with workshop and room for a horse (stalls and corrals do not convey). Remodeled kitchen and Travertine floors, dual pane windows, spa tubs, etc. This is the property I think might be most similar to our property after he gets done spending $80k on it. It sold for $585,000 in 06/2007.

There is another property I like quite a bit:

*** Park Ridge

2258 SqFt 4/2 on 1.07 acres “relaxing pool”, but nothing special beyond that. It sold in 06/2007 for $580,000 and is the closest sale to out property, being just north off of Live Oak. I’d rate this as a little inferior to the Havencrest property overall because of condition but it is larger and it does have the pool, so that pretty much demonstrates how the market reacts to the different features between these two properties. I’d rate it a lot superior to the what is being described for our property’s “as is” condition.

The break even point for this flip would probably be somewhere around $585k ($470,000 purchase + $80k refurbish + 5% cost of sales). That would net zero profits for the seller and indeed it would represent a net loss when considering the labor. He might end up with a house that’s a bit better than Havencrest by virtue of it being a little newer, but I can see no way how it would be better than the fully remodeled home on Morro Hills Rd (1977yb 2157 SqFt on 1.17 ac) that sold in 07/2007 for $640,000.

Of course, a lot would depend on what he’s doing with that $80k. The article includes a photo of him digging for a pad for a propane tank – that’s not the type of improvement that buyers would normally pay for. Ditto for the yard cleanup. I doubt that flooring, paint, baseboards and door casings would make this house competitive with either of the properties I listed above. I assume he’s going to include a reasonable kitchen/bath remodel, but I wouldn’t assume that dual paned windows, A/C or other upgrades would be included. Maybe so, though – you never know.

I hope this seller has a day job.

[Bugs]

The overall number of bad loans relative to the number of loans made isn’t that high, but the dollar amounts stemming from those losses are sizable. How many good loans does a lender have to make in order to pay off the losses stemming from the one foreclosure where they lose $75k or $100k? What happens when those principle losses start exceeding $150k per foreclosure, AS IS ALREADY HAPPENING in some Riverside County neighborhoods? There’s profit in making a loan and selling it off to the secondary market but that margin isn’t THAT big. These lenders aren’t being driven under by a lack of demand, they’re going down because of the margin calls.

I think the big story here really is going to turn out to be the credit contraction and it’s results.

If you hold the notion that prices locally were driven that high by speculators and marginal buyers who were enabled by easy credit, it would follow that a credit contraction will have the opposing effect. Many of the banks are losing money right now, many of the secondary market investors are losing money right now. Eventually the only way they’ll continue to participate is if the reward justifies their perceived risks. More negative press contributes to more negative perceptions above and beyond those that would already be justified by these losses.

All indications going forward are that credit is going to be both much more difficult to obtain and much more expensive. A 10% mortgage interest rate may not be outside the realm of possibilities in our near future.

At street level that means more downpayment requirements, more underwriting of credit and income requirements, more scrutiny of the collateral valuations (appraisals and automated valuation products) and higher interest rates. If the investors were hyper agressive before the opposing corollary will be hyper conservatism, which will be reflected by higher interest rates.

The $800k house may end up costing the $575k price just because of financing, but that won’t change the amount of the payment or the ability of the borrowers to make that payment.

$800,000 @ 6.5% = $5,030/month
$575,000 @ 10.% = $5,004/month

Poof, the previous buyers in that neighborhood are now down $225k. That’s just the effects of financing, alone and apart from any other factors.

Because there will be less room for monkey business, only those borrowers who really are able to pay will be getting those loans. That doesn’t even touch the underlying dynamics of a regional economy that has been largely subsidized – if not driven – by the real estate industrial complex. Fewer RE-related jobs = fewer buyers who can make the high-dollar house payments. The combination speaks to the “effective” half of the term “effective demand”.

More buyers will be reluctant to commit, more buyers will reduce their maximum housing expenditures and will decline to pay the 50+% of their income for housing in lieu of other alternatives. That speaks to the “demand” half of the term “effective demand”.

I think we’re moving past the point of talking about bumby rides.

[Bugs]

The overall number of bad loans relative to the number of loans made isn’t that high, but the dollar amounts stemming from those losses are sizable. How many good loans does a lender have to make in order to pay off the losses stemming from the one foreclosure where they lose $75k or $100k? What happens when those principle losses start exceeding $150k per foreclosure, AS IS ALREADY HAPPENING in some Riverside County neighborhoods? There’s profit in making a loan and selling it off to the secondary market but that margin isn’t THAT big. These lenders aren’t being driven under by a lack of demand, they’re going down because of the margin calls.

I think the big story here really is going to turn out to be the credit contraction and it’s results.

If you hold the notion that prices locally were driven that high by speculators and marginal buyers who were enabled by easy credit, it would follow that a credit contraction will have the opposing effect. Many of the banks are losing money right now, many of the secondary market investors are losing money right now. Eventually the only way they’ll continue to participate is if the reward justifies their perceived risks. More negative press contributes to more negative perceptions above and beyond those that would already be justified by these losses.

All indications going forward are that credit is going to be both much more difficult to obtain and much more expensive. A 10% mortgage interest rate may not be outside the realm of possibilities in our near future.

At street level that means more downpayment requirements, more underwriting of credit and income requirements, more scrutiny of the collateral valuations (appraisals and automated valuation products) and higher interest rates. If the investors were hyper agressive before the opposing corollary will be hyper conservatism, which will be reflected by higher interest rates.

The $800k house may end up costing the $575k price just because of financing, but that won’t change the amount of the payment or the ability of the borrowers to make that payment.

$800,000 @ 6.5% = $5,030/month
$575,000 @ 10.% = $5,004/month

Poof, the previous buyers in that neighborhood are now down $225k. That’s just the effects of financing, alone and apart from any other factors.

Because there will be less room for monkey business, only those borrowers who really are able to pay will be getting those loans. That doesn’t even touch the underlying dynamics of a regional economy that has been largely subsidized – if not driven – by the real estate industrial complex. Fewer RE-related jobs = fewer buyers who can make the high-dollar house payments. The combination speaks to the “effective” half of the term “effective demand”.

More buyers will be reluctant to commit, more buyers will reduce their maximum housing expenditures and will decline to pay the 50+% of their income for housing in lieu of other alternatives. That speaks to the “demand” half of the term “effective demand”.

I think we’re moving past the point of talking about bumby rides.

[Author]

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