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I’d say that any RE professional who hasn’t already been through a complete cycle literally lacks the experience. That’s not to say they can’t make up for it by keeping an open mind and looking at the data. If memory serves both SDRealtor and sdrealtor came into the business during this upwswing, but the both make up for that lack of (that) experience by having and using their critical thinking skills.

Try to remember the typical RE agent is not a college grad, has no professional experience with qualitative or quantitative analysis, and only knows as much about RE as they learned in their Anthony School’s Introduction to Real Estate courses. They depend on David Leahrah and their local Diamond Level upline to tell them what to think and what to say. You probably are better off talking trends with the guy who runs the hardware store down the street- he’s at least been through it all before.

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Many of the apartment properties were financed with loans that have a 30yr amortization, but a 5-year call. This means they get refinanced every five years. We’re probably getting close to some of those resets, at which time we’re going to see if their increases in net income are sufficient to refinance.

I don’t necessarily see a huge problem right now unless the commercial mortgage interest rates jump up. A borrower whp’s been paying on a loan for 5 years has a little more equity than they started with. Although there have been rent increases, the expenses have been increasing too so net income hasn’t increased that much. Vacancy rates are relatively stable so that isn’t much of a problem right now, unlike what happened during the ’90s.

One of the reasons we had a lot of problems with apartments in the 1990s was because we had a glut of apartments as a result of the number of projects built during the mid 1980s. This time, they added almost no apartment properties on the lower end of the size ranges and relatively few of the large projects. We don’t have 15% vacancy rates this time.

Of the few sales that are closing it is apparent that we still have some investors who have an unrealistic view of where those rents are going. It doesn’t make any sense to buy a rental property with a annual gross income multiplier of 15 (that’s equal to a GRM of 180) and a 35% expense ratio UNLESS you think that either the rents or the value is going to increase significantly in the short term. And I’m not talking about 3% increases here, either.

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This is a horrible time to buy multi-family units, which is why there are very few sales right now. They’re very overpriced relative to their earnings.

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You can tell those borrowers aren’t viable, otherwise they’d be able to refi out of those loans. Extending the teaser rates won’t help them. Alls it will do is cause the lienholders more losses.

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I really wish I didn’t have to say this, but a deal like this doesn’t get done without an appraiser enabling it. Whether it’s as a result of stupidity – appraiser can’t tell when a sales price is higher than the list – or outright dishonesty, the results are the same.

The appraiser is REQUIRED to review the sales contract and analyze the sales transaction as part of the appraisal process for those mortgages. Even if an agent hands an appraiser a doctored sales contract, the appraiser should be able to tell when a sales price exceeds a listing price, and when the sale price itself is not supported by the comps.

After all, the whole point of getting a 3rd party appraisal is (supposedly) to help the lender avoid making loans that aren’t entirely secured by the collateral.

Most likely the appraisal for that loan is a POS, and it’s equally likely that the lender’s underwriting process failed in not catching it. The appraiser is at fault for enabling the lie, the Lender is at fault for not checking up on the appraisal, the loan originator is at fault because they’re probably the one who coerced the appraiser to enable the deal, and the agents who conspired to put this whole thing together are at fault. Of these parties, it is the appraiser who deserves the most punishment because their sole job is to be honest and tell the truth. We expect the advocates to advocate; we expect the appraiser to be unbiased and tell it like it is.

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Those arguments do make some sense when prices are as distorted as they are right now. However, if/when the prices drop back down below the long term trend again the cost of owning the home will be a lot closer to rent. At that point, a homebuyer has an opportunity to control their housing costs.

Here’s an example: I have a friend who bought a home in 1997 for $185k and subsequently refinanced – without taking any money out – when the interest rates dropped to 6%. Not counting his home improvement costs, his PITI (Principle, Interest, Taxes and Insurance) costs are about 30% less than his rent would be on that same house.

Now granted, he did put in a $15k downpayment, but the point remains – it’s now cheaper for him to stay in his 2-story house 4bd/3ba house than it is to rent a 3bd apartment of similar age and half the size. That leverage will increase as the long term trend progresses, and will jump when the mortgage is finally paid off. Prop 13 will continue to limit his property taxes to whatever the present value of $2,500/year is in perpetuity. The feds could do away with the mortgage interest exemptions and he’d still be way ahead.

Besides that, there is the opportunity to leave an inheritable estate, which would be of tremendous economic benefit to the heirs if it passes in one piece.

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I’m still very skeptical that any property owner – particularly one who works in the RE business – is going to just walk away from $75k in equity in that price range.

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The press approaches this subject with the depth of a 9th grade textbook. The politicians are coasting on those general themes under the (correct) assumption that the majority of the electorate has an equally shallow grasp of the subject. It’s about the votes and nothing but the votes.

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These people aren’t in trouble because of the terms of their loans; they’re in trouble because their income isn’t sufficient in relation to the amount of money they borrowed.

It might be appealing to think that the gov’t and Wall Street can work together to come up with “new tools” to apply to this problem but the simple fact of it is that these tools all have costs. They can’t be effective in a situation where a borrower owes more than they can pay. These investors have money out on the street and they require return of and on investment capital. They might forego getting the return on their investment, but they cannot forego getting the return of their capital and there’s no reason to think they should.

This end of the cycle is just starting in the metro markets across the nation. While not all the markets are overextended, there are enough of the metro markets that are to make these finger-in-dyke proposals pointless.

Locally, there are still a lot of problems with the intertwined trends of the declining prices and the demise of mortgage-capable employment. Let’s be real here, the creation of retail jobs down at the mall isn’t a substitute for the RE dependent jobs that are vanishing every week. Service jobs can’t pay these mortgages even at the teaser rate.

It’s a trend and we’re just a few months way from that trend taking on a life of its own. At that point it won’t matter what jobs are in town because the market psychology will drive the pricing all by itself. Irrational exuberance has an evil twin and we’re about to meet it (again).

Stick a fork in it because it’s done.

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Yeah, they borrowed the $30k all right, but unlike the rest of the purchase price, this portion of the loan is not justified by the value of the home. The lender doesn’t realize what the true sales price was, and they’ve overencumbered the property as a result of that ignorance. It’s as if they issued an unsecured $30,000 credit card, except they don’t realize they’ve done it.

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The thing you want to remember about Fannie and Freddie is that they are publicly traded companies that are in business to make a profit and must answer to their shareholders. Offhand, I’d say their allegiences are to their shareholders, not the federal government or its policies.

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These hidden sales concessions are another reason why Dataquik’s medians don’t appear to reflect what’s happening at ground level. It only takes a couple of sales in a neighborhood with hidden concessions to influence the median.

Sandicor’s refusal to require the reporting of these concessions does not do much for their credibility. It’s obviously an attempt to avoid alienating the agents.

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There are a lot of games being played right now with sales concessions in the form of closing costs and cash back to buyer. The number of true bidding war situations that are occurring right now are few and far between.

Let’s say I’m appraising a property and I have a dozen sales to analyze as potential comparables. If 10 of the 12 show one trend and the 2 “overbids” with 100% financing at the overbid price show a different trend, to which trend do you think I give more weight? If for some reason I am compelled to use a sale that included such concessions I adjust that sale for the financing terms, so it ends up reflecting the prvailing trend anyway.

Let’s think about this logically. Why should there be ANY overbids in this market? Sales volumes are down by 15% compared to the same period last year and inventory is just about as high.

It’s not like there’s any shortage of listings out there; and in most areas (including Carlsbad and Encinitas) that includes foreclosures, short sale, and other “must-sell” listings. There might be a couple holdout pockets of move-up homes in Scripps or Poway where buyers think they need the schools, but in the end they still have to make those decisions against the backdrop of the economic conditions present in the region.

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As long as everyone is playing the game with their own money then nobody should feel sorry for anybody. I don’t feel sorry when a gambler goes to Vegas and loses their shirt “going for it”, why should I feel sorry for the homeowner playing RE Lotto? Likewise, I don’t begrudge the property owners who, whether by genius or more likely by luck, have made a ton of money during this upswing.

Nobody could have foreseen in 2001 what the ultimate effects would be of giving all that credit away. This last swing has been unprecedented, but the potential downside has always been known.

By now, everyone should understand that it isn’t how much you make but how much you keep that counts in the end. The people who are now facing the ravages of foreclosure could have avoided it had they paid attention to what was going on, so no, I don’t feel sorry for them beyond what I would feel for anyone who’s having a tough time. They made one or more bad decisions and they are just as deserving of what follows as the people who gambled and won.

Let us not forget that the people who really make enough money to debt service their loans at the regular rate are not the people who now face foreclosure. That loss is mostly reserved for the people who never should have bought at those prices to begin with, and that includes a lot of people who lied on their loan applications. I not only don’t feel sorry for them, I think they and their mortgage brokers and in some cases their realty agents should face criminal prosecution for mortgage fraud.

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It’s my understanding that Temecula is a planned community and was planned by the same company that planned Irvine. Temeku/Murietta has a sizable portion of of area devoted to industrial and business park uses, which is where a lot of economic activity occurs. It is a much more mature area now than it was during the last cycle.

With all that said, though, I would recommend some caution in terms of judging its current degree of economic independence. If you drive through the business park areas one thing you’ll notice very quickly is how dependent most of those businesses are on the fortunes of the real estate industry. The most common business type in all those industrial areas are businesses either directly or indirectly related to development and real estate. There are the home furnishings, flooring, landscaping, mortgage and other RE operations. The second most common businesses are related to discretionary income, such as the motorsports and other lifestyle businesses. Many of these businesses rely on discretionary income that will decline as the current RE cycle unwinds, and are doomed to fail.

I think the area will still end up being dependent on some commuting before this is all over. I think the prices will suffer in proportion to its outlying location relative to the more diverse employment centers. In other words, if San Diego ultimately bites the 40% bullet, this area will probably be in excess of that.

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