September 29, 2006

What goes up must eventually come down. Especially when going up consisted of using Houdini like smoke and mirrors.

The L.A. Times has an excellent piece discussing recent trends in mortgage fraud. I want to discuss a few points that the article highlights and should cause any bubblehead a resounding inner-voice saying “duh!” But I’m sure that the public will slowly catch wind of these type of dealings since as this article highlights are not isolated incidents.

Mortgage fraud didn’t really matter when everyone was pigging out at the trough. So you fudged a few numbers! No biggie, put it back on the market in one year for 20% more and cover your 6% selling cost. This was the case for the last five years but what happens when equity reverts to zero or even worse, negative?

“But now, with prices flattening out or declining, those without sufficient equity could be forced to sell for a loss or even default on payments. That could accelerate any downturn in the market by swamping it with foreclosed and bargain-priced properties.”

Whoops! I thought real estate climbed high in the sky like the nursery rhyme of Jack in the Bean Stock. But as the recent reports by DataQuick, NAR, and CAR all point to record inventory increases and prices stalling and even worse declining year over year in places like San Diego. But what is the true source of this? I mean everyone that used a stated income loan told the truth so why worry…right?

“One lender recently compared 100 stated-income loans with the borrowers' tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to Mortgage Asset Research Institute, a division of data firm ChoicePoint Inc.”

Are you meaning to tell me sir, that only 10% of stated income borrowers in California actually told the truth? I haven’t been this shocked since I was told Santa Clause was only my uncle in an outdated Superman costume. Well, I’m sure even though they fudged the numbers, they only did it by adding a few thousand for the closing cost…

“Sixty of the borrowers had exaggerated their incomes by more than 50%, according to the institute, which didn't identify the lender.”

I let out a belly laugh when I read this part! So now we know how people on a median income where able to afford a home ten times their annual income; they simply inflated their income to that level. No wonder why I couldn’t reconcile facts from the Census Bureau with the housing syndicate numbers. The housing syndicate is the Arthur Anderson to the Enron of housing. But I’m sure the people that made out during this boom wisely invested their earnings…

“Then there are cases of outright theft. Kenneth C. Ketner, who ran a Newport Beach mortgage company, pleaded guilty last month to diverting about $9 million in borrowers' funds. Prosecutors said he used some of his loot for a $244,000 Ferrari.”

Now I know how my next door neighbor was able to afford a 5-series on her teacher’s salary!,0,4945436.story?track=mostviewed-homepage

September 28, 2006

How I learned to Love SoCal and Forget the Bubble!

How I learned to Love SoCal and Forget the Bubble

Thanks for taking time to stop by this humble blogger’s spot on the net. First, some background about myself: Believing that having an advanced degree and sacrificing countless hours reading books and studying, I would be prepared to purchase a starter home in no time. Well guess what? Like many, we have landed in the middle of a category 5 hurricane otherwise known as the housing bubble, housing boom, or housing explosion depending on how you’ve been following the market these last five years. I on the other hand decided that the best way to learn about housing was to study up and read books regarding the matter. I’ve read these books that promote housing as the way to go to become a successful and wealthy individual:

Rich Dad Poor Dad – Robert Kiyosaki
Multiple Streams of Income – Robert Allen
Nothing Down – Carleton Sheets

Like an investigative journalist working on 20/20, I dug deeper to see what the other camp had to say. I’ve read these following books as well:

How to Profit from the Coming Real Estate Bust - John Rubino
The Coming Crash in the Housing Market – John Talbot
Safely Prosperous or Really Rich? - Howard Ruff

Now I can tell you that both books do have a common theme, that in order to become financially independent you must own real estate. However, certain books especially the one’s regarding the impending bust argue that housing is in for a long and drastic fall from grace. Can you guess which books these were? I’ll give you a hint, they include “crash” and “bust” in their titles. Don’t Google only “bust” because you’ll find some other interesting articles and websites that usually require your name, ID, and a valid Visa or MasterCard. So back on topic of this blog, why is the title of this blog “How I learned to Love SoCal and forget the Bubble?” The way I figure, I want to own a home in five years and since I missed the last run-up there is no point in me worrying if I can enter this market at the current. Prices are currently stagnate: In the U.S. they are currently flat year-over-year:

229,900 July 2005
230,000 July 2006

And let us look take a look at the true price of living in Southern California:

Housing 30 Years

As you can see from the chart above in the early 70s housing in California and housing in the U.S. was nearly equal. Now in the year 2006 prices are nearly 2.5 times more expensive than the overall U.S. median price. Here are my expectations for the next five years:

1. Housing will remain stagnate or drop.
2. Numerous loans will reset placing pressure on the market
3. Rents will increase
4. The Dodgers will win the World Series

Aside from prediction number four, I’m willing to bet that 1-3 (aside from wishful thinking on number four) will occur for these following reasons.

Regarding Point #1

The current trend is that inventory is rising and prices are going down:

Tracking Los Angeles County
Population 2005: 10.17 million
Listing to population ratio 8/17 1:544
Listing to population ratio 11/20 1:367

07/05: xxxxxx (10,711)__07/04: (11,549)
08/05: 20,025 (11,653)__08/04: (10,710)
09/05: 23,223 (10,988)__09/04: (10,501)
10/05: 26,141 (9,792)___10/04: (9,709)
11/05: 27,763 (9,066)___11/04: (9,404)
12/05: 25,589 (8,845)___12/04: (10,242)

Population 2006: 10.25 million
Listing per population ratio 1/2 1:417
Listing per population ratio 4/30 1:300
Listing per population ratio 8/17 1:223

1/30: 27,732 (6,761)____1/05: (7,633)
2/28: 29,420 (6,405)____2/05: (7,056)
3/31: 31,819 (9,755)____3/05: (10,878)
4/30: 34,032 (8,364)____4/05: (10,299)
5/31: 37,847 (9,654)____5/05: (10,128)
6/30: 42,317 (10,248)___6/05: (12,001)
7/10: 42,977
7/20: 44,541
7/31: 45,315 (8,040)____7/05: (10,711)
8/10: 45,979
8/20: 46,456

From the wonderful blog tracking multiple markets:

Beyond inventory going through the roof, which you don’t need numbers to tell you this just hop in your Jeep, Honda, Toyota, or BMW and take a drive through your local watering hole. Those for sales signs are growing like weeds on the high school football field during the summer. In addition, with higher rates and more loans currently adjusting, many folks are becoming financially strapped. Take a look at these figures:

A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%. These results suggest that the stated income loans deserves the nickname used by many in the industry, the “liar’s loan.”i

i, page 15 of adobe document, July 17th, 2006.

Regarding Point #2

And according to the MBA over 2.5 trillion loans will rest in 2006, 2007, and 2008. This year an estimated 500 Billion in loans will begin to reset. Well why not refinance into a historically low fixed rate you may ask? I’m just hallucinating this is your question but the answer is that the majority of recent homeowners are only making the lowest monthly payment because they cannot afford to go higher. Another study indicated that 70% of borrowers with Option ARMs (Arms that allow negative amortization) are currently making minimum payments. Fixed rates, even at all time lows, will thus increase overall monthly payments.

Regarding Point #3

I think rents will rise in the short term since buying will actually become more risky. With more people looking to rent, from simple supply and demand I feel in the short-term prices will increase. I say short-term because many folks that put their house on the market and are unable to sell will slowly begin to lower prices and possibly try to rent their homes. I’ve tried to find data on this but have only found that current rental rates are slowly going up (

Regarding Point #4

There is clearly no data on this point and my biased wish for the Dodgers to win the World Series is only a young man’s dream.

So in conclusion I love Southern California for everything we have to offer! I love having access to beaches such as Huntington and Long Beach. I enjoy the atmosphere of Hollywood and Los Angeles; the plays, the subcultures, the people, and most importantly the diversity. I was born and raised here and can’t see myself living anywhere else. During the summer I spent a few days in Arizona and let me tell you, 120 degrees does feel like 120 degrees. I will save, be in a career I enjoy, and spend time with friends and family. But like most of us I also have this gut obsession with real estate and facts; so I will continue to follow this market and blog my way through the next few years until I own! Please share your comments, views, and ideas!