Real Homes of Genius: Today we Salute you Torrance. $575,000 in this Housing Market?

What a gorgeous day in Southern California. It was a mild day with a touch of fall permeating through the morning marine layer. It is becoming evident that some people believe this wonderful climate is reason enough to ask for bizarre and economically devoid prices. Some sellers still seem to think that Johnny Subprime is around the corner, eager to jump on an overpriced 50 year old home simply to obtain the proverbial Mr. Homeowner label. Alas, this story like all Shakespearean dramas seems to have a tragic ending and the foreshadowing is already darker than a full eclipse. You might have noticed on the right hand column a weekly short-sale and inventory count. An emerging trend is brewing. We are reaching a critical mass of inventory and I am sure housing pundits are going to run with this like a child eager to show his parents their first A in fractions. But there will be two backhanded retorts to this premature excitement in October. First, the percent of short-sales coming on the market is staggering. Next, we are going to have the 3^rd quarter foreclosure numbers sometime in the middle of the month and they will be brutal. How do we know? Just take a look at this article on mortgage resets, price-to-income ratios, and the list of Real Homes of Genius. And speaking of Real Homes of Genius, let us take a look at a short-sale home to highlight the current market. Today we salute you Torrance with our Real Home of Genius award.

In California, we have beach cities and then we surrogate beach cities. Torrance is considered a middle class area here in Southern California. Nothing outrageously glamorous or anything that would cause you to lose bodily functions over. Today we are going to look at what 95 percent of the country would consider a starter home. This home is 1,106 square feet with 3 bedrooms and 2 baths. You would think folks would cut their grass before putting a home up for listing but hey, this is California and vegetation is the next big thing. When you read the ad you realize that this place is fully “landscaped” and has “sprinklers.” Looking at the lawn, we are glad the sprinklers are working. In the midst of the current housing market malaise and the overall reluctance of buyers, what would your guess be as to the current price? How about $575,000. Entering the fall and winter selling season at peak price, I’m not sure how much action this home is going to get.

Now before you rush out to call your agent, let us take a look at the sales history of this home. As an aside, folks even a few years ago did not have quick access to previous sales history as we do now. A rudimentary breakdown of the numbers puts things into perspective quickly without running to your local clerk’s office. This simple caveat as it becomes more mainstream will change the way people value homes. So without further interruptions let us run the numbers:

Sale History

08/14/2006: $575,000

01/11/2006: $450,000

08/15/2003: $255,000

07/21/1994: $110,000

Some of you may be surprised to see such numbers but I have seen this more than I would like to admit and am no longer shocked. I’m realizing after talking to certain sellers that there is psychologically some mental block on realistically evaluating your own property. You can run the numbers hypothetically to a non-owner and they will objectively say “oh yeah, that price doesn’t make sense considering stalling appreciation and the area income base.” But once they become owners a switch goes off in the noggin and we suddenly hear, “well you need to realize that over the long-run, real estate always goes up. And renting is the equivalent to flushing your money down a porcelain toilet.” From 1994 to 2003, a period of 9 years this place had an annual average percent gain of approximately 9.8 percent. Not a bad track record for a decade. But let us take a look at the price gain from 2003 to 2006. In this timeframe, the price went from $255,000 to $450,000, a nominal gain of $195,000. During these 2.5 years the average annual percent gain was get this, approximately 32.9 percent! Bwahaha! Oh wait, it gets better. On the next time frame from 2006 to 2006, we see the price jump from $450,000 to $575,000. This is a nominal gain of $125,000 in 7 months or if you want to look at it another way, the actual total sales price of this same home in 1994. Since we didn’t go one year before trading hands, what does the percent gain work out to? This number should cement in your psyche why we are in a historical bubble; the percent gain over 7 months equates to approximately 28 percent! So for 4 consecutive years this home had annual gains of 30 percent. In four years this home has increased in value by an amazing $320,000.

People must be making a boat load of money in this area right? It is always sobering to look at the area demographics. Let us take a look at some numbers pertinent to this area:

Average Household Income: $63,377

So let us assume the average household was to purchase this home. How would their budget look like?

PITI: $3,968 - with $28,750 (5 percent) down and current jumbo rates

Net Income: $4,188 - filing in California as married with 2 exemptions

So this family has a net disposable income of $220 after paying their mortgage principal, interest, taxes, and insurance. No wonder why folks in California went interest only or with option ARMS since it was the only way they were going to squeeze into these absurd prices without eating mac and cheese and a steady diet of tortillas and cheap beer.

Today we salute you Torrance with our Real Home of Genius Award.

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Please Ignore the Inventory Behind the Curtain: Lenders and Agents now Holding Open Houses Together.

Great things come in pairs. We have Amos and Andy, Siegfried and Roy, and now Countrywide and your local real estate agent? We really have to examine why this tactic is being taken. Keep in mind that we’ve been in a hyper reality of housing for the past decade. The problem with those in the housing complex is that they are living with an inflated perspective of a reality based housing market. The market is simply adjusting to market fundamentals. Sadly, many are grasping at an industry that is entering a fierce bear market. It turns out that easy credit, human nature, and greed are powerful forces. In fact, the money movers figured out a method of tapping into one of America’s deepest primordial desires, that of owning a piece of land and property. They figured if you could monetize something with a powerful emotional component many people would pay to play no matter what. It worked.

Even before the peyote induced housing bubble, American’s as a whole had most of their store of wealth in housing. After Credit Mania™ came out like an Ultimate Fighting Championship, more and more American’s saw their home as a store of wealth and figured out that hey, what is the use of idle equity? Why not tap it out via mortgage equity withdrawals? Refinance, spend, let equity build up, and repeat the process. It was the perfect combination and allowed the American economy to avoid a prolong recession. Our savings rate went negative during this glorious housing golden era. The only problem is this “healthy” economy was fueled by easy credit and not production of new industries. With the technology bubble of the 90s, even though it went into another dimension as well, we are still left with remnants of fiber optic lines, better information technology, and this will serve our society for the better in the long run. Flipping and trading houses like baseball cards? Well once this bubble subsides not much will be left except a credit hangover.

The New Tag Team of Housing

If you haven’t read the story here is the link. What is now happening is even homes that go into contract are falling through the cracks. You only need to look at the sales contracts that fall through from the large home builders and you will get a good sense of the current housing market. In fact, many folks go home and get a nice case of buyer’s remorse. The mortgage market is tanking. Record amounts of debt. Open any newspaper and even a housing novice will realize buying right now may not be the best bet. So imagine a couple going to an open house, finding a place they like, and going home to run the numbers only to see that they will not be able to afford the place without “creative” [read speculation] financing. They turn on the television and hear about the tanking credit markets and the mortgage market fallout. They decide to wait out the market. Aside from the subprime mortgage G-men, we no longer have a secret group of people buying homes with exotic financing hoping to flip. So what if we could lend to these people before they left the open house? From the article:

"With housing prices lower in many parts of the country and still-low interest rates, we are clearly in a buyer's market," said Dan Hanson, managing director of Countrywide Home Loans. "Our hope is to make it easy for people who've been on the sidelines to go out, look at open houses, and understand their home loan options."

Housing prices that are trending lower and low interest rates do not equal a buyer’s market. We’ve already examined the selling stalemate in the current market. Sellers do not want to lower home prices because they have an inflated view of what they should be getting. In basic economics the price of a product is what the market will support. Sales are radically down because people don’t want to buy at current prices. Instead of realizing that this is the new status quo, sellers and the housing complex are trying each and every way to come up with absurd products that make no financial sense. They make sense for their commissions and keeping the butter churning, but it makes no sense for a current buyer. Why would you buy right now if you know next year prices would be cheaper? You don’t. This bubble psychology is what got us into this mortgage credit mess as well.

People saw that housing went up year-over-year and figured they had to jump in. For a few years they were right. Even a broken clock is right twice a day. Economic fundamentals didn’t push the market up but mass psychology did. Folks went into massive debt with adjustable rate mortgages simply to own a piece of the America dream. Here in California, many areas saw price gains of $100,000 year-over-year; in some cases yearly price gains were higher than annual household income. How is that supportable in the long run? Clearly it isn’t. We aren’t talking about a home in the Midwest that jumped from $100,000 to $110,000 while the area income is $42,000. We are talking about homes that jumped from $350,000 to $450,000 in one year and area incomes are approximately $50,000. I know most people in the United States have a hard time wrapping their brain around bubble areas but take a look at some of the Real Homes of Genius here in Southern California and you’ll get a better idea.

Missing the Bulls-eye

Keep in mind that Countrywide even as late as May of this year was expanding its subprime mortgage outfit and talking about 50-year loans.

Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year.

With that said, let us take another look at what is being said today:

"We're pleased to assist our local real estate professionals, and we encourage buyers to work with an expert who is seasoned in helping buyers with the home purchase transaction," said Hanson.”

Seasoned? You mean with a company that was expanding their subprime unit only a few months before the current implosion? Why would anyone take a 50 year mortgage when rates are at all time lows? Is this your definition of seasoned? Well let us continue forward in the magical world of mortgage Oz:

“It has always been Countrywide's mission to provide optimal mortgage solutions for each homebuyer's needs and financial situation, and it is Countrywide's continuing commitment to help find the most appropriate mortgage solution for every qualified buyer.”

Here was the option list for the last 7 years: adjustable rate mortgage, option ARM mortgage, reverse mortgage, 2/28 mortgages, and maybe a 30 year conventional mortgage. Keep in mind that with absurd ratings of the mortgage backed securities market premiums were better on the riskier mortgages so guess what was pushed by lenders? And now these same people are the gurus of financial prudence? Scotch please! Dissecting the article you can tell someone is well groomed in the art of PR. When they say most “appropriate mortgage solution” the implication is that there is a mortgage product for you. Take this a step further and you will see that they are still trying to push people into houses while the market is entering the first stages of a bear cycle. You’ll love this:

“Through the America's Open House campaign, Countrywide hopes to encourage buyers to do their house hunting with a clear understanding of how much they can afford and what types of financing options are available to them.”

So now after 7 years theses mortgage companies think that it is important to look at your income. You can imagine how one of these sessions will go:

Buyer: “Yeah, we have an annual household income of $60,000, what do you think we can afford?”
Housing Tag Team: “Well according to my modified housing algorithm, you qualify for a $700,000 mortgage.”
Buyer: “I’ve heard that the credit markets are getting tighter and housing prices are going lower. Is this correct?”
Housing Tag Team: “Nonsense! There is never a better time to buy then right now. In fact, if you can put down 5 percent today before you walk out of this 500 square foot home, we will make you the proud owners of this place? How does that sound?”
Buyer: “I’m not sure. It sounds like we will be out of our range.”
Housing Tag Team: “Listen. If you sign right now we will throw in an additional granite countertop and 42” plasma. You don’t even need to go to the bank! That is the benefit of the Housing Tag Team (HTT).”

Housing tied at Hip to Healthy Economy

In that past decades, real estate contributed about 10 to 12 percent of all added job growth. However, in the last decade real estate related jobs are now pushing closer to 30 percent of the entire job output. So of course the economy is healthy. Real estate has been fueled by a massive credit bubble thus leading to job growth and spending. But this circular logic has a fallacy that I’m sure many of you see. If housing hits a road block and slows down, guess what happens to a large portion of our employment sector? The economy is predicated on continuous housing appreciation; not normal appreciation that tracks with inflation but debt fueled home equity line of credit type of expansion. When you pull the curtains back on your new house, make sure you send the wizard a nice tag team hello.

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Press Zero for Reset: Are we out of the Subprime Mess?

Before the subprime issues, there were many articles and research papers highlighting the impending challenge the mortgage market would face once rates started their inevitable reset descent. Two camps emerged; one believed that the subprime market would be contained while the other camp saw it as the tip of something much larger. There is no point in rehashing which side won this debate since it is already clear. The next step is to focus on a market analysis and assess the current situation. Recently, we haven’t seen much analysis in this area because it is a foregone conclusion that many subprime loans are resetting and this is causing a profound market impact beyond the subprime sector. But what does the future potentially hold? There is a great article that was published in the O.C. Register talking to a BofA analyst, Robert Lacoursiere discussing the future of the mortgage correction. The chart provided on the site provides a disturbing picture:

*Soucre: O.C. Register

From past articles and projections, we already knew that September through December of 2007 would see the largest number of subprime resets. We've seen a couple of reports putting monthly rate resets in the range of $50 billion to over $100 billion. This is important because it will be a litmus test on the resiliency of the housing market. It is clear that many lenders and financial institutions are buckling even with the current environment. A few other things will place additional strain on the market including third quarter results that unfortunately, will reflect a slow and underwhelming summer housing market. This coupled with growing inventory, stalling appreciation, and the massive wave of resets will make it very difficult for housing prices not to depreciate.

Option One – Refinance

According to DataQuick, during the first half of the year over 43.4 percent of loans in Southern California were jumbo loans. Jumbo loans are home mortgages that go above $417,000. The typical monthly payment buyers committed to was $2,421. Sellers facing reset issues have the option of refinancing into a fixed rate mortgage. Thanks to a low interest rate environment, rates are still hovering at all time lows. Unfortunately, many home owners are unable to refinance even into reasonable conventional loans because they stretched into their current home. If we take a look at notice of defaults (NODs) in Southern California, we are seeing an exponential jump:

The illuminating thing of this data is that many of these NODs are turning into foreclosures. This is a phenomenon absent in the previous decade of the housing boom. Sellers facing trouble were bailed out by a rising market and rapid appreciation. There was no need to refinance aside from taking out money or lowering a higher previous rate. Those sellers that desperately wanted to stay in their home, used creative methods such as tapping into a home equity line of credit and bought extra time for paying off their current mortgage. The burden has now shifted since the mortgage markets are tightening their belts and appreciation is stagnant. In fact, this is the first year of serious market issues in Southern California in over 10 years. The refinance option may not be a viable choice for many home owners that have a subprime loan and are facing a reset in the next few months. That is why many housing bears cautioned that these loans had a biased toward continued appreciation and no insurance in case the housing market started losing any steam.

Option Two – Sell

Last month sales volume fell over 50 percent in Los Angeles on a year-over-year basis. The last option of hope for many home owners in trouble was selling. In fact, many sellers were able to unload their homes before their rate reset and profited nicely. This went on for multiple years. In a bubble, rational behavior and fundamentals seem to take a backseat. Even staunch opponents of housing started singing a different tune. It is almost a historical prerequisite that once a bubble forms and is in full stride, rhetoric regarding a “new era” creep into the mainstream lexicon. Selling is becoming a challenge in the current market because of market depreciation, increased inventory, and buyer psychology. Another characteristic of any bubble is irrational logic guiding fundamental economic decisions. There was really no reason for housing prices to run up the way they did with no income support, population growth numbers that didn’t instigate amazing jumps, and renovations that didn’t reflect hundreds of thousands of dollars in price premiums. In addition, buyers are no longer fighting for the one home on the block. Any person living in Southern California need only get in their car for a weekend drive and cruise the local streets. Without fail you will find one or two homes for sale within your field of vision. The growing number of foreclosures doesn't help:

Sellers are also competing with short-sales and foreclosures. The worst time to negotiate is when you are hostage to spiraling debt. Many of these sellers have no choice but to sell. Life goes on and things such as divorce, employment disruptions, or crushing debt payments are enough reason to move out. At a recent presentation by Countrywide, they announced that the number one reason for people facing foreclosure was “curtailment of income” at 58.3 percent of all causes. The second leading cause? Medical or illness coming in at 13.2 percent. This paints a contrasting view to the current reports that employment and income is strong and healthy. We need to start examining leading indicators such as building permits, insurance claims, and the money supply because this will tell us where we are heading. Looking at lagging indicators such as the unemployment rate only tell us where we have been. They are both important but clearly we are at a tipping point of market data not reflecting market reality.

Option Three – Foreclosure

It goes without saying that most people do not want to lose their home through foreclosure. It is a financially and emotionally stressful life event. 100 percent of people do not want to lose money. Yet looking at the exploding number of foreclosures, it is becoming more apparent that the country debt load is becoming too much to handle. Keep in mind that we have never witnessed a time in history of such extraordinary national real estate appreciation. We had previous regional housing bubbles such as the Florida housing boom during the 1920s. In addition, our unemployment rate is relatively low and inflation according to government statistics is still under control. We examined this in a previous article and highlighted that in modern day society, avoiding debt is nearly impossible for most working class Americans. The cost of education, healthcare, housing, food, and energy have all gone up dramatically in the last decade. Let us take a look at the national mortgage debt load for the entire country:

As you can see from the above chart mortgage debt has tripled from 1992. It went from approximately $4 trillion to about $12 trillion in the current market. You can also see the inflexion point at roughly 1999. It is hard to imagine that such a booming economy with relatively low unemployment is facing the debt struggles that we are facing. One of the main reasons is that employment in the housing sector has boomed in the last decade. It goes without saying that a slower housing market will equal unemployment for those in the housing industry.

Solutions

Policy makers are providing their solutions to this mortgage crises. Initially what started as a subprime problem is now spilling over into multiple sectors. This has the potential of pushing the economy into recession and more and more economist are chiming in with future odds. What are some of the current solutions on the plate?

*Tax forgiveness for those in foreclosure

*Lowering the Fed Funds Rate trying to make credit products more attractive

*Increasing loan caps through government sponsored entities (GSEs)

*Funding for credit counseling

These solutions may help but they only put a bandaid on the overall broken housing market. In a politically charged environment with so much at stake next year, both sides of the political spectrum are treading water carefully. No one wants to be seen as the party that didn’t help suffering home owners. Bernanke is a student of the Great Depression and realizes that history doesn’t bode well for a Fed and government that doesn’t act swiftly. Even though they publicly echo fears of inflation, policy moves and data point toward a more permeating fear of deflation. I truly believe Americans do not want to see their fellow citizens fail and suffer. In fact, I believe most Americans have a strong work ethic and hold that people that sacrifice and work diligently should be rewarded. What frustrates most Americans is a game where the uber-wealthy are given corporate welfare when times are tough but poorer Americans by these same groups are seen as not being able to pull themselves up from their own bootstraps. The solution to this, even though people do not want to hear this, is a market correction. This means that local income levels and the new tighter credit standards will dictate future housing prices. In some areas this means 10 percent drops while in others this can reach 50 percent or higher. Will this happen? The data is already pointing toward this. Even if property drops 30 percent over 5 years, combined with inflation adjustments this is close to a 50 percent drop. Some areas in Los Angeles are already seeing 20 percent adjustments year-over-year.

By looking at the reset charts, we realize that the housing correction still has a long way to go. What will happen in the next year through policy and market sentiment will set the tone for the next decade of housing in America.

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Real Homes of Genius: Today we Salute you Bell. 551 Square feet for $349,999. No Bubble Here.

The market has gone completely bipolar. A few weeks ago, the market was tanking and practically every day, we were hearing about one after another lending institution collapsing. Now, we are riding the stock market to prosperity once again thanks to the Federal Reserve and easy money (you can use these interchangeably). Even though we still hear about lending institutions tanking this is already baked into the market since data doesn’t matter anymore. This past week was full of pyrotechnic housing fireworks. Let us recap the week:

Fed drops funds rate to 4.75

Stock market soars like an eagle on methamphetamines

Dollar index falls below key support levels

Gold shining at 27 year highs

Oil prices keep chugging along

And guess what happened to the 10 year Treasury note?:

It actually went up! I’m not sure why so many in the housing industry think that the Fed has some kind of direct impact on the direction of long-term interest rates. Do you now get that they are simply bailing out Wall Street and hedge funds? Take a look at the stock market and you should get a clear idea who has gained the most benefit. They have a massive impact and influence on direction but this doesn’t always hold true. Fears of a falling dollar, inflation, and rocketing commodities had a larger impact on the direction of rates. And LIBOR rates that most adjustable rate mortgages track is still holding strong. We aren’t having a 30 year conventional fixed mortgage crises; we are having an exotic banana republic mortgage credit debacle. Thanks Ben for that .5 cut which does very little for 9+ percent subprime loans! Making lending standards more lax at this juncture may not get you into MENSA so let us take a look at a case example. Today we salute you Bell with our Real Home of Genius Award.

Today’s home is one of the smallest Real Homes of Genius ever featured coming in at an eye-popping 551 square feet. This 1 bedroom 1 bath home is the envy of the neighborhood. Who said you couldn’t have a white picket fence in Los Angeles County? This place can be your's for only $349,999. Make sure you mention to your broker that you are looking for the Bernanke Special since it’ll save you $100 a month. What was this home initially listed for?

Price Reduced: 09/13/07 -- $370,000 to $349,999

A $20,001 discount is not a bad incentive. I would not have looked any further if it was $20,000, but I’m a fan of one dollar bills with that great green portrait of Mr. Washington. In fact, I’m hearing that in a few years they’ll be collectibles since they’ll stop printing them and only dish out bills in denominations of $10 or more. I’m not buying a $100,000 boat but show me one at $99,999 and then we are talking. What does the sales history on this place tell us?

Sale History

10/26/2005: $299,500

12/30/1998: $78,100

06/29/1998: $95,970

Say what? 5 figures in Los Angeles County and within the past 10 years? This place had an 18 percent decline in 1998. This 18 percent decline amounted to $17,870. We already got that discount in a few weeks plus a few extra dollars; we’ll need those extra dollars for higher energy costs. Do you realize that this home went up by a multiple of 4 in 9 years according to the current sales price? Somehow I doubt incomes went up by this margin. Let us assume that they sell this home at the current price:

$349,999 – six percent commission of $20,999 = $329,000. A profit of nearly $30,000 if they stay in the home until the end of October and pay no capital gains tax on their profit. Again, this is assuming they sell it at their current price. Let us take a look at the neighborhood information:

Average/Household: $41,464

Median Rent Price: $900

So let us say that a hypothetical family in this area was to buy this place. Let us run their monthly budget:

PITI: $2,465 (5 percent down and 30 year fixed mortgage)

Monthly Net Income: $2,868 (filing as married with 2 exemptions)

So this family is left with $403 of disposable income each month. They are spending an unbelievable 85 percent of their income on housing. 401k? Forget it. Roth IRAs? If there is money after food. Do you see why this makes no sense? No investor would purchase this place since they would be negative cash-flowing by $1,565 a month. I know that here in California finding cash flowing properties is like finding a leprechaun. Even so, the number of investment properties bought in California has exploded over the past seven years. This was the flipping, mortgage-equity-withdrawal, and other people’s money (OPM) crowd. Apparently, this mantra is straight from the Fed because they have no respect for your American dollar and are using this OPM strategy. Too bad the other people are you and your family. Now that we are seeing depreciation in California, who do you think will buy these homes? Income ratios do not make sense so families in the immediate area are very unlikely to buy these places. Investors will not buy unless they want to feed an alligator property with no appreciation. Could it be that we have been living in a major Ponzi bubble here in Southern California and the game has now stopped? No amount of rate dropping will change the above facts.

Today we salute you Bell with our Real Homes of Genius Award.

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Operation Destroy the Dollar: H.R. 1852 Objective Number One – Bailout the Lenders.

You can tell it is an election year when political operatives try to pander to every single group with no long-term thought process of the implications of instant gratification. Maybe that is why the United States on a personal level, has a negative savings rate. How can the government encourage people to save and be prudent when they do the complete opposite? Let us take a look at the winners with this newfound ease in lending:

Home Loans: Winner because they become cheaper

Auto Loans: Winner because payments will be lower

Credit Cards: Winner since your APR just dropped from 18 percent to 16 percent
Lenders: Winner since they are given a lifeline to do more loans

Savings Account: Losers since your interest rate is lower than inflation

Dollar: Loser as you can clearly see by the drop below the 80 support level

Pretty basic right? But if you think about the deeper ramifications of the decision it shines the light on an eerie part of our economy. The only way we can keep this game going is by making savings unattractive to the masses and encourage spending at all cost. Many investors realize the game is up and are diversifying out into foreign currencies, stock, and everything else that will benefit from a falling dollar. Many are doing short-term call options and figure they can make a profit on these pseudo bull runs. This does not help the massive majority of Americans. How is this good for our country in the long run? Today we will take a look at an absurd piece of legislation that passed the house, H.R. 1852. I will translate the key points for you into blunt language and what it means to you and our country. Take a look at this press release issued a few days ago from the House Committee on Financial Services:

· Lower Down Payments. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

Translation? We are going to institutionalize subprime lending! Forget about the tried and tested 10 and 20 percent down payments of yesteryear. We are overhauling the system to remove down payments. After all, we have a hard enough time saving anything month-over-month so how can we expect people to save a few thousand dollars? So instead of requiring this archaic “saving” that is so passé, we are going to allow people, assuming they can make the monthly payment, to purchase homes even if the prices go beyond financially prudent ratios. Down payments exist for a reason. They show that a prospective buyer has the ability to tighten their belt and manage their finances for a few years to purchase a home; normally this is achieved by foregoing spending on other discretionary items. But you can have your cake and eat it too in the mortgage world! Debt is saving in this apparently brave new world.

· Housing Counseling. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

Do we really need housing counseling? I can imagine one of these sessions:

Counselor: “Can you tell me about your current situation?”
Supbrime Borrower: “Ok. Someone from one of those now bankrupt lenders gave me this great 1.25% teaser loan and told me it wouldn’t reset for a long time. I didn’t read the note because hey, I trusted him since he was in a nicely ironed suit. When he said long time I thought he meant 10 years, not 2 years. Now my payment went from $1,250 a month to $2,200. What can I do? I barely was able to afford it even with the crazy teaser rate?”

Counselor: “Damn. Looks like you need to increase your income by adding an all America 2^nd or 3^rd job. Another option is to go into foreclosure since the market price on your home is now less then the mortgage balance. Oh hold on a second…I’m getting a fax from our blessed government. [pause to get fax] Hey! Good news. We can refinance you into another loan with another teaser rate since the government is now subsidizing these loans.”

Subprime: “Great! Because I was looking at this other home that I would like to flip…”

The folks that need “counseling” are the lenders and the policy makers for thinking this is a good long-term strategy.

· Subprime borrowers. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.
Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

Higher risk but qualified borrowers? Bwahaha! You couldn’t write more Orwellian language. Could it be that they are high risk because maybe they can’t afford the home? This is like saying that a person is perfectly suitable for working at the drug enforcement agency so long as his cocaine and heroine addiction doesn’t rear its ugly head while raiding a drug house. As we are seeing, it is unethical to give someone that doesn’t have their financial house in a row $100s of thousands of dollars in the form of a mortgage only to have them lose their house later on. That is why we have [had] lending standards. When lenders had to hold the notes they actually vetted the loans with higher scrutiny because a foreclosure would hurt their books. Now we have this moral hazard where we are encouraging irresponsible lending. This doesn’t help the homeowner. This is horrible classical conditioning on a mass scale. What we are telling people is credit doesn’t matter, saving is irrelevant, and bad financial moves will have a bailout from the government. Does this make sense?

Then the reverse mortgage portion is just classic. You can see the light bulb over these congressmen go off. “Next year is so important. Older voters are an important constituency group.” Since Social Security is peanuts and the cost of living adjustments are based on ministry of truth data, they only see marginal increases. The majority don’t have adequate savings but what do they have? Over inflated home equity! How about we slap on another virtual ATM and drain all their savings so instead of the equity going on to their children or grandchildren, it will go to the good old government. Amazing planning here. Let us keep reading.

· Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

You really need to put on your doublespeak reading glasses for this one. So they want to raise FHA multifamily loan limits to encourage affordable housing? They are basically forcing prices to go up. If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more affordable housing. But this legislation assumes that current housing bubble prices are justified and are trying to institutionalize them under the guise of good public policy. What we need is less legislation and more open market competition. Think about it. If you have two companies and materials are being driven down because of competition and efficiencies, then the company that can provide lower priced goods to the market will win. That means lower priced homes and more sales. Did you notice how Hovnanian had no problem attracting buyers when it slashed prices by $100,000? But here, we have this big government mentality and you’ve seen the ridiculous budgets where toilets cost $2,000 and pens go for $30 each. Do you really think these companies compete when they know they have a locked in price? Why do you think communism failed so miserably? And the language is scary. What do they mean “fully fund construction costs” in bubble areas? They call them more expensive areas instead of overpriced bubble metro areas fueled by rancid loans but I think the PR folks removed that language. This is a blank check. Make sure you contact your representatives in both houses and contact the White House to veto this. Maybe Bush will dust off the pen and use it for once.

· Affordable Housing Fund. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury.

You don’t need the affordable housing fund if you relax zoning rules, stop bailing out lenders, and make these folks accountable for their actions. They are trying to seal high prices into the system as a paradigm shift. These folks want you to believe that higher prices are just a thing of the modern day as opposed to being fueled by exotic funky lending and mass greed.

· Higher Loan Limits. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”

This is the one that is getting everyone worked up. How is raising loan caps going to help the family on main street USA by pushing limits over $500,000? I thought the median price was somewhere around $225,000 for most Americans? Oh! I forgot. Lenders make their most profits from overpriced bubble metro areas therefore we should ask our brothers and sisters in Wyoming, Montana, Arkansas, and every other non-bubble state to contribute to their mass greed. Make no mistake. This bill is 95 percent for the housing industry. It will not help you or your family if you are facing foreclosure. They will use the 1 or 2 examples to get media heart bleeding and lenders going into crying moments (did you see that Youtube video of the guy pleading for Brittany?); it’ll be something to that effect but everything is garbled up in this translation. Pandering at its finest. How is someone in a high priced area with a $400,000 or $500,000 mortgage with a family income of $50,000 going to get help if the main problem is a pricing and income issues? Unless they want to give everyone a 50 percent mandatory raise, I’m not sure how this helps anyone except lenders on the large part by washing their hands clean ala Pontius Pilate of unethical and corrupt mortgage products?

Doublespeak: Helping Minorities Pad our Bottom-line

Someone once told me that getting married is easy, staying married is the hard part. During a presentation, one of the nation’s mortgage lending leader reiterated their goal of helping minorities to own homes. The government always throws this PC statement out. The last few years these lenders have done the most damage to minorities. Guess who are the folks who are losing their homes because of subprime lending in the largest numbers? These greedy lenders didn’t care about folks’ long-term well being, they only cared about putting people into homes and getting their nice commission cuts. So what if 1, 2, or 3 years down the road the family drowns in their own debt service? Setting people up for failure is not the American way.

The fact that many are subprime meant they couldn’t afford homes to begin with. Simple way to avoid this mess from the start. If people want to buy homes why is it so bad to ask that they save a minimal down payment? You know why? Because this slows the real estate complex down. During this time people aren’t buying, selling, refinancing, busting out home equity lines of credit and all things where the housing Ponzi Scheme gets their money from. To use this “we are helping minorities” line is arrogant and absurd. Why don’t they address the real reason that of massive inequities in pay for minority groups? Oh! We can’t talk about income because that is taboo. Yet they are okay with putting people into ticking time bombs. A good senator and representative, for example, in voting for a war should always ask themselves if they would send their own child to a conflict. In the case of lending, a good lender should be required to ask, “would I loan this person money if it came out of my own bank account?” Guess what your answer would be?

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Real Homes of Genius: Today we Salute you Pasadena. $87,000 off in 2 Months for 937 Square Feet.

As the dollar goes sledding down below levels that even a Victoria’s Secret bra couldn’t support, the market rejoiced at the Fed’s rate cut. Too bad this won’t do much for banana republic loans in the wonderful sunny state of California. Since most of us are paid in dollars, freely purchase things in dollars, and usually use the greenback, a declining dollar really isn’t a good thing for the long-term. But for now, let us party with Bacardi and extend a warm welcome to Ben Bernanke and the Fed. In addition, this won’t do much for the Real Homes of Genius inventory that is piling on like warm pancakes. October will see the largest amount of rate resets at a mind-boggling $50 billion; and yes, those rate resets are dollar denominated unless you plan on paying your mortgage with Euros or Yen. I know many of you feel a gut disappointment with the Fed. You were hoping that they would do the right thing but realized that they are part of the credit machine. Don’t worry yourself too much. Many people think this credit crunch is an interest rate dilemma but as our Real Home of Genius today shows, this is a pricing problem. Today we salute you Pasadena with our Real Home of Genius award.

This inspiring 2 bedroom 1 bath home will put your green Bermuda lawn to shame. Who needs grass when you have fortified concrete with wild weeds growing out of it? This place spanning out over a whopping 937 square feet will be a sure hit with friends and family. And for the rock bottom price of $450,000, you’ll be the first in Pasadena to buy a sub 1,000 square foot home that doesn’t run half a million dollars. The mortgage shenanigans of yesteryear are now finished according to our friend Big Ben. Let us take a look at the sales history on this home:

Sale History

03/06/2007: $507,000

02/25/1987: $75,909

Someone is trying to unload this property really quickly. At the current price, they are taking a $57,000 hit without the 6 percent commission. This was a flip gone bad as you can see from the pricing action:

Price Reduced: 07/09/07 -- $537,000 to $450,000

With the first price, someone felt that they would be able to get out of this market with no skin. Let us run the initial calculation ($537,000 - $32,220 = $504,780). The $32,220 is 6 percent if you are wondering. In fact, you can almost derive from these numbers that the person went with a zero down mortgage. How can you arrive at this conclusion? The sales cost minus the commission cost bares an uncanny resemblance to the purchase price in March of this year. This is a new trend. Unfortunate buyers that came to the party too late and are trying to hand off the home to another would be flipper. But guess what? The game is over. Keep in mind you were still able to get your hands on a fantastic supercharged wonderland exotic mortgage in March of this year. In fact, Countrywide was ramping up its subprime outfit and even talking about 50 year mortgages as late as May of this year. Now they are saying "no subprime for you!" How quick things change. You may say, “I feel sorry for this buyer.” Here is the poetic justice, these buyers can hand the keys over just in time for the bailout forgiveness and face no tax consequences. The only ding they will have is a foreclosure on their credit history but after the next few years, having a foreclosure will be in like having a divorce. The stigma is gone when a large part of society has faced a similar circumstance.

So how low can this place go? Well considering that this place would rent for $1,500 tops, it is still a bit on the expensive side. But hey, your $450,000 mortgage just got a boost in the interest rate of .5 percent. That is if the market responds to the injected liquidity and the LIBOR acts accordingly. But even if it does, this place would not make sense as an investment. Let us run the numbers as a prospective investor. Currently for investment properties if you have good credit, you can get a mortgage with 5 percent down for approximately 7 percent. So let us assume that we buy this place for 5 percent down with a 7 percent 30 year note:

5 percent = $22,500

PITI = $3,312 (30 year fixed at 7 percent for investment property).

The monthly payment will be $3,312 and we are receiving in rents $1,500. That means we are negative cash-flowing by a whopping $1,812 a month. And appreciation is gone for at least a few years. The only benefit is in tax relief but this is equivalent to spending $1 and getting 2 quarters back. If you desperately need tax relief why not buy a cash-flowing property out of state? This property has an intrinsic value of $225,000 to $275,000 tops from an investor standpoint (and this is being extremely generous because of the city). Only at that price point would rental market growth, market stagnation, and the headache of being a landlord make any financial sense. As you can see, 100 percent of investors are going to rule this place out. You can’t flip properties as the pricing trend is down.

Many in California, as myself, are disappointed with the Fed but this doesn’t change the fact that prices will plummet in California. We are already seeing this. If many of the rogue investors were forced to mark-to-market their portfolios, there would be absolute chaos. So in a way, I can understand that the Fed is trying it’s best to avert disaster. After all, why would they drop .5 basis points if they were only moderately concerned about the data they were seeing? They talk to folks and they have a front row seat to the private equity firms and their portfolios must look like a stew of mortgage excrement for them to drop rates as deep as they did.

Today we salute you Pasadena with our Real Homes of Genius award.

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The Sacred Commission: 3 Reasons Why Commissions Will Come Down.

During the housing boom, agents and mortgage brokers have done extremely well. In fact, word spread so quickly that we have seen large increases in the number of people making career shifts into the housing industry. From 1989 to 2001, the membership numbers for National Association of Realtors was around 800,000. However, from 2002 to 2007 we see a dramatic and steady increase to approximately 1.4 million active members. Why the sudden increase when for over a decade, membership numbers stayed relatively stable? Welcome to the world of basic economics. The fact that money was to be made in the industry and low barriers for entry, many folks decided to roll the dice and take a chance with real estate. Simple supply and demand. In addition, with a booming market and lending standards so low that you can smell the floor, selling homes and lending money seemed to be a no brainer. Prices kept going up in double-digit sprints and many in the industry saw this as a locked in yearly wage increase. After all, if your income derives on the underlying asset price and the price keeps going up, it is by default that you will make more money since you are paid a percentage of what a home would sell for. This was all fueled by easy credit in every aspect of life. For 7 years it seemed that housing would go up ad infinitum.

The housing market is now entering the first stages of a multi-year bear market. 2007 has seen the loss of 155+ lending institutions. Over 100,000 individuals have lost their lending related jobs. Many entering neophytes are victims of poor timing. They read and listened to the housing bull books and seminars 7 years too late. Many seasoned agents and brokers realize that housing ebbs and flows. These housing veterans have sufficient contacts to weather the storm and will try to hold the fort down during these down times. From my experience in the industry and simply looking at the wage earnings for agents, it is apparent that he Pareto Principle holds true for this industry. Vilfredo Pareto, an Italian civil engineer, observed that 80 percent of the wealth in Italy was owned by 20 percent of the population. How does this apply to agents? In the case of superstar selling agents, it is the case that 80 percent of the sales happen via 20 percent of the top producing sellers. They have deep contact lists and other attributes that make them successful. When you look at the median earnings of real estate agents in the U.S., you’d be surprised by what you find. A good agent is someone that can sell a home when no one else is able to do so. See, the last few years even amateurs were able to sell homes and oversights were masked by a booming housing market. Sort of like venture capitalist throwing money at any prospective company with a dot com in its name during the raging tech boom.

Capitalism is a great thing if you let it run its course without government intervention. For example, now that the housing market is slowing down many companies are falling flat on their faces for running poor businesses. The 155+ lenders that have imploded this year are victims of inefficient business models and the market is taking care of them. After all, these companies were raking in money during the boom times. Good businesses are built with diversification to weather multiple storms. Take a look at Proctor and Gamble and General Electric. During the good times, they ventured into other businesses that allowed them to have a buffer should one industry sector falter. Many of the lenders that are now defunct saw returns too appetizing in the housing industry. Instead of going into more conservative ventures with their revenues or build war chests, they decideded to reinvest into a business model that was unsupportable.

The internet is now a ubiquitous part of life in the U.S. Everyone uses Google to search for answers. If you don’t know the answer to a complex question, you can go to Google and find not only one response but probably a few thousand. Information is power. Even in the 90s, buying a home was a challenge because you didn’t have access to all the important pieces of information. If you wanted previous sales data, you would need to go to the clerks office or pay a title company to dig up the information. Most people never bothered to look at previous tax records. And finding comparable sales? The only viable source was the MLS which was under lock and key by the housing industry. Now with the advent of Zillow, ZipRealty, Redfin, HelpUSell, and other do it yourself services information on homes is no longer hard to find. The LA Times had a great article this Sunday about selling your home with different services. Do you want to know the previous sales price? This will be easy to find. What about comparable sales? Not only can you get this information but you will have it nicely displayed via a satellite hybrid image that you can sort out. And the best thing is most of these services are free or cost a small price. And in a market where 6 percent can mean the difference between you breaking even or going into a short-sale, many folks are opting to use discount services or doing it themselves.

So why will commissions drop? Here are three further reasons for the inevitable drop in commissions:

Misnomer: Only the Seller Pays the Fee

You always here this argument thrown out. Buyers shouldn’t hesitate in using an agent because it is the seller that pays the fee. The way the process is currently setup, the seller pays the typical 5 to 6 percent commission fee and should a buyer’s agent bring a worthy customer, will get a cut of the percent. This can be anywhere from 2.5 to 3 percent. So why is this a misconception? Like a stock that pays a dividend, the market already factors this into the price. You aren’t really getting the service for free because the underlying price is inflated to reflect this market standard. But as standards shift, say commissions go to a lower rate or flat fees, the price of the home will reflect the difference. We are already seeing this here in California where market pressure and multiple options are giving consumers different choices. And sellers that went 0, 3, or 5 percent down realize that 6 percent may be their entire equity, are willing to find creative ways to sell a home. Keep in mind in a hot market where the median price for Los Angeles County is $550,000, 6 percent is $33,000. As a seller, you may think twice about paying this especially in a tighter market.

This priced in model happens in many financial instruments. If you look at options that are nearing a dividend pay date, the market has already priced this into the premium. So you really aren’t getting a good deal even though this is a sort of slight of hand financial gain. And many professionals will argue that you can’t get the service that they can provide at a lower cost. This may be true depending on the person you hire. But look at the professional Hovnanian Enterprises cutting prices in their Deal of a Century campaign to unload homes. In some cases, these professionals are lowering prices by $100,000. Now that will get your attention. And these homes are new units so you don’t really need to worry about wear and tear and in many cases, these builders are now offering financing to move inventory. You can see why a downward market will put pressures on commissions.

Access to Information: MLS, Competition, Down Market

Have you used Zillow? Know about Craigslist? Ever browsed homes on ZipRealty? Then you are benefiting from the competition brought on by the industry. Many of these companies realize that you can make money from other venues such as advertising and taking a lower fee and making it up on volume. They realize that a small piece of $550,000 is enough money to invest millions of dollars into new business models. In addition, the competition is now fierce since sales are dropping and credit is tight, so now your option may be limited to a few qualified buyers that are absolutely determined to buy right now. A good agent is now earning his money trying to sell a home. No longer are multiple offers coming in like the good days. The market is now different. Many new industry folks are unable to deal with a down housing market and are going into this as a trial by fire. This is their first experience with a down market. And the last 7 years were a complete anomaly so anyone thinking we will be back to that is hoping for a deal of a century that will not come again for another century.

It is easy to find information on comparable home sales. You can easily access previous sale prices. These companies at the vanguard are finding that many buyers and sellers are willing to get their hands dirty if that means they will save $20,000 to $80,000. I always get a kick out when the rebuttal is, “well I wouldn’t expect to pilot a plane just because it is cheaper.” Flying a plane is not like selling a house. Doing heart surgery is not the same as showing an open house. There is a clear difference. Will it require work if you decide to do it? Of course. Just like owning a rental property. You will have issues come up but that is why you are rewarded financially. Otherwise, everyone would be doing it. Even savvy attorneys, title companies, and discount brokers are capitalizing on this market. If you are too lazy to review sales on Zillow or ZipRealty, drive around and see a few comparable homes, and read one of the thousands of real estate books out there then yes, maybe you should fork over your money to an expert.

Cost of Housing: People Will get Dirty for Tens of Thousands

When you are selling a $100,000 home in a slow market with few buyers, agents do earn every penny for their hard work if they bring a qualified buyer and the deal closes. Many agents across the US are not in prime areas and the percentage is not that much in nominal terms. But in the last few years, if you managed to get a listing in SoCal all you needed to do was list it in the MLS (if that) for $600,000 in a decent area and you would get multiple offers. In fact, sellers even put into their listings “sold as is” expecting buyers to put up or shut up. And guess what? Homes sold without inspections many times. Lenders couldn’t careless since banana republic mortgages were being bought by investors. So the sellers were in absolute control. It was the best sellers market in decades. It’ll be interesting to see how those in the housing industry that haven’t seen a downturn will react to this market shift (remember the jump of 600,000 NAR members since the boom?). Many of course are calling for a bailout and corporate welfare but this has little chance of making any impact in California or other high priced areas where prices are disconnected from the reality umbilical cord.

Many sellers that bought in 2004, 2005, 2006, and even 2007 that are looking to sell are quickly realizing that 6 percent is a big deal especially if they are swimming underwater. Any smart agent realizes that in slow markets quality buyers must be courted with lower prices and this may include rebates. No amount of marketing or savvy advertising will make a lender fund a buyer; you may have a willing buyer but if they don’t get financed, the deal is going nowhere. The market is changing and to be honest, those in housing will have to revert to old school ways of doing things. Adding repairs and sprucing up houses to catch a now dwindling amount of buyers. Throwing in discounts if possible. More aggressive marketing directed to bringing in qualified buyers (take note on Hovnanian advertising approach). And no, we are not even remotely close to a bottom. We had a 7 year housing bull market and only in late 2006, did we shift into a slower housing bear market. Heck, Los Angeles County returned back to its historical median record price of $550,000 last month so we haven’t seen a correction here. Expect this to last 3 to 4 years. Moreover, these new services are built to cater to price conscious buyers and sellers; in down markets with tighter credit, nothing is more precious than price.

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