September 27, 2007

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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Exit said...

Doc, to follow up on your Florida piece, found this clip through Minyanville -

50% off condos in Miami - and tons more coming down the pike.

The unemployment figures are skewed, as well, since non-salary commissioned LO's can't file for unemployment insurance. So these 30% aren't even showing up on the rolls.

And of course Orangzilo has the 7000 LO's out at open houses - they have quotas to meet, and the builders that CFC have joint ventures with (KB, etc.) are sucking wind from a tailpipe right now.

Exit said...

Oh - 1 more thing about CFC and realtors. In California CFC vetted a payment plan to referring realtors and got it approved by the powers that be.

The CFC loan officer establishes one or another type of 'marketing' relationship with the realtor, variously called a CBA (Controlled Business Arrangement), ABA (Affiliated BA), or a JV (Joint Venture), any of which permit the LO to pay a referral fee to the realtor on the closed loan. There's a few more requirements, but essentially, there is a non-disclosed (to the buyer) financial incentive to the realtor to use the CFC LO. On top of any commission the realtor gets.

Once the relationship is established, it's like a pusher and a user - the user (realtor) is going to continue to go the pusher for that extra kick, regardless of whether it's truly beneficial for the buyer.

CFC benefits because they have the best customer retention program in the business (why B of A is interested in them). LO benefits by a steady stream of referrals. Realtor benefits from extra income.

Buyer? Hmmm.

Dr Housing Bubble said...


It is definitely a tight knit circle. In addition, there is a major lag factor for these job losses. The credit crunch only happened on a large scale a few months ago. Fall and winter are slower selling seasons in general. I imagine the large impact will be early Q1. Even in my very old posts, I was predicting this crunch hitting during late Q4 or earlier Q1 of 2008. It wasn't some amazing guess or prediction, simply looking at this data how could this market keep up the pace?

You bring up good points and I always appreciate your thoughtful comments. It'll be an interesting Q4 that is for sure.

Chris said...

exit: Concerning CFC referrals from realtors. Seems to me as long as the realtor isn't acting as the mortgage broker for the borrower, it doesn't seem like that bad of a deal.

Obviously, if the realtor were also the borrower's mortgage broker, that would be an obvious RESPA Section 8 violation. However, if they're casually referring a homeowner to a Countrywide retail office (without providing "settlement services") that borrower could still go to another lender if they wanted to.

To me it doesn't seem like anything more than good marketing.

Michael Blomquist said...

Interesting post!

I would like to encourage you and your readers to join me in convicting the criminals behind this growing pandemic. I am not talking about the mortgage broker or borrowers who committed fraud while inflating their incomes. I am talking about the kingpins. The debt rating agencies, analysts and investment bankers who were selling the illegal drugs...I mean loans.

This catastrophe will effect the innocent and the guilty. Those who inflated their incomes and those who did not. Numerous laws were promulgated after the S&L crisis to protect our financial markets from another catastrophe, but the regulators and others dropped the ball.

Have we gone insane, lazy or completely ignorant? These criminals need to be prosecuted!

Exit said...


In a truly 'neutral' environment where a borrower were to go to another lender, sure, it seems harmless.

That's a pollyanna view, however.

The buyer has entrusted this financially and emotionally gigantic transaction to the realtor - trust being the operative word.

For a realtor to then 'refer' the borrower to a CFC LO without disclosing that a referral fee is attached to me is unethical, despite it being blessed by the DRE et al. Who do you think pays for the referral fee? The lender? Sure.... in the same way that a seller pays for closing costs. If you've read any of Doc's explanations, you'll recognize that it's the BUYER who is paying the costs in the form of a higher sales price, or in the case of a mortgage, a higher rate or fees.

You say 'casually referred' - there's nothing casual about the referral when money exchanges hands.

The direct referral from a trusted source, a so-called warm lead, means the CFC has a much greater chance of closing the loan than does some 'other lender'. And contrary to the concept of competing on equal footing, internal CFC policy permits management to close a loan just to beat the other guy even if the loan loses money.

Why is this bad? Because the next borrower in line is NOT given the same deal. If EVERY borrower was given the same deal, then such a business model would be non-discriminatory and truly competitive. Why should borrower B who doesn't go to another lender to beat the price down not benefit from the same terms as borrower A who did? And in the end - again - who do you think ends up paying for the discounted loan, and the referral fees? The next borrower in line.

Good marketing means competing on a level playing field. I don't consider paying to play an example of a level playing field. In some arenas, it's called bribery, though here it's called a JV or ABA and sewn up nicely by the attorneys.

thamnosma said...

Follow up report on the Beazer project on Foothill Blvd. in Upland.

This is a long, somewhat narrow plot of land with multi-unit townhouse buildings set in two rows (the narrow side facing Foothill).

Far in the back I see completed, or what appear to be completed, buildings. It's difficult to determine if they are actually finished both inside and out, though.

Closer up toward Foothill are buildings in various stages of construction (like with the first layer of roof on) or cleared lots.

I haven't seen any pick up of labor activity since a couple weeks ago when it seemed awfully quiet for a workday. There is no labor being done whatsoever on the buildings "in progress". I do see some sign of activity way in the back on the more advanced units. My guess is this is mostly interior work.

This site had lots of trucks, equipment and laborers a few weeks ago. So, unless I'm missing something, progress seems on hold.
Same low level of activity I noticed a couple weeks back.

I'm wondering whether there are many half-built "communities" in the bubble states of Nevada, Arizona, Florida and our dear California. At the very least, I could see these "homebuilders" slowing down the pace of construction on started projects just to keep inventory down.

Mentalic said...

@Dr. You mentioned "Dissecting the article you can tell someone is well groomed in the art of PR". I read the CFC article that you linked to, and thats the exact thought that went through my head. Man!! These guys really know how to fool people. I was shaking my head all the while reading that article. I don't really understand why the "prime time" media doesn't dissect this further. By reporting such statements, they really mislead people. And, if you read towards the end of the article, they make it sound like CFC is the greatest there is.

RE Broker/Appraiser said...

RE Brokers must be having fun. Of course, you have to experience a relationship with a lender doing an REO to feel soome of this, to the heart! Begin relationship with REO outfit by doing your broker price opinion from $50 to FREE. Wait and see if you get the listing; which is seldom priced where you want it. Then, at your own expense, you pay past due balances to reactivate water, gas and electric, and have the house winterized. Spend more to spruce up the property and made essential repairs. At no interest, you await re-imbursement. THEN you learn a loan officer will be arriving to assist in the sale of the property. Naturally, he will report back to his firm on the condition of the property and what a great job you have done with your own money in getting the place ready to sell. I would expect the lender rep will have some new ideas of what you might spend in order to be ready for the open house. If you're wealthy, and have survived all this; you run the open house, accompanied by an individual with lots of authority and no clue how to sell a house. It takes a Realtor with deep pockets to finance the lender's REO adventure at no interest; and the bills keep coming in throughout the process. Usually, the result of the open house is a stab at a price reduction, and no interested buyers. It's just an expensive REO training seminar paid for by the Realtor. Referral fee at closing? I'd settle for interest on my money and proper pricing. Call me a dreamer!

goodloans4u said...

Once again, CWF comes out with a media hype that makes them look like the hero of the Mortgage industry.
This is the reason CWF has grown. They use the RIGHT appeal ,whether it is right or wrong. They are still offering POA's and NIV's. They are going to take their case to the homeowner, which is what we used to do. "GASP" a loan officer at an open house? That was part of the basic marketing back in the 90's folks. We offered discount fees to the builders just to let us in, one on one handshaking service. The typical loan officer today doesn't have a marketing plan if he got in the business in the last 5 years. If LO's would spend as much time at the open house as they do sitting around crying the blues they would turn this market around somewhat. This is a great article on the cause of what happened and who did it. SOOO, CWF is going to kick our butt again by simply doing what we ought to be doing. Get out there people and quit letting them take your business. You may not get as much as you once did, but you can always file for BK while CW takes your business.

speedingpullet said...

Strangely enough, ZipRealty just "lost" my login info this morning - all my saved searches and 'my homes' details have been mislaid, after almost two years of hassle-free use.
Fortunately, I keep a spreadsheet with all the info on it, so I can retro-find all my saved homes.

thamnosma said...

Results of Miami condo auctions this week...

Exit said...

Pie in the sky from Gary Watts

reader said...

dhb, can you please do a posting on the various incentives and recent drawings offered by builders here in CA? you offer brilliant and entertaining perspectives, would love to read your take on it.

John said...

Dr. HB:

At what point will Alec Baldwin be brought in to fire up the Real Estate sales force?

Third place is your fired.

This is sounding like Glengary Glen Ross every day.

Nathan said...

Ok, so I'm trying to buy a new house in the IE, offered a good price, way less than asking and builder accepted.

excellent household income with spotless credit/high FICO.

The best countrywide could offer me is 5% down, 6.75%APR paying one point and 9.5% on my second. House is about 700K.

I won't be borrowing any money from countrywide if that's the best 30-y fixed they have to offer. There are better deals to be had.

Dr Housing Bubble said...


Regarding the condo sales:

“A two bedroom unit that sold for about $600,000 last year, sold on average for $295,000.”

I don’t know about you, but that sounds like a nice discount. Keep in mind that record number of projects are being canceled and some will come online in 2008/09 which will be the worst timing for the housing market.


The media reports on what happened yesterday, today, and tomorrow. Historical researchers they are not. In terms of offering a future perspective, if they missed something so obvious as this housing market, why go to them for any guidance or financial advice now?

@Re broker/appraiser,

I think many agents are shocked that they have to stage a house and now wait months on end to sell a home. In fact, they are realizing that simply putting a home on the market isn’t enough anymore. A change in perspective will take at least a year or two.


They are forced to scale back. That is why they are planning on laying off 20,000 employees. They need to cut back in order to survive. Even BofA with their no fee mortgage is eating up the prime mortgage market. Why would you go to a broker when you can get competitive rates and pay zero points and no closing cost? They’ll just make it up on prime paper. Only the prime will survive.


Not sure what that is about. ZipRealty is a good search system. I hope to see them expand in the near future.


Let us take a look at a few of the arguments proposed by Gary Watts’:

"Although we are enduring the “hang-over” from the 2003 & 2004 “wild party years” (which includes the present problems in the sub-prime market and increasing foreclosures), Gary still does not see any economic signs, that will cause any major price changes for most of the Southern California housing market – other than remaining in a “neutral position”

Even the most adamant housing bears are negative on housing. Look at Cramer telling people not to buy. And what did he say about the Inland Empire? If you are holding a neutral position with everything that is going on in the current economy and all the trends that are emerging, I’m not sure what else can be done. Remember Baghdad Bob and his “there are no tanks…” talk and then we see other footage showing American troops taking over the area? It is something to that effect.

“The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000.” – Business Week, 1969

Great! Why stop at 1969, homes were going for a few thousand during the Great Depression. People had no jobs and incomes were much lower, but why mince words. That same $28,000 invested with a conservative 8 percent return is $521,360 for the same time frame.
Another one of his arguments is the baby boomer effect:

“They are part of a major buying wave, as 75% plan on moving to either the west or the south for warmth. Already, 80% own their own home with 25% of those owning additional property. This helps to explain why, in 2005, 27.7% of all sales were for investment purchases and 12.2% of all sales were for 2nd homes!”

Too bad the average nest egg for those reaching retirement is $50,000. And 27 percent of homes were not bought by baby boomers. They were bought by flippers via renegade mortgage products that we are seeing implode. Apparently he thinks that while you start receiving your Social Security checks most folks are going to decide to be landlords. Why do you think the vacancy rate is running up in many parts of the country? Are these retirees going to buy $500,000 homes to rent out in major metro areas for negative cash flow? His analysis regarding boomers is wrong especially in the current market it isn’t even worth going into any further detail.

Another of his arguments is immigration:

Add to this the immigrants purchasing real estate and you can see that the U.S. home buying market will remain strong. From 1980 to 2000, over 6.2 million minority households joined the ranks of middle-income earners, and they are purchasing housing.

Guess who is getting destroyed in large numbers with subprime loans? Minorities in lower to middle income areas. In addition, many of these immigrants are not going to be buying over priced homes in metro areas, especially not in California. Where the hell is he getting these stats from? Just because you can buy a home doesn’t mean you should. As Chris Rock once said, we can all drive with our feet but that doesn’t mean it’s a smart idea.


I think prices aren’t going down as fast in the data because of home builder incentives. Free appliances, trips, cars, and other goodies don’t factor into the bottom line sales price. Now, they are having to cut prices in addition to these other free items. At this point price is king.


I expect to see him show up on a NAR commercial. “If you don’t buy right now, I’ll smack you across your filthy face!”


Only you can tell if the price is good. Run the numbers on a rent-vs-own calculator, factor in tax benefits, and see if it makes sense. If it does, go for it. The thing is, nearly every area in California doesn’t make sense in any real estate valuation formula.

JimAtLaw said...

Had an interesting exchange with IrvineRenter (of the Irvine Housing Blog) a couple of weeks ago. He suggested that the rent-to-purchase-price ratio for owner-occupied in this area is closer to 160x than the 100-120 for investors, to which I responded that if you have an HOA, let alone Mello-Roos, this presumably pushes you back toward the investor number. But it got me thinking about getting off my rear and doing the math.

However, I'm a lazy, lazy man, so first, I'll put the question to you, Doc and esteemed co-readers - what do you think are reasonable ratios for SoCal for rental-investments and/or owner-occupied homes, given our property taxes, etc.?

Doc, as a topic suggestion, I would just love to see an analysis of why 100-120x is the conventional number, and/or how you come up with whatever numbers you do come up with for either or both categories.


Mr.Mortgage said...

Millions of Homeowners Only Have Three Choices