November 12, 2007

Happy 1 Year Anniversary Doctor Housing Bubble! Introducing the new Website

Hard to believe that we have been posting for one year. With over 150 posts, many multiple pages long, I realized that we have outgrown the Blogger site. In fact, we have written over 300 pages worth of housing analysis regarding foreclosures, housing psychology, and the intricacies of the current housing market. We have a wonderful and insightful community and I wanted to setup a site where communication will be much better and provide a place for a community to grow. I believe that we are only entering the first stages of a multi-year housing bear market. And since our friend Ben Bernanke is slamming the dollar, I decided to celebrate our 1 year anniversary by rolling out a new site by spending my now depreciated dollars because in a year, I may need to use a wheel barrel to purchase this same website. This weekend I was working away setting up the new website at and making sure everything was up and working. Over at the new site, we have the following new items:

· I’ve added a search feature to make it easier to search through our 150+ articles.

· I’ve added a forum which should be great for conversations that require more than a simple comment section.

· The posts are now easier to browse through via the archives section.

· I will be doing a weekly short-sale update.

Come take a look at the new site and let me know what you think. We will keep up this Blogger site for the meantime but will be adding new posts to the new site. But if you could please update your bookmarks to, that would be great. If you are subscribed via Feedburner you do not need to do anything since we will update that information for you. What started out as a hobby has morphed into a fun and diverse community with over 160,000+ unique visitors a month. Thanks for making this a wonderful community and I look forward to posting new articles. I look forward to seeing all of you at the new site!

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September 30, 2007

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 3rd 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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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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September 25, 2007

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.


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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