Housing Rolling Along 2

Loss Vegas

You could call it condo-maximum in Las Vegas. With so many projects in the works, industry watchers are starting to believe that some developers might have more luck at the craps tables than in their own sales offices.

"The city's official bird appears to be the crane," chuckled one builder who got in and out of the condo market before the flock of construction towers landed on building sites.

The most notable of the troubled projects is George Clooney and Rande Gerber's (aka Mr. Cindy Crawford) 11-building Las Ramblas complex, on 25 acres.

The plan called for thousands of residential units, a hotel, casino and retail area. Calls to fellow partner Jorge Perez and Marty Burger, The Related Companies president of its Las Vegas operations, were not returned.

Elsewhere, Ivana Trump's condo project is tanking - with her 80-story, 945-unit "Lipstick Tube" tower coming up short of customers.

Her co-developers have put the site on the market for $49 million, The Post reported last week. Meanwhile, Ivana's ex-husband Donald Trump's residential project, a short distance away, is nearly sold out.

We're told there are more soon-to-fail projects to follow. But Happy Holidays, anyway.

http://www.nypost.com/realestate/gs1.htm
 
http://realtytimes.com/rtapages/20051227_california.htm
California Market Timer Pessimistic
by Blanche Evans

Robert Campbell, author of The Campbell Real Estate Timing Newsletter, a subscription-based bimonthly newsletter, says that his biggest concern about the California housing market is creative financing.

In his November, 2005 edition, Campbell writes, "Creative financing can be very dangerous when the price of the asset loses significance. People start believing that it doesn't matter whether a home sells for $200,000 or $400,000 because the monthly payment is the same. Sorry, but when mortgage loans are based on fictional values as opposed to true values that are supported by economic fundamentals, financial bubbles can develop that eventually implodes."

Markets are mean-reverting, which he says explains why booms are followed by busts. Prices will fall and revert back to true economic value if they have become overvalued in a boom. He considers vital signs to be: existing home sales, new home building permits, notices of default, foreclosure sales, and interest rates, but looks at many more indicators to arrive at his market timing solutions.

Like other investors, Campbell compares housing to stocks, and believes that when investors push prices up beyond the fundamentals of earnings, stocks invariably make a correction and return to the mean. Housing's "P/E" ratio can be valued in a similar fashion to stocks. The price of homes is compared in a ratio with the income needed to buy them.

Using that calculation, California homes are overvalued, he says. "In September 2005, the median price of a CA home was $544,000 and the median household income was $60,300. This puts the P/E ratio at 9.4, which is a level of extreme overvaluation based on 26-year norms. From 1996 to 2005, CA home prices rose by $366,000, a phenomenal 305 percent rise, while CA incomes rose by $17,000, a 40 percent rise."

To calculate how housing prices would fall if they were to revert back to the 26-year average for the P/E ratio, Campbell multiplies $60,300 by the average P/E ratio of 5.2. If the market reverts to the mean, housing in California should cost about $314,000, which makes it susceptible to a stomach-lurching 42 percent drop.

"Pushed to extreme levels of overvaluation by greed and easy money," writes Campbell, the California real estate market is now a bubble. Housing prices have risen to a price/earnings ratio that is significantly out of balance with sustainable economic fundamentals. When a bubble bursts, history shows that , at a minimum, prices will retreat back to levels that are consistent with long-term norms. Sometimes, however, over-inflated asset prices fall to P/E ratios that are below the long-term norms, when this happens, the stage is set for the next great buying opportunity." P/E's were at their most favorable in 1985 (4.1) and 1996 (4.1). If incomes rise 4 percent annually, creating an average income of $70,500 in 2009, home prices should fall to $303,150.

That would represent a 44 percent decline from today's median home price of $544,000.

If that's not enough for speculators to mull over, Campbell has more.

California homes have always sold for a significant premium compared to other U.S. homes -- 63 percent more since 1968. In Sept. 2005, the median U.S. home was $212,000. The same home in California should cost $346,000 (212,000 x 63 percent, add result to 212,000.) If the median home in CA is $544,000, the market is overpriced by $199,000.

With market bottoms in 1983 and 1996, the market premiums were 63 percent and 50 percent, for an average of 57 percent. That means the current market would have to drop 39 percent to meet that lowest average. Using a 38-year historic norm, housing prices would have to drop 36 percent to $346,000.

Now, if only someone had a boom calculator that could price in human nature because it's highly unlikely that with today's easier credit, that investors, speculators and homebuyers would ever let the real estate market get that low again.

Published: December 27, 2005
 
just from personal experience...

i have an income in the top 10-15% of the country but can't afford a MEDIAN priced home without sending half my net to the bank or using an infinite year/interest-only loan.

meanwhile some examples of my friends in the past 3-4 months:
- bought $340k home on $70k income and no savings
- bought three $350k pre-construction condos with plans to either flip quickly or rent them for $6-800 negative cashflow. cap rate is 2-3%.
- refinanced on an option ARM, takes a trip to Europe, 3 trips intra-country, remodelled the house, and doesn't even work. he lives off the refinancing!
 
Quote from jem:

As a realtor, and and investor I have been watching this stuff.

First regarding the Price to income thing. Properly framed the ratio should be the cost of finance to income.

The NAR stat I just saw for my area which was the hottest in the country on recently moved out of the middle of the chart. It may begin expensive but it hasn't reached levels that were hit in the 1980s.

Two, I read today, that 40% of homes in this country are owned outright. No mortage. Which is consistent with what I have been saying. Many buyers here in Florida have paid cash for homes.

....
More...

I dont know how the stats were compiled but its pretty clear that in many areas price versus income is completly off the chart historically.

Moreover, the ownership is not distributed uniformly and clusters in low price to earnings areas.

I've made my play - cashing out of most of my investment properties except those that I plan to hold for the next 15 years.....

I really only use the price to income numbers and in many of the boom areas these have continued to degrade over the last few years .... the pricing will not be supported short term. The only question is how long and how far the price adjustment will run ....
 
Quote from jem:

As a realtor, and and investor I have been watching this stuff.

First regarding the Price to income thing. Properly framed the ratio should be the cost of finance to income.

.....40% of homes in this country are owned outright. No mortage. Which is consistent with what I have been saying. Many buyers here in Florida have paid cash for homes.

I am saying that we are not going to fall off a cliff. No, but what I am saying is I have seen these same B.S. stats for 5 years. They were wrong for the first 4 now we are having a little consolidation. We will see.
More...

Jem....I understand what you are saying. But your statement "the ratio should be the cost of finance to income" to me represents the whole problem in a nutshell. That people have gone out and chased up the value of these homes with all this "cheap" money simply because they could afford the monthly payments.

But now a storm is brewing. While over the last few years real estate lending standards has gotten easier and easier...to the point that it appears there is just nothing kinkier in the mortgage product universe to be offered. All the "longs" are FULLY invested. The change is that now interest rates are starting to rise, documentation is starting to get tougher...just the opposite of the relaxing of the last few years.

So, while you contend that the chart should show "finance to income", it should really be showing what my charts actually showed...the actual price of the underlying house to income. Because buying a real house for the long term means having real long term fully amortized financing. Remember when people used to buy homes and they were eventually paid for after 30 years with 30 years of predictable payments?

Prices really do matter. Loans must be eventually repaid. And when trillions of ARM and Option ARM real estate loans (most all the of new loans in Florida and everywhere else) begin to be reset fundamentals will once again be set right and they will matter once again.

And Florida is no different than San Diego, San Francisco, Boston, or any other bubble area. All of these areas will crash. Florida has crashed before despite the sunny weather, and it will crash again.

Soon.

http://www.politicalgateway.com/news/read.html?id=5723
"I had said, 'Once the new laws go into effect, only the destitute will be able to walk away from their bills in bankruptcy. Others will have to pay or make arrangements to pay...The lenders no longer fear you walking away from a bad loan and that has been a subtle under current in this crazy loan market."

"I had mentioned in my previous article..the I/O and ARM mortgages all have a fixed term for a few years and then start 'adjusting' yearly or even monthly. You can see what will happen. You will need to refinance when the rates adjust, quickly. Many may have to sell causing a huge inventory to appear. This makes it a buyer's market and prices will drop considerably, or so I predict."

"Some signs that this is coming true: According to CNN Money, real estate inventories have hit their highest point in more than 19 years. New home sales posted their biggest drop in over a decade, falling 11 percent from October. In south Florida, where the market is hot and where I work, single-family existing home sales dropped 48 percent in Miami-Dade and 44 percent in Broward compared to the same period a year ago."

"CNN Money reports today 'Sixty-five of the nation's 299 biggest real estate markets, representing 38 percent of all housing, are severely overpriced and subject to possible price corrections.' 15 different metro areas in FLorida are in the list of extremely over priced metro areas and all 15 had grown more over priced during the last quarter. In Phoenix Ariz..over 30% of all homes selling on the market are owned by investors. That means they are getting out in droves and when the speculators (investors) leave, it is a sign."

"My advice, if you are not a seasoned investor and your mortages are ARMS and I/O's because you could not afford a normal mortgage, I say 'sell as fast as you can, for whatever price you can get now.'"
 
Quote from onewaypockets:

Jem....I understand what you are saying. But your statement "the ratio should be the cost of finance to income" to me represents the whole problem in a nutshell. That people have gone out and chased up the value of these homes with all this "cheap" money simply because they could afford the monthly payments.

....
More...

This argument has been advanced by the real estate ecosystem that makes money off of transaction volume. The argument was the answer to the objections of the unsophisticated when they mentioned that the property they were considering was underwater as a rental, and would be underwater for the forseeable future.

I've heard every theory in the world to explain that currrent price levels are still valid: rich foreign investors, a new world of financing and new economic rules, retirement purchasers, etc etc etc.
 
Saying that "the ratio should be the cost of finance to income" is a bit of a misnomer because there is no uniform metric for the cost of financing. The increased number of various mortgage products completely throws this theory out the window. The cost of financing will be extremely low on an OptionARM but that cost of financing is unsustainable as that loan will recast and the cost of financing will more than double when the loan recasts after reaching either 110 to 125% of the original loan value or the end of the 5 year Option period. Same goes fore interest only ARMs, the cost of financing is not fixed and therefore cannot be used. I can see a argument for cost of financing on a sustainable market rate fixed loan, and would assume that today's rates of 5.75-6.5% offer a significant discount over the historical average of 7.5-8.5% but the adjustment still has to be somewhere in the -20% to -30% range for housing prices to become sustainable. Also take into account the number of borrowers who have been misled or flat out lied to about the true structure of Interest Only hybrid ARMSs and Option ARMs. I know about this phenomenon first hand because I currently work in the mortgage industry. A large percentage of these people will have their homes foreclosed which always leads to a downturn in value. Nothing hurts a neighborhood more than properties for sale by the bank
 
Quote from dvda420:

Saying that "the ratio should be the cost of finance to income" is a bit of a misnomer because there is no uniform metric for the cost of financing. The increased number of various mortgage products completely throws this theory out the window. The cost of financing will be extremely low on an OptionARM but that cost of financing is unsustainable as that loan will recast and the cost of financing will more than double when the loan recasts after reaching either 110 to 125% of the original loan value or the end of the 5 year Option period. Same goes fore interest only ARMs, the cost of financing is not fixed and therefore cannot be used. I can see a argument for cost of financing on a sustainable market rate fixed loan, and would assume that today's rates of 5.75-6.5% offer a significant discount over the historical average of 7.5-8.5% but the adjustment still has to be somewhere in the -20% to -30% range for housing prices to become sustainable. Also take into account the number of borrowers who have been misled or flat out lied to about the true structure of Interest Only hybrid ARMSs and Option ARMs. I know about this phenomenon first hand because I currently work in the mortgage industry. A large percentage of these people will have their homes foreclosed which always leads to a downturn in value. Nothing hurts a neighborhood more than properties for sale by the bank
More...

Exactly...I posted a month ago about how much the monthly payment could go up...the example here showed it could raise 48%!

Suddenly flipping isn't fun anymore! OWP



From "Another Fu@ked Borrower" website...payment not up 7.5%, try 48%! OWP

http://anotherfuckedborrower.blogspot.com/
Thursday, December 01, 2005
Welcome to the gun-show...now show me your ARMs!

DAYUM!!! Mr. Greenspan should be a personal trainer...he has millions of home buyers working on their ARMs! Depending on what program you get on, your ARMs won't grow at all for a while...but then something happens....and BLAM they will really GROW!! I have seen people add 3" to their ARMs overnight!!

Yeah, too bad people's fascination with ARMs isn't in the fitness realm of things....it is in the financial.

Well, at least I'm here to "pump you up" with the real deal of what is going on out there...

Depending on where you are in the country, and whose numbers you use, ARMs (adjustible rate mortgages) are making up a staggering percentage of todays loan production. I have seen some statistics that say over 70% of the loans in California are ARMs...and many of those are interest only and option-ARMs (see my long post about them further down...or in the archives).

So what does this mean??? Here, I'll show you. Let's take the ever popular 2/28 loan that millions of "subprime", "alt-a", "non-conforming" borrowers have jumped into the past few years. Most of these have a 1.5% annual cap on the rate increases, and the index is usually the 6-month LIBOR plus the margin.

Let's just use a $300,000 loan amount as an example...and let's say the bwr got the loan a year or so ago when rates were "smokin".

$300,000 at 5.25% I/O 2/28 ARM

Payments for 24 months = (300,000 x .0525) / 12 = $ 1,312.50 a month

Now lets look at those payments when they adjust. Not only do the payments adjust, but you have to start paying the PRINCIPLE off as well (unless you refi/sell/foreclose). Let's say the rate jumps to 6.5% (could be higher) and NOW you have to amortize over the next 28 years because you didn't pay any principle during the 2 year I/O period.

Now, I'll compute the payment from my old-school HP 12c calculator...if you are smiling...you know what I'm talking about...you love'em or hate'em!

Payments when it adjusts = $ 1,941.05 a month

So the payment JUMPS $624.50 in one month!

NOW, let's assume that when you "qualified" for the loan, you met the 50% DTI (debt to income ratio). Now that your payment jumped 48% in one month, what kind of dent does that put into your cash flow?

But wait...what if you happened to have gone STATED to meet the 50% DTI requirement because you didn't make enough money to qualify for even the I/O payment??? Now what is your DTI??

I have no idea....because I don't know how much you lied your a@@ off to get the loan in the first place!

Well, I think you get my point. Now multiply this scenario by the tens of thousands. Sure, some will have sold, refi'd, or otherwise could have afforded the house in the first place...but is there any chance that maybe a few people cannot handle a $600 jump in their mortgage payments?!?!?!

Keep in mind...I only used a 300k loan amount. I see plenty of people doing this on loans from 500k to 900k and above.

Multiply the pain accordingly...

posted by SoCalMtgGuy at 2:40 PM
 
http://www.voiceofsandiego.org/site/apps/nl/content2.asp?c=euLTJbMUKvH&b=486837&ct=1748713
"Stephen G. Bishop thought becoming a real estate appraiser would be a good idea. A couple of years ago, he got himself an appraiser's license and went to work as an trainee appraiser in the thick of San Diego's then-booming real estate market. Two years later, Bishop said he had been fired from three appraisal companies for refusing to inflate property estimates to meet the demands of competitive mortgage brokers. He mailed his license back to Sacramento in disgust."

"'This whole run-up in prices has been fraud-driven, it's got very little to do with supply and demand,' Bishop said. 'Nine out of 10 deals are fraudulent, and any successful real estate person has an appraiser in their hip pocket who will give them any figure they want.'"



http://www.chicagotribune.com/business/bal-te.bz.slowdown30dec30,1,4544031.story?ctrack=1&cset=true
"Fat bonuses for buyers' agents. Thousands of dollars for closing costs. Prizes at open houses. Price cuts. Welcome to the new reality of the Baltimore real estate market."

"Homes are going on the market faster than they are selling. Realtors no longer lament a 'lack of inventory.' Sellers no longer can expect a flood of offers and even bidding wars."

"Chad Dillard doesn't need anyone to tell him that the sizzle has evaporated. He chopped $14,100 off the asking price for the Homeland semi-detached just 30 days after listing it for $299,000 in late September, and now his agent is hinting at another cut. Dillard, who had watched Baltimore friends lose out on house after house in a hot market, never expected to have a problem selling. 'It surprises me. I just didn't suspect that was happening,' said Dillard, who moved to Oregon in October. Now, paying the mortgage on a home he no longer occupies, he says, 'I've gotten more anxious.'"

"Nationally, sales of existing homes declined in November for the second month in a row. In the Baltimore region, sales fell in every jurisdiction, including the city, where the drop was the first in three years. The number of homes for sale in Baltimore and the five surrounding counties more than doubled from a year earlier, to 10,913."

"In Howard County, realtors say the shift is unmistakable. 'It's definitely slowing, and people are going to have to realize they may have to lower prices,' said Melvina Brown, past president of the Howard County Association of Realtors.


http://business.bostonherald.com/realestateNews/view.bg?articleid=119218
"'It sounds more and more like the housing adjustment is a harder landing in Massachusetts than elsewhere in the country,' said economist Nicholas Perna. 'I don’t think we are seeing anything like that in the country as a whole. My guess is that Massachusetts is among the most seriously affected.'"

"The cooling market is disappointing would-be sellers. Gone are the days when brokers could easily sell a house within a few days or weeks, juggling multiple offers, executives said.


http://www.bradenton.com/mld/bradenton/news/local/13512109.htm
"The number of existing home sales fell 39 percent in Manatee and Sarasota counties in November, the sharpest drop in the state. The Sarasota/Bradenton market remained the fifth-highest priced in the state, according to numbers released by the Florida Association of Realtors."

"The trend of more inventory and fewer sales started toward the end of the summer after a four month period of skyrocketing prices and sales that started in March. 'The investors that wanted to get in, buy something and flip it quick, they don't exist anymore,' said (broker) Dave Minton."

"Leslie Wells said the numbers don't surprise her. After 30 years in the real estate business, Wells said that instinct tells her a change has taken place. 'I'm going to say yes, it has changed from a seller's market,' Wells said Thursday. 'We are starting to see price reductions every day and sales aren't coming as rapidly.'"

"If Wells listed a house for less than $350,000 during the past year, she could count on multiple offers in the first week, she said. Now, houses in that price range are 90 days on the market and haven't been shown as much as they previously were, Wells said. 'It's a market adjustment,' Wells said. 'There was a frenzy and we are seeing the corrections now. People were putting their houses on the market and expecting an offer the first week. Appraisers had a hard time justifying prices. They couldn't find any comparables.'"

"For the first time in a year or so, prices are coming down as sellers see that their property is not being grabbed immediately, said David Ford, a broker in Bradenton. 'There are a glut of properties on the market,' Ford said. 'Every day we are getting faxes and e-mails offering an extra $10,000 to buyers if you can bring an offer in before Jan. 1. Right now, there are far more sellers than buyers and people are discounting their numbers.'"
 
Most 2/28 I/O ARMS still have a 5 or a 10 year I/O period so the paymnet jump will not incorporate any principle and therefore not be as painful as an Option ARM scenario.

Option ARM cash out or purchase transactionis performened with LTV of 75 or 80% and 2nd mortgage up to 90% CLTV on a $400,000 property. Minimum payment rate is 1.5% margin is 3.25 and index is currently at 3.8, meaning the real interest only payment is 7%. Minimum payment is now 5.5% below real payment. Assume no I/O or Fully Amortized payments are going than 5.5% of 75% get's tacked onto the pricnciple. This takes the original loan of 300,000 and makes it a $316,500 balance. The loan will now be at 105.5% of original LTV at the end of year 1

. Suddenly the compounding effect will kick in and make the loan recast by reaching 110% of the original loan size some time around month 20 or so. Keeep in mind that the recent fed hikes have not fully made their way into the 12 month MTA average therefore we will likely see the index climb further. When the laon re-casts at month 20 all payments must now be fully amortized on the remaing 28 year and 4 month term. Well let's take that $330,000 and see how the payment jumps when it goes from a minimum payment negative amortization loan to a fully amortized 28 year and 6 month loan.

The original terms were 1.5% with a 30 year amortization resulting in a payment of 1035.36, the recast will send the payment to 2230.09 OVER DOUBLE the original payment! Now also keep in mind that the loan balance has now grown to $390,000 or 97.5% of the original purchase price. If the house has not appreciated enough to allow the owner to refinance into an interest only loan at approxiamtely 6% for a payment of $1650 a month which would itself represent a 65% jump in payment over the original NegAm payment of the Option ARM the borrower will likely not be able to sell and pay his/her half of the closing costs and the realtors commission therefore leading to a foreclosure situation.

This is also a terrible scenario for the bank because they will never fully collect on the negative amortization as the borrower has been paying only 1.5% interest during the life of this loan and the bank will be unlikely to recover all of the defered interes after foreclosing on the house and than having to sell the house at a discount due to its status as a foreclosed property.
 
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