Real Estate Crash thread

[Spats]

There are 206 houses on the market in a population of 8600. There will only be a shortage if all those prices fall to where the current market can bear them, and somehow lending in the next few years returns to easy money allowing the rental crowd to start buying. While the first might happen, I really wouldn't count on the second occurring in any big hurry.

Also, don't forget that people are taking roommates, moving in with relatives, etc. because they have either no job or a lesser-paying job. Many of those 3500 square foot McMansions with more bathrooms than people are going to get used as multi-family dwellings or carved up into apartments, just like all the big old Victorians in city centers were.

[H0G]

Otherwise, your lender might be amenable to a reduced principal if you have to sell, so call them and
try to get a principal reduction, I don't know if CO has that program in place. .

principal reduction is NOT an option. Your have 3 options...Short sale your home, keep it and ride the wave, or ask your lender to modify your loan (which does not include principal reduction and will not)

If they start doing reductions on a massive level, then everyone will stop paying his/her mortgage to get it.

edit - loan mod includes lowering your rate, etc.

[coreshot-tourettes]

Countrywide is already doing principal reduction in some cases, as is GMAC. HOG, don't throw BS out there if you don't know what's going on. Principal reduction is going on at the lender level and may start to happen via governmental action in the next few months. HOWEVER, your loan mod whether it's a refi or a principal reduction may turn it from a non-recourse to a recourse loan (meaning your other assets are on the hook for it and can have liens against them if you default).

What HOG is suggesting is only good for the lenders (which is to be expected given his employ).

woodstock, the 2.5-3x incomes is reasonably invariant with interest rates, as higher rates also drive down business credit (that is, wages) along with home prices. Higher interest rates drive down home prices but also prevent businesses from servicing their credit lines as easily, so your paycheck will go down too.

[woodstocksez]

woodstock, the 2.5-3x incomes is reasonably invariant with interest rates, as higher rates also drive down business credit (that is, wages) along with home prices. Higher interest rates drive down home prices but also prevent businesses from servicing their credit lines as easily, so your paycheck will go down too.

That doesn't seem to make sense. Whatever amount of money you make, the amount of mortgage you can afford (and thus, we're assuming, the amount of money you can pay for a house) will decrease as interest rates increase. (If I make 50K, for example, the maximum mortgage I can get at 5% is greater than the maximum mortgage I can get at 10% - given that lenders have started to have lending standards again.) So, if high interest rates drive down wages, as you posit, then home prices should be driven down even more, as they experience the double whammy of lower incomes to pay mortgages and a greater cost for any given mortgage amount. Correspondingly, even if higher interest rates don't depress wages, any given wage amount will only support a smaller mortgage amount. So, it would seem that the ratio should increase as interest rates decrease and vice versa. When we're in a low interest rate environment (as now), it makes sense to me that the ratio would be higher than the historical norm.

[mock vomit]

...Let's say the water stopped running in your house for a week. What would you drink?
Let's say the electricity in your area goes off for a week. What do you do about all the food in your refrigerator? Can you cook food? Can you heat your house?
Let's say that there's a financial dislocation and credit cards and ATMs stop working for a week or two. How do you feed yourself?
Let's say the local supermarkets stopped getting food deliveries for a week or two. What would you eat?...

Ooooh, ooooh!!! I'm a real estate nerd, I think I know the answer to these; "Hookers and blow"???

[H0G]

Countrywide is already doing principal reduction in some cases, as is GMAC.

If you are one of the 400,000 involved in the Countrywide lawsuit, it may be possible to reduce your principal. GMAC and the other lenders are doing it on an EXTREMELY small level with people in very specific situations.

So it really is not an option unless you are lucky. Go do the research on the interwebs and ask the person you "follow." Then get back to us. I can't wait.

[coreshot-tourettes]

That doesn't seem to make sense. Whatever amount of money you make, the amount of mortgage you can afford (and thus, we're assuming, the amount of money you can pay for a house) will decrease as interest rates increase. (If I make 50K, for example, the maximum mortgage I can get at 5% is greater than the maximum mortgage I can get at 10% - given that lenders have started to have lending standards again.) So, if high interest rates drive down wages, as you posit, then home prices should be driven down even more, as they experience the double whammy of lower incomes to pay mortgages and a greater cost for any given mortgage amount. Correspondingly, even if higher interest rates don't depress wages, any given wage amount will only support a smaller mortgage amount. So, it would seem that the ratio should increase as interest rates decrease and vice versa. When we're in a low interest rate environment (as now), it makes sense to me that the ratio would be higher than the historical norm.

You have a point with the double whammy of high interest rates depressing wages *and* the higher interest rate reducing the ability of a constant wage to service a given loan principal. However, one could also account for raises one could expect to see over the life of a loan (representing genuine increases in productive capacity).

There's the other metric of 50% debt to income which gives you insane results (a household making the median $50233 would be given a $437K loan at the current 4.xx% rate). Putting it at a conservative 20% of debt to income gives a loan result of $151K or ~3x gross

Historical rates going back to 1991 vary from 9.5 to 4%.

Basically, using 2.5x - 3x price to gross income ratio puts you using a safe 25-30% of your gross income in a monthly payment across all historical interest rates since 1991 in a 30yr fixed. So it's a pretty good metric.

The maximum you could safely do at these rates is about 4.7 times your income. However, that ignores other credit card debts which average at $8200 a household ($136/mo) plus a car payment ($200/mo), puts you at $904/mo house payment or about 3.3x your income.

[coreshot-tourettes]

If you are one of the 400,000 involved in the Countrywide lawsuit, it may be possible to reduce your principal. GMAC and the other lenders are doing it on an EXTREMELY small level with people in very specific situations.

So it really is not an option unless you are lucky. Go do the research on the interwebs and ask the person you "follow." Then get back to us. I can't wait.

The federal government is already doing loan mods to principals on a trial basis. Way more lenders than CW and GMAC are doing it as a way to reduce defaults. Some at least appear to be working.

Principal modification will become more widespread, it's viewed that it's a virtual certainty. I'm not saying that's a good thing, but it's in the pipe. Sorry. That's just what I hear. It might be a good option for the maggot above if he qualifies. That's better than you saying "PRINCIPAL MODIFICATION IS NOT AN OPTION, SO SAYETH GOD." Why not explore all available options instead of you slamming the door shut on him? Sheesh.

[Hutch]

I'm trying to persuade a Utah lender to take a 10% hit on the principal on the $1.5MM construction loan I referenced yesterday. The only leverage I can think of is that they will not wind up owning the property (avoiding legal and carrying costs) and they will have a hard time collecting the deficiency from my client (which is probably not really true, he has a bunch of equity in other real estate). I'll let you guys know what happens, but the way these mortgages are written, I anticipate that they would rather do just about any type of restructuring of loans than a principal reduction.

[Stu Gotz]

The problem surrounding principal loan modification is the fact that no one owns the whole loan. (Edit - rarely does any bank hold the loan, although that is changing) If you could go to Bank A and talk to your banker about the win-win aspects of reducing your principal, everthing would be hunky dory. But these mortgages have been sliced and diced so many times, that getting any consensus from the invested parties would be almost impossible on any scale whatsoever. Just google Carrington Capital and Wilbur Ross to see what a sh!t show is occurring between servicers, senior and junior note holders, etc.

[woodstocksez]

You have a point with the double whammy of high interest rates depressing wages *and* the higher interest rate reducing the ability of a constant wage to service a given loan principal. However, one could also account for raises one could expect to see over the life of a loan (representing genuine increases in productive capacity).

There's the other metric of 50% debt to income which gives you insane results (a household making the median $50233 would be given a $437K loan at the current 4.xx% rate). Putting it at a conservative 20% of debt to income gives a loan result of $151K or ~3x gross

Historical rates going back to 1991 vary from 9.5 to 4%.

Basically, using 2.5x - 3x price to gross income ratio puts you using a safe 25-30% of your gross income in a monthly payment across all historical interest rates since 1991 in a 30yr fixed. So it's a pretty good metric.

The maximum you could safely do at these rates is about 4.7 times your income. However, that ignores other credit card debts which average at $8200 a household ($136/mo) plus a car payment ($200/mo), puts you at $904/mo house payment or about 3.3x your income.

My other quick observation is that the "safe" level of the ratio should increase with increases in home price, i.e., as my income gets larger, I should be able to use a larger percentage of it to pay a mortgage (and property tax, etc.), since my other expenses will probably (at least not for me, certainly) increase by a commensurate amount. For instance, if I make 50K, spending half that on housing costs is a stretch, whereas if I make 500K, spending half that on housing costs is far less of a burden. So, I think it would be reasonable to expect a "safe" level of the ratio to be higher in places with high housing costs (and wages).

[Hutch]

The problem surrounding principal loan modification is the fact that no one owns the whole loan. (Edit - rarely does any bank hold the loan, although that is changing) If you could go to Bank A and talk to your banker about the win-win aspects of reducing your principal, everthing would be hunky dory. But these mortgages have been sliced and diced so many times, that getting any consensus from the invested parties would be almost impossible on any scale whatsoever. Just google Carrington Capital and Wilbur Ross to see what a sh!t show is occurring between servicers, senior and junior note holders, etc.

That is a great point, but probably less true for 2-year, high interest construction loans, no?

[skier666]

Wouldn't the tax consequences if your loan does modify/principal reduction mean that you technically received income? Just a thought.

[H0G]

Wouldn't the tax consequences if your loan does modify/principal reduction mean that you technically received income? Just a thought.

yeah - they would 1099 people who short sold their home for $300k or whatever.

now they are not supposed to do that btw. but they still try.

[LeeLau]

H0G - are you a realtor?

2.5x is a thing of the past? That's a brave thing to say. What has changed so this old rule of thumb is no longer valid?

there is no need to get butt hurt about it. if your employment had anything to do with the real estate industry, your words would carry more weight.

being a safety engineer reveals a lot about you. you probably are very risk averse and tend to over analyze things. look at specific numbers vs the overall picture. averages, etc etc. real estate is about location, and the front range is starting to look ripe for investment.

I am in the real estate industry and in the trenches every day btw. you go off of reports and numbers that lag behind what is happening in the now.

there are still people making money out there despite what the news tells you, and people like to spend a little more on a better home. 2.5x earnings is a thing of the past.

[Benny Profane]

Wouldn't the tax consequences if your loan does modify/principal reduction mean that you technically received income? Just a thought.

It was taxed as income, and may still be, but this may have changed recently.

[cramer]

Wouldn't the tax consequences if your loan does modify/principal reduction mean that you technically received income? Just a thought.

If its your primary residence, i doubt there are any tax consequences. The only ones getting nailed right now were the flippers and investors who are foreclosing on houses other than their primary. That law just changed last year. It use to be anyone who foreclosed or short sold, you'd be taxed on the difference. The govt see's the transaction as income. I don't know how loan modifications work, but probably fall under the umbrella of that law passed last year.

EDIT: The Mortgage Forgiveness Debt Relief Act of 2007 is what i was talking about. Google that for more info on what you have to pay and what you dont.

[ass-to-mouth]

Helicopter Ben better keep the presses running. We're gonna need a lot more money.

http://www.sfgate.com/cgi-bin/articl...MNL516UG90.DTL

Banks aren't reselling many foreclosed homes

Carolyn Said, Chronicle Staff Writer

Wednesday, April 8, 2009Print E-mail Share Comments (151) Font | Size:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

"There is a real danger that there is much more (foreclosure) inventory than we are measuring," said Celia Chen, director of housing economics at Moody's Economy.com in Pennsylvania. "Eventually those homes will have to be dealt with. If they're all put on the market, that will add more inventory to an already bloated market and drive down home prices even more."
More than one-third locally

In the Bay Area, a Chronicle analysis of data from San Diego's MDA DataQuick shows that more than one-third of foreclosures are in shadow territory - that is, they are not registering in county records as having been resold.

For the 26 months from January 2007 through February 2009, banks repossessed 51,602 homes and condos in the nine-county Bay Area, according to DataQuick. Yet in the same period, only 30,823 foreclosures were resold, leaving about 20,000 bank repos unaccounted for.
Turnaround usually quick

Realtors say foreclosures generally go on the market a month or two after the bank takes title and then sell fairly quickly, often getting an accepted offer within a week or two of being listed and then closing escrow within 30 days. That means that foreclosures should register as being resold within three months.

But taking the foreclosures in any given month or selection of months and looking at what happened three months later also reveals a big gap between what banks took back and what they resold.

Tom Kelly, a spokesman for banking giant Chase in Chicago, said the bank sells foreclosed homes in a timely fashion.

"We try not to be in the business of owning homes," he said. "Our goal is to get them back on the market as quickly as possible. We want to maximize what we sell them for and yet do it quickly."

Kelly was at a loss to explain the shadow inventory phenomenon other than the quantities involved.

"The inventory might be growing because there is just a lot of volume coming in. That would not surprise me," he said.

Locally, the monthly number of foreclosures has decreased since peaking at 4,321 in August 2007. That has allowed foreclosure resales to start closing the gap.

Most observers say the recent fall-off in foreclosures came because California and many banks implemented foreclosure moratoriums in the fall, not because the problem has diminished.
Only 65.5 percent resold

A second DataQuick study of all Bay Area homes repossessed by banks in the 18 months ending January 2009 tracked how many of those homes had resold by mid-March. It found that 65.5 percent had resold. Discovery Bay's ForeclosureRadar.com compared its database of Bay Area foreclosures to MLS listings for the past 120 days and found that fewer than one-fifth of the foreclosures showed up as for-sale listings.

"Foreclosure numbers are artificially depressed," said CEO Sean O'Toole. He puts California's shadow inventory at about 100,000 homes.

So why aren't banks selling off their foreclosures?

Observers say several factors are at work.

-- The "pig in the python": Digesting all those foreclosures takes awhile. It's time-consuming to get a home vacant, clean and ready for sale. "The system is overwhelmed by the volume," Sharga said. "In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month."

-- Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. "With banks in the stress they're in, I don't think they're anxious to show losses in assets on their balance sheets," O'Toole said.

-- Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don't fall as fast. "They want to be careful about not releasing them too quickly so they don't drive prices down and hurt the values," O'Toole said.

Besides the shadow foreclosures, yet another wave of distressed properties is in the pipeline. These are homes with delinquent payments for which the banks appear to be prolonging the foreclosure process. Some of that could be because they're negotiating with homeowners about loan modifications or other ways to keep them in the home. But banks also could be deliberately foot-dragging for the same three reasons listed above.

"The problem is that no one knows how extensive (the shadow inventory) is," said Patrick Newport, U.S. economist with the Massachusetts research firm Global Insight. "It's a wild card. If it's a really big number, you'll see prices drop a lot more and deeper problems for the financial system."

Missing foreclosures

Only 65.5 percent of all Bay Area homes repossessed by banks in the 18 months ended January 2009 had been resold by mid-March. This study looked at the same homes over time, not an aggregate of all foreclosures.

[Benny Profane]

The new outer burbs in California, Florida, Arizona and Vegas are going to turn into bizarre 21st century slums.

http://www.nytimes.com/2009/04/10/us/10squatter.html?hp

"Anita Beaty, executive director of the Metro Atlanta Task Force for the Homeless, said her group had been looking into asking banks to give it abandoned buildings to renovate and occupy legally. Ms. Honkala, who was a squatter in the 1980s, said the biggest difference now was that the neighbors were often more supportive. “People who used to say, ‘That’s breaking the law,’ now that they’re living on a block with three or four empty houses, they’re very interested in helping out, bringing over mattresses or food for the families,” she said."

[Platinum Pete]

The new outer burbs in California, Florida, Arizona and Vegas are going to turn into bizarre 21st century slums.

http://www.nytimes.com/2009/04/10/us/10squatter.html?hp

"Anita Beaty, executive director of the Metro Atlanta Task Force for the Homeless, said her group had been looking into asking banks to give it abandoned buildings to renovate and occupy legally. Ms. Honkala, who was a squatter in the 1980s, said the biggest difference now was that the neighbors were often more supportive. “People who used to say, ‘That’s breaking the law,’ now that they’re living on a block with three or four empty houses, they’re very interested in helping out, bringing over mattresses or food for the families,” she said."

The last part of that lady's quote is really interesting - the "good neighbors" attitude towards the homeless can go so far to keep a neighborhood from diving into an uninhabitable slum. I live in a decent neighborhood now, but when I lived in a trashier area, I would always let the local guys help me with projects so I could get to know them and help them out with a few bucks. Win-win in the small picture and big picture with those guys less inclined to steal for their habit and more inclined to look after my place. Its great to hear that this attitude is at work in other places where things are bad.

[Hutch]

This is pretty slick - run your development through bankruptcy, wipe out $350 MM in debt, buy your development back for $30 MM.

Bankrupt luxury community sold to same developer

Associated Press - April 17, 2009 2:55 PM ET

SALT LAKE CITY (AP) - The developer of a bankrupt luxury community near Park City was able to buy his own project back.

U.S. Bankruptcy Judge Judith Boulden approved the sale of Promontory ranch to an affiliate of the original developer, Francis Najafi (Na-JAF-ee), chief executive of Phoenix-based Pivotal Group.

Najafi's major creditor, the Swiss investment bank Credit Suisse, decided not to try to recover Promontory, which is operating at a loss.

That left Najafi the only bidder in a courtroom Friday.

Najafi bought Promontory for $30 million after defaulting on $350 million in loans packaged by Credit Suisse.

Lawyers say the deal wipes out hedge funds and other investors who bought the loans arranged by Credit Suisse.

[grrrr]

This is pretty slick - run your development through bankruptcy, wipe out $350 MM in debt, buy your development back for $30 MM.

That should be a capital crime.

[ass-to-mouth]

Any type of deal that fucks over a hedge fund sounds good to me.

[Benny Profane]

http://www.nytimes.com/2009/04/22/bu...t.html?_r=1&hp

"The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.

Throughout the evening, such low-ball prices continued to win the bidding. At one point, the auctioneer, Wayne Wheat, interrupted his sing-song auction call to cheerfully ask, “Where are my investors?”

The tables that had been set up around the edges of the ballroom, reserved for people planning to buy multiple houses, were mostly empty. Many audience members, like the man in a camouflage baseball cap just in front of me, were attending their first auction.

On Sunday, my colleague Carmen Gentile went to a larger auction, in Miami, to see if my experience had been unusual. It wasn’t. The homes there also sold for just a fraction of what they would have even a year ago. The rate of decline in Miami hasn’t even slowed noticeably in recent months, according to data kept by Real Estate Disposition Corporation, known as R.E.D.C., which runs the auctions.

A recently transplanted New Yorker named Michael Houtkin won the bidding on a one-bedroom condominium on the outskirts of Boca Raton, a few blocks from three golf courses, for the incredible price of $30,000. “Things were almost being given away,” he said later."

[CUBUCK]

http://www.nytimes.com/2009/04/22/bu...t.html?_r=1&hp

"The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.

Throughout the evening, such low-ball prices continued to win the bidding. At one point, the auctioneer, Wayne Wheat, interrupted his sing-song auction call to cheerfully ask, “Where are my investors?”

The tables that had been set up around the edges of the ballroom, reserved for people planning to buy multiple houses, were mostly empty. Many audience members, like the man in a camouflage baseball cap just in front of me, were attending their first auction.

On Sunday, my colleague Carmen Gentile went to a larger auction, in Miami, to see if my experience had been unusual. It wasn’t. The homes there also sold for just a fraction of what they would have even a year ago. The rate of decline in Miami hasn’t even slowed noticeably in recent months, according to data kept by Real Estate Disposition Corporation, known as R.E.D.C., which runs the auctions.

A recently transplanted New Yorker named Michael Houtkin won the bidding on a one-bedroom condominium on the outskirts of Boca Raton, a few blocks from three golf courses, for the incredible price of $30,000. “Things were almost being given away,” he said later."

Nice, did you pick yourself something up or are you just here to pound your chest some more?