The Pride of Ownership

"Think of owning your own home" The American Dream, and favorite real estate agent mantra, has turned into a nightmare. Anyone who bought during the last decade, is watching a slow-motion trainwreck, as home prices drop back to 2006, 2005, 2004, 2003 and beyond. The last real estate boom on the Westside, began in 1997 and ran 10 years through 2007. We are now in year 4 of the subsequent bust and have another 5-6 years to go, before we see a drop of appreciation. Think 2017, before local real estate has a chance of rising again. 10 year cycles of boom and then bust. The last real estate boom peaked in 1987 and didn't begin appreciating again until 1997. With the latest real estate binge being the bubble of all bubbles, I'm afraid we have much pain still ahead.

But, let's say your tired of waiting and decide to jump into the market, while interest rates are low. (Another bogus real estate agent argument) With $3,200 a month to spend on housing after the tax break, what can you get?


709 Ozone Street
Santa Monica 90405
2+1, 668 sqft
Lot size 1999 sqft
Year Built 1945
SOLD 2/2/11 for $542,000

$108,400 down
$3924/month payments
(Principal, Insurance, Taxes, Maintenance)
-$727/ month tax break
$3196/month for housing
$144,000/year of income to qualify

OR

Rent a 2-3 bedroom home North of Wilshire
$3200/month
No risk of losing your $108,000 down
Investing your $108,000 elsewhere
Mobile, free to move

These and other calculations to see how overpriced buying a Westside home is, can be found at HomebuyingTips.com

Even the LA Times had a story recently, about people rethinking the age-old idea of owning a home here. Renting has quickly become the weapon of choice for would-be buyers in LA. Why not, when you can live in a bigger house, in a better area, for less money and no risk?
Lastly, the Case-Shiller Numbers for December 2010 are out now and for the 7th consecutive month, home prices are down year over year (YOY). Now that the goverment is trying to exit the housing industry, it's obvious we have double dipped.

The Real Estate Market Is All About Perception

It's incredible how differently people think about buying real estate now. 3 years ago, we were at the height of euphoria in our market cycle. Now, we are finally accepting that real estate doesn't always go up, and many home debtors are financially upside down. That combined, with banks not lending without a big chunk of skin and stellar credit, has turned the market to ice. Still ,we have yet to see the biggest shoe to drop, that finally clears everyone out. It happens every cycle, and this one is no different. The market will never come back, until some major event causes most to throw in the towel. With banks playing hide and seek and our government refusing to pull the plug, we could be in for a long drawn out process. That big shoe could very well be unemployment, which is the normal culprit in market downturns. In California, the "Unemployment Rate" according to government is a little over 12%. Most believe that's overly optimistic, by just looking around themselves. In last week's LA Times, they published statistics about voter demographics during the gubernatorial election. What caught me suprise was one category in particular. The question asked of ALL voters was :

Have you have been laid off within the last 2 years?

34% Yes
66% No

If that is indeed true, than unemployment and our housing market are in worse shape than anyone has led us to believe. How can someone risk their hard earned cash AND depend on such a shaky job situation that is now become the new norm. If this is our new reality, there is no way current home prices will be supported. Worst of all, with all of the negative sentiment, very few are even thinking about buying a home at current prices. It is all about confidence and perception, which isn't improving given our employment situation. Of course, there will be those that say "Now is the time to buy!, Rates are low, Prices have dropped" They are either industry cheerleaders, realtors desperate for a sale, or just plain out of reality. The question is, why are rates so low and still nobody is buying?

Be Prepared to Spend 10 years in the House You Buy Today

The old rule of thumb, before the massive 90s steroid housing bubble, was keeping a home at least 5 years, before selling it. That equation has now changed on The Westside to a new 10 year time horizon. As we continue with more downside over the next few years, see prices flatten out and deal with a "Burned Buyer" syndrome, a decade will have passed before, we see any appreciation from today's pricing.

Let's use a purchase price of $1,000,000 on the Westside. Here is the way I see it, given today's trends:

2010: Purchase a home at $1,000,000 (2004 Prices)
2010-2014 prices decline 20-25% (2000 Prices)
2014-2017 prices flatten out (2000 Prices)
2017-2019 prices creep back up (2004 Pricing)
2019-2020 to cover maint, taxes, insur & commission

My reasoning is based on past bubbles and recent declines in the Westside Market. First of all, it has taken 3 years for prices to decline 20-25% on the Westside so far. Like every previous real estate bubble, we are only half way through the declines, by looking at a return to historical norms. The declines have been slow, but show little evidence of stopping. In 2014, we should experience total capitulation in the marketplace and intersect the historical norm line at 2000 pricing, after accounting for a standard 3-4% annual appreciation rate. Next, it will take 3 years to scrape along the bottom, as it takes time for buyers to gain any confidence in the market again. At this point, buyers painfully remembering the lessons of the last bubble, prices begin to appreciate slowly over the next 3 years. Finally, you should be able to cover your 2010 costs, after taxes, insurance, maintenance and sales commissions, in 2020.

Now, if you love the house and neighborhood, are prepared to spend at least 10 years, or have money to burn, than go for it. Don't believe the realtor hype about anything else. They make their living through sales, remember? Especially, in this marketplace, they will do ANYTHING to make a sale. Just because a home is discounted from a higher price doesn't necessarily make it a good purchase. Perhaps, waiting a few more years before purchasing is a better strategy. Do your own research and definitely know what your own time horizon is.

For those who have purchased in the last 5 years, they could have to wait well into until the 20s, to come out even again.

House Prices Rolling Back to 2003

How low can you go? We have the first documented 2003 rollback on the Westside. Newly constructed in 2004, this house recently sold 6.6% or $260,000 below its original sale price (8/13/04). This home is obviously not some outlier in a marginal area, and is situated in the heart of the Santa Monica 90402 walk streets. There are plenty of interior pictures to see on Redfin. If this trend continues, could 2004 prices be a losing proposition? Here are the details:

209 Euclid Santa Monica 90402 5+6, Mediterranean 6859 sqft YB 2004 Lot Size 7500 sqft SOLD 4/21/10 for $3,690,000

(Click on photo to enlarge)

At a loss of $260,000 + the commission to sell it, the actual loss is at least $444,000 or 11.2% below what was paid in August of 2004. This represents a solid 2003 price. We aren't even including the $48,000 annual tax bill, along with maintenance and insurance. With losses such as these on 2004 construction in prime areas, what does that say for other areas on the Westside? Even Zillow had it right on this one, with a current estimate of $3,640,000. Interesting enough, Zillow had it pegged at $6,860,000 in January of 2008. I guess they held it bit too long.

If this area did peak in early 2008, and we are only 2 years into the real estate bust, what will the next 2 years bring?

Prime Santa Monica Neighborhood Sliding About 10% A Year

Santa Monica 90402, North of Montana, is on the down hill slide. Case in point is:


627 Euclid Street
Santa Monica 90402
2+2+den, 1244 sqft, pool
Remodelled Craftsman
Built in 1922, 7500 sqft lot
(Click on photo to enlarge)


Since the end of 2007 this entry level home has seen steady price erosion at 9.7% per year, a total of $549,000. Throw in sales commission and it is well over 10% (11.2%). Now lets look at a historical perspective on this house, since it has been sold 7 times since 1994:

SOLD 9/26/94
$524,000

SOLD 3/1/96
$541,000

SOLD 8/29/97
$736,000

SOLD 3/9/00
$932,000

SOLD 7/2/03
$1,401,000

SOLD 10/23/07
$2,298,000

SOLD 4/9/10
$1,749,000

This is a perfect Case/Schiller Type of Comparable, being the same house sold over and over again. If we use 3.5% as the standard rate of inflation, we arrive at a historical perspective of the price this house should be worth, in any given year. At the current rate of decline, the price of this house will intersect the historical inflation line (standard appreciation) in 2014 at approximately $900,000 (early 2000 year pricing). Rarely do we see prices drop in a straight line. Normally, they will begin to flatten, after an intial steep decline, before leveling off. If this happens, we miay not see any appreciation, until the end of the decade.

Some Big Neighborhoods Take Some Big Hits

According to Dataquick, some of our most cherished neighborhoods have seen serious price erosion over the last 2 years. Perhaps one of the best measures we can easily use are, prices per square foot being paid. It's not perfect, but is certainly more informative, than just looking at median prices. Here are some prime neighborhoods, that have suffered some of the worst declines in price per square foot YOY, since March of 2008.


1) Beverly Hills 90210
(2008) $851 (2010) $516 (-39.4%) 17 sales

2) West Hollywood 90069
(2008) $1,032 (2010) $680 (-34.1%) 10 sales

3) Santa Monica 90402
(2008) $962 (2010) $724 (-24.8%) 10 sales

4) Brentwood 90049
(2008) $818 (2010) $632 (-22.8%) 17 sales


And, just for good measure:

Manhattan Beach 90266
(2008) $826 (2010) $602 (-28.1%) 26 sales


Buyers are definitely getting more house for their money. The question is, what will change, if anything, the downward trend in prices?

How Much Are Homes Really Worth ?

Historically speaking, housing prices have tracked inflation at roughly 3% appreciation per year. This was of course until 1995, when the housing bubble was in it's infant stages. A starter home in a decent area was roughly $300,000 after the real estate crash of the early 90s. If we take that price and apply historical norms, smoothing out for stock and real estate bubbles, that same house today, increases by 56% to $467,000. With Westside starter homes in decent areas, priced from $750,00 to $850,000 today, we are still bubble priced. (a good 40%)

This method is easy to apply to any home purchased from 1995 to 1999, before the bogus loans distorted the prices of real estate. Just multiply the starting 90s' sales price by 1.03 for each year, until 2010. This will give you an idea of what the home price should be. It may take awhile, but we always revert back to historical norms.

Foreclosure Filings Surge in the First Quarter of 2010

The number of houses hit with foreclosure notices in California from January through March was at an all time record of 216,263, according to Realtytrac. That's a 60% increase from the 135,431 during the first quarter of 2009 and a 256% increase from the 84,568 during the last quarter. It appears banks are now getting their act together, after the foreclosure moratoriums and are moving faster on properties in default. Those current numbers now mean, 1 out of every 62 houses in California is now in some stage of foreclosure. Right behind Arizona and Florida. In contrast, the national figures show 1 out of every 138 houses are in some stage of foreclosure.

But the "Westside is different" as many will tell you. Let's see how different it really is. According to Foreclosure Radar, there are now over 200 properties in some stage of foreclosure in Santa Monica. The breakdown by zip code is as follows:

90401 (8)
90402 (26)
90403 (52)
90404 (61)
90405 (64)

Total (211)


Most of these properties are Bank Owned (REO) or scheduled for Auction. If someone had told you 2 years ago, there would be over 200 foreclosure filings in Santa Monica, they would have said you were insane. This is not the sign of a healthy market, especially with the Gov't pulling out it's support last month (RMBS purchases), this month (Tax credit ending) and the banks requiring 20-25% down with FULL documentation,. To make matters even worse, California's unemployment rate just a hit a high of 12.6% last month.

Keep track of your own areas foreclosure statistics, and watch the numbers swell, as the shadow inventory makes it's way onto the market. With a smaller pool of buyers and more inventory, prices will continue their decline.

Buying vs Renting Doesn't Make Sense

One of our readers has done research on "Asking Rents" of homes located in the 90402 zip code of Santa Monica. Not surprising, the cost of buying a home is about double, plus the risk and opportunity cost of a 20% down payment. When properties are appreciating, buying "might" make sense. But in today's environment, where home prices are declining, or remaining flat at best, it is a losing proposition. Below, are some current asking rents on houses in 90402:


1616 San Vicente $5500 3+2
415 14th St $5000 3+1
340 21st Pl $4500 3+1
728 26th St $4950 3+2.75
316 20th St $4500 3+1
1064 Harvard $5900 3+2
1101 Harvard $4900 3+2
328 18th St $6300 3+2.75


Let's use 340 21st Pl as an example. The location of this home is excellent and it is situated on a large lot. If the home were to sell for say $2,000,000, the mortgage payment, taxes and insurance, after 20% down, would be well over $9000 per month, or twice the asking rent. This equation works for most homes for sale on the Westside. Here is a simple calculator to do your own analysis if you know comparable asking rents and asking sale prices of the house your interested in. Mortgage Calculator Do your own homework and don't be fooled by the real estate sales hype.

It would be interesting to see the difference in mortgage payments vs rent payments on the above houses. If anyone is familiar with possible selling prices of the above homes, let us know the relative cost of buying, versus renting them.

A Paradigm Shift in Home Buying ?

Going into the third year of market corrections, a new mindset about buying homes seems to be emerging. No longer are there thoughts of netting 6 figures in buying a home and selling it 2 years later. We can attribute this to the extinction of the no doc liar loans that fueled the stratospheric rise in home prices. Homes became priced as investment vehicles and ATMs, as opposed to a place to live in. In 10 years the price of a home doubled or even tripled in some cases. Looking at historical appreciation, a 40% increase instead of 100-200% appears more realistic.

So where does that leave us now? We have entry level homes starting at $750K on artificial life support via gov't intervention. Banks are extending and pretending, but not lending, jobs are scarce, and more homes turn upside down each day. Most who bought from 2005 - 2007 would come out with a loss after taxes, maintenance and sales commissions. For those who believe we are at the bottom, buying today means barely keeping up with inflation (if their lucky) over the next 2-5 years, minimum.

With the housing casino gone, that means people are forced to buy based on income, sizable down payments and what they can truly afford. In other words, probably 2/3 of the inventory (both shadow and listed) will not sell, unless the banks foreclose, short sell, or cram down the principal. Fat chance, when banks keep extending and pretending, while encouraging more buyer defaults and walkaways. Eventually, that's a ton of inventory for the market to absorb at reduced prices.

Sure, you will hear the stories of multiple offers this spring, due to the limited amount of owners with equity, actually selling. This will appear as if the market has picked up, trumpeted by the real estate industry and media . The keys to watch will be 1) Sales Volume and 2) Prices per Square Foot. Most buyers will continue saving for down payments and renting at half of the mortgage price, without risking their hard earned cash. Once again, their purchases will be based on what they can afford and not some creative loan scam trying to slam dunk them into a house. The days of $0 down, Interest Only for 2 years, and easy credit are GONE!

As the paradigm shift occurs, business will eventually return to normal, with homes selling again at reasonable prices, based on reality (verifiable income, down payment and good credit required).

How Many Zombie Listings Are Out There?

We are headed into the spring selling season and listings are on the rise. The question is, how many of those listings are actually ready to sell? Many of them are so upside down they can't possibly sell. Hence the name "Zombie". Sure, there are a few sales occurring on some listings with equity, but that is a minority. The listings that are selling have attracted multiple offers only because they are few and far between. Just because there are multiple offers on a property doesn't mean the market is picking up. There will always be some that buy even when the overall market is declining.

People need to see the big picture, instead of getting bogged down on one property.

Taking a Plunge Into The Market ?

There seems to be a growing chorus about jumping into the Westside market, now that prices have dropped. Realtors are pushing low interest rates as the reason to buy now. Perhaps it is true, interest rates are headed up in the near future. How will that affect the "nascent" recovery in housing? If you were to buy an $800,000 house and interest rates do rise, what effect will that have on the resale of your home later? These, and other questions need to be answered before taking the plunge.

My guess is, there are weak hands out there buying due to pent-up demand, low saleable inventory and impatience. Bidding war stories on desirable listings that aren't "zombies", have encouraged some fence-sitters to dive in. Could a double-dip in prices be in store, once the fed stops buying mortgage backed securities and ends the first-time buyer credit?

What Happens When The Government Pulls The Plug?

That is the real question now, as we hear threats of the tax credits and MBS purchases coming to an end. Will they really try pulling the real estate industry off life support? Or, is just a big bluff? The housing market has been artificially supported over the last couple years and now they're talking about pulling the plug. Last time I looked, FHA was backing about 90% of the mortgages being made, interest rates were being subsidized and tax credits combined with 3% down payments were keeping the market alive. Banks certainly don't want to lend because, they know what's in store. Can the government go on indefinitely supporting the housing bubble? I doubt it. Sooner or later the bill will come due and then what? The easiest way out is, the devaluation of our currency. If you can't pay the bill, then just lower the cost. It has been happening for ages and is the end game for economies in serious trouble.

What do you think about the government decision to "wind down" its programs?

2009 Year-end Median Prices for The Westside. What a Difference a Year Makes!

The 2009 median price numbers are out for the Westside on Dataquick. Where median prices appear to be increasing for the larger LA areas (Case Shiller Index), the exact opposite is true for the Westside. The lack of financing for Jumbo loans is affecting the sales mix. Lower to mid range properties are slowly beginning to move as banks and sellers lower prices. Meanwhile, the higher-end continues to suffer. In addition, banks are reluctant to foreclose as they "hope" the market turns around. Obviously, they know how bad the market is and would rather not take more losses and keep someone in the house, whether paying or not.

Let's compare yearly total sales and median prices for 2009 compared to 2008, ranked from worst to first:


Single Family Residences (SFRs) :

1) Bel Air 90077
84 sales, $1,465K, -30.7%

2) Malibu 90265
130 sales, $2,000K, -29.8%

3) Santa Monica 90403
29 sales, $1,463K, -26.7%

4) Marina del Rey 90292
26 sales, $1,225K, -26.1%

5) Rancho Park 90064
209 sales, $855K, -21.7%

6) Venice 90291
125 sales, $835K, -21.2%

7) Beverly Hills 90210
212 sales, $2,775K, -17.2%

8) West Hollywood 90069
115 sales, $1,775K, -16.3%

9) Pacific Palisades 90272
201 sales, $1,950K, -15.5%

10) Brentwood 90049
257 sales, $1,849K, -14.0%

11) West LA 90025
61 sales, $952K, -13.5%

12) West Hollywood 90048
87 sales, $940K, -12.6%

13) Culver City 90230
128 sales, $565K, -12.5%

14) West Hollywood 90046
230 sales, $919K , -10.4%

15) Mar Vista 90066
249 sales, $690K, -10.0%

16) Beverlywood 90034
142 sales, $658K, -8.0%

17) Santa Monica 90405
90 sales, $1,025K , -6.8%

18) Westwood 90025
76 sales, $1,756K +3.9%

Although I 'm not a big fan of median prices and prefer price per square foot, these yearly sales figures tend to smooth out seasonal and month to month variations. It's interesting to note, some of the more affluent areas are higher up on the loserboard. Financing has become a huge issue and there are less and less move-up buyers, as most transactions at the lower and mid levels are "one and done". Expect more continued weakness at the higher levels.


Here are the Condo prices:

1) Malibu 90265
130 sales, $610K, -29.8%

2) Venice 90291
33 sales, $835K, -21.4%

3) Marina del Rey 90292
193 sales, $585K, -20.4%

4) West Hollywood 90069
203 sales, $446K, -19.0%

5) Beverlywood 90034
33 sales, $400K, -16.2%

6) West Hollywood 90048
40 sales, $525K, -15.3%

7) West Hollywood 90046
101 sales, $440K, -13.8%

8) Bel Air 90077
20 sales, $1,025K, -12.4%

9) Brentwood 90049
151 sales, $625K, -11.0%

10) Pacific Palisades 90272
64 sales, $673K, -10.9%

11) Santa Monica 90405
89 sales, $650K, -5.9%

12) Rancho Park 90064
45 sales, $522K, -5.2%

13) Mar Vista 90066
67 sales, $42oK, -4.1%

14) West LA 90025
199 sales, $598K, -2.8%

15) Santa Monica 90403
143 sales, $750K, -2.0%

16) Westwood 90024
204 sales, $630K, -1.9%

17) Santa Monica 90402
19 sales, $1,220K, -1.8%

18) Beverly Hills 90210
26 sales, $830K, -1.5%


Once again, there are familiar names at the top. These areas had some of the most appreciation and you would expect bigger price drops. This trend should continue. The other big factor affecting condos are huge inventories left by overbuilding in areas such as West Hollywood and Marina del Rey

Real Estate Bears and Bulls

Apparently, we have 2 separate camps on this blog. Those that think prices still have a ways to decline (Bears), and those who think the bottom is in and increasing home prices will leave would-be buyers behind (Bulls). Whichever camp you fall into is fine. We all have our reasons for what we believe in. However, to be taken seriously here, you need to back up your comments with a few facts. Otherwise, you are just popping off without any credibility. Nobody really knows what the future will bring. However, with a bit of research, at least you can formulate an educated guess. This blog is not about having to be right or blasting others for their opinions. It is about discussing the latest sales information and how it affects the real estate market. It would be great to see specific transactions that demonstrate price increases or price decreases, rather than bantering about what others say.

Obviously I am a Bear. The way I see it is, buying real estate is always a risk and one needs to decide exactly how much risk they can afford. What is the % of risk to the upside compared to % risk to the downside and % risk of being flat. For the Westside, I would estimate a 70% risk to the downside, a 20% risk of being flat and a 10% risk to the upside. When you find most of the risk in the neighborhood is to the downside or being flat, there is little need to buy and you should protect your future investment (down payment). With all the headwinds facing our economy, the real estate prices of 2007 are long gone. Here are just a few factors that I believe will drive prices down further:


1) Unemployment and Underemployment
2) Federal Government's ending of tax credits and subsidized low interest rates
3) Large overhang of unsold inventory. (Listed and Shadow)
4) Alt-A and Option ARM recasts from 2010 - 2012
5) Increasing default rates for Prime Mortgages
6) Record Notice of Defaults (NODs)
7) Increase of foreclosures
8) Increase of negative equity
9) Rising interest rates
10) Commercial Real Estate Bust in 2012-2013
11) Renting option being half the cost of a mortgage
12) California budget problems
13 ) Tightening of credit from banks
14) Future bailout of FHA and FHA loan foreclosures
15) Lack of move-up buyers

The list goes on and on and on etc....

With this much down side risk, or even if prices drag along the bottom for a couple years, there isn't any rush to buy. Why not preserve or invest your capital, then wait and see if prices continue declining.

Double Digit Losses Per Square Foot Over the Last 2 years on The Westside

Finally, we have some Price Per Square Foot Numbers on the Westside, over the the last 2 years. They are for Median Priced Single Family Residences taken over the entire year, from 2007 through 2009. These are the best numbers yet, for averaging out seasonal variations and market mixes, providing you with a better picture of sales value. Also, it's an overall snapshot of your neighborhood and a way to ballpark figure your average house. Let's take a look at the 2009 Price Per Square Foot Numbers and their relative losses, ranked from highest to lowest :

1) West Hollywood 90038 ($370/sqft) -36.6%

2) Malibu 90265 ($734/sqft) -29.7% (2008-2009)

3) Marina del Rey 90292 ($506/sqft) -28.9%

4) West Hollywood 90046 ($525/sqft) -23.6%

5) Pacific Palisades 90272 ($728/sqft) -22.5%

6) Venice 90291 ($712/sqft) -22.4%

7) Beverlywood 90034 ($456/sqft) -21.5%

8) Culver City 90230 ($467/sqft) -20.6%

9) Santa Monica 90405 ($676/sqft) -19.9%

10) West Hollywood 90048 ($574/sqft) -19.6%

11) Santa Monica 90403 ($811/sqft) -19.4% (2008-2009)

12) Santa Monica 90402 ($876/sqft) -19.3%

13) West Hollywood 90069 ($723/sqft) -19.0%

14) Westwood 90024 ($616/sqft) -18.8%

15) Brentwood 90049 ($654/sqft) -17.8%

16) Beverly Hills 90211 ($621/sqft) -17.6%

17) Rancho Park 90064 ($547/sqft) -17.2%

18) Mar Vista 90066 ($531/sqft) -16.2%

19) Bel Air 90077 ($572/sqft) -15.5% (2008-2009)

20) West LA 90025 ($599/sqft) -14.8%


An interesting note is, the entire County of Los Angeles has corrected over 41.3% in Price Per Square Foot since 2007. Many of those places were due to the subprime explosion and inventories cleared, due to bottoming out at 40-50% discounts. The higher end still has huge inventory, when we take into account both shadow and listed properties. In addition, inventories will increase, even more, as NODs become foreclosures and the Alt-A / Prime toxic mortgages blow up over the next 2-3 years. Remember, we are only 2 years into a real estate recession, which historically on average takes 7 years to cycle through. We could be only half way through our declines on the Westside.

Hats off to Patrick.net and Jas Jain , for digging up the information from Dataquick. You can see more Price Per Square foot data on any city in Southern California at Patrick.Net Feb 12th Losses Per Square Foot Southern California (Jas Jain)

Real Estate in 2009 is the Worst Since the Great Depression

Existing home sales for 2009 are out and the national numbers are terrible. Median prices sank 12% Year over Year, marking the worst on record since the Great Depression. Month to Month sales figures also dropped almost 17% from November to December, marking the worst decline ever. Not a great way to kick off 2010. All of this is with life support from the Federal Government through tax credits, purchases of Mortgage Backed Securities, and FHA being the lender of last resort. The question is, what happens when the Government stops buying MBS in March, ends the tax credit and FHA becomes insolvent? I'm afraid we got a taste of the numbers when the rush to buy was over at the end of November, when the tax credit was due to end. I don't put a lot of weight on Month to Month numbers, but this was hard to ignore.

Sure, you may argue the Westside is different compared to the National Market. True. But the Westside hasn't corrected as much as other areas, so the downside risk is even greater.. Of course homeowners, investors and the real estate industry will tell you the Westside won't correct any more because they have vested interests. Look at history and you will see that affluent areas take longer, but they usually drop the hardest.

With only 2 years into the downturn, throw in unemployment, loan recasts, bank failures, tight credit, rising mortgage rates, shadow inventory and record foreclosures, the next 5 years will take it's toll on everyone.

ARMs Race Is All But Over Now

The proliferation of ARMs (Adjustable Rate Mortgages) is just about dead. According to Dataquick, these loans averaged over 51% of all purchases in Southern California since 2000. In December of 2009 the amount of purchase loans that were ARMs was 4.6%. Obviously these loans fueled the housing bubble that we just experienced. In addition, Jumbo Loans ($417,00+) which averaged nearly 40% before the credit crunch, averaged only 16.7% of purchases last month.
Most of the sales ocurring now are first time buyers or all cash investors. In outlying communities, people are snapping up properties at a 50% discount. With the Westside down 20-30%, it may seem like a good value, but is still overpriced, compared to other areas that have fully corrected. With fully documented loans now and the virtual elimination of ARMs, the fuel behind the Westside real estate boom is gone. Sure , there are a few affluent buyers out there getting good deals with tough negotiationsl. However, compared to the amount of inventory listed and in the shadows, it will be awhile before we work through the overhang of homes on the Westside through short sales and foreclosures.

What is the risk in waiting a couple years, compared to getting up to 20% off? Without liar loans and ARMs, it might be the difference between losing your down payment or not.

Under House Arrest ? To Walk Away Or Not

That is the question for some upside down in their mortgages. Obviously, there is no clear cut answer and it depends on your own particular situation. However, let's discuss the pros and cons of such a decision where people are under "House Arrest".A must read is Dr. Housing Bubble's January 8th article on Moral Hazard and Strategic Defaults. It speaks very frankly about walking away from a mortgage . His take is, it has become more of an ethical decision rather than a financial decision for many homeowners. When in reality, businesses make financial decisions like these daily, without the blink of an eye. Perhaps, the most important factor is whether your state has recourse over your other assets in the event of a foreclosure. I'm no lawyer, but I believe that California is non-recourse state, when it comes to foreclosure of a home with it's original mortgage. Mortgages that have been re-financed however, are a different story. With banks playing more games like "Extend and Pretend", it can take up to 18 months for foreclosure and some are banking their mortgage payments. I have also heard others are buying second homes before letting their first one go.

So, what are the advantages or consequences of walking away from a mortgage?

Regardless, I am not an expert in real estate law, however I think it's time we have a meaningful discussion about walking away from a mortgage. Remember, this blog is for discussion only, and it is imperative that you speak with a professional before making any type of financial decision .

Out With the Zeroes, In With the Teens, Happy New Year!

As 2009 comes to a close, we can only wonder what 2010 will bring. In 2009 we saw affordability improve some, due to foreclosures and government intervention. Not exactly the preferred method of a real estate recovery. Notice of Defaults (NODs) have soared in all neighborhoods, and sooner or later these properties will come to market. If you own property, ask yourself if it increased during 2009 or not. That should give you an answer about your particular market, despite what anyone in the media says. Overall, I would venture to say there have been losses of varying degrees based on which neighborhood you live in.

So what does 2010 have in store for home values on the Westside? With the gov't throwing in everything but the kitchen sink and home values still dropping, the future has more downside than upside. The reality is, housing is still on life support. Now that rents are running about half of the price to "own" a home and it doesn't risk losing money or damaging credit, I can't see many rushing to purchase in 2010. With the Westside peaking in 2007, a good year later than most areas, it makes sense that declines would come later also. Only time will tell.

Lets hear some of your predictions for 2010.

Will Strategic Defaults Become the Rallying Cry in 2010?

Lately, there has been alot of discussion about strategic defaults. Essentialy, that is where someone decides it is no longer in their best interest to keep paying an upside down mortgage or on a declining assett. The reasons for this are numerous, some good and some bad. Let's open it up and see what others are thinking, especially with more recasts on Alt-A, Option Arms, and Interest Only loans accellerating in 2010.

I am not advocating this particular strategy, but am curious what others have to say, given the current changes in our economy.

FHA is the New Subprime

With only requiring 3% down on homes up to $750,000, our beloved FHA is the lender of choice these days. Along with the government $8,000 credit, that means coming up with less than $15,000 to "buy" a house. Nice try at re-inflating the bubble with a few "buyers" that want to be home debtors. Chances are, they can't really afford the payments and destined for foreclosure, with little skin in the game. Home prices are still at least 25% overvalued on the Westside and the timebomb is ticking away with Alt-A and Option ARMs. Foreclosures are piling up higher behind the dam, only to be a bigger disaster once it breaks.

Now that FHA appears to be approaching insolvency, what government agency is next to throw under the bus?