Lately, I have read story after story about the real estate market "finding the bottom" or "hitting the trough". These are usually propaganda stories generated from the thoughts of a small handful of "real estate experts". These folks would say ANYTHING to keep the blood flowing in that nearly-dead industry. I do not say this lightly-my wife is a Realtor.
Set those faint lifesigns aside, my friend. I am afraid that 2010 will be the real bloodbath in housing and in real estate as a whole. I have reasons for thinking so, and there are plenty of places you can look up the data I will generally quote. If you would like a specific link to any particular section I mention, please pm me.
Aside from my usual gloomy predictions, there are millions of Option/Arm loans that will reset this year. Many will reset early because of early-amortization, meaning that a lot of folks chose to pay the minimum monthly payment and ADDED to their principal. When the principal reaches 125% of loan value, the reset is automatic. And that's just for starters.
Below, I outline some other serious concerns.
First, the market is artificially driven at this point. You could say it is on life-support, literally. The last two years we saw the government propping up the housing market with the 8k first time homebuyer credit. This caused a churning effect in the lower end of homes nationally. This effect was felt strongest in the worst markets, places like Florida, California, Nevada, and so on. The idea was to encourage renters to make that first big purchase. Ultimately, the credit was available to use as a downpayment at time of closing. Eh, did someone forget that zero-down loans are a large part of what got us to where we are? So, many of these "first time home-buyers" were able to purchase homes without scraping up even a dollar to do so. Now, what will happen when these borrowers need to come up with taxes and insurance next year? If they didn't even have 8k for a downpayment, we will be in for round three (or is it four?) of the crash.
Late last year, the government expanded and extended this program. It now includes people who already own a home. Given this scenario, we bought our current house about two months early. We are letting our 600k McMansion go back to Bank Of America in foreclosure. Strangled by medical debt, we finally gave up the fight. But, apparently, we surrendered too soon. If we had waited a couple months, we would have received the 8k credit as well. And we are talking CASH here. Money from your pocket and mine. We could have had the 8k, even though we are letting our primary, original residence, go to foreclosure. Something stinks about this picture, no? The government just handed the final piece of the puzzle to anyone considering the "buy and bail" method of getting out of an underwater home.
But, wait! Step right up, it gets even better.
Bank Of America currently has 721 properties for sale, through foreclosure proceedings, in the state of Florida. SEVEN-HUNDRED. That strikes me as an unusual number. Why? TOO LOW. The Tampa Bay area (my home) booked 80,000 foreclosures in the third quarter of 2009. Bank Of America, and its new bed-buddy Countrywide, only have SEVEN-HUNDRED foreclosure properties in ALL OF Florida? I doubt it.
That brings us to shadow inventory. This is property the bank has (or should have) foreclosed on, but the property has not hit the open market or the MLS. Bank Of America claims it does NOT hold property off the market. This is a suspect statement, given the above numbers. With the Tampa Bay area going through record foreclosures, nearly 200k homes this year, it seems incredibly unlikely that BoA has only 700 properties in the entire state that are for sale after being foreclosed on.
Among all the large lenders, there must be millions of homes that are unaccounted for. In fact, there are reliable sources out there who concur. A quick search online reveals anywhere from 2-7 million properties that have, seemingly, disappeared.
They WILL reappear one day. Soon.
When they do, anarchy will reign. The banks cannot let these properties linger in the shadows forever. Nor can they afford to maintain them long enough to sell them at a decent price. Prices will plummet further. I am guessing the drop in 2010 will be around 20% in already distressed areas like CA, TX, FL, and NV. I could be optimistic.
Now, if you have sat through this joy-fest long enough to read this, let's discuss another, potentially more serious, problem. Some banks, Wells Fargo comes to mind, are tackling this issue in another fashion. Wells is rolling the dice as though they were in Vegas with unlimited funds.
Ah, who are we kidding. With the US taxpayer behind them, they have nothing to lose.
But WE do.
You see, Wells Fargo has decided that pretty much ANYONE who has an Option/Arm or Pick A Pay loan should be eligible for a ten year interest-only modification. Hey, sign us all up. The thinking goes like this: People didn't just buy a house, they bought a HOME. Their kids go to that school, for God's sake! They WILL want to keep it if they can.
Maybe.
Maybe not.
The result of these "interest-only" modifications is two-fold. One, it keeps bad debt off WF books and keeps the money (interest) rolling in. Therefore, WF does not have to account for these huge losses, and generate new reserves to cover the losses.
Second, it kicks the ball back into the borrower's court. Borrowers who accept these mods are making a risky bet that the housing market will increase by 14% PER YEAR for the next TEN YEARS. How do I arrive at this figure? More than 60% of borrowers are underwater. Of that percentage, about 80% are underwater more than 75%. The numbers are stark.
If you bought at 400k in 2006, your home is probably worth 200k, in the worst markets. That is a 50% drop in value. To recover from that, in the ten year interest-only mod, you would need to regain 200k, or a 100% increase in value.
But that is only part of the equation.
You must also factor in cost-of-living increases and future increases in tax, maintenance, insurance, HOA, and so on. So, let's be conservative in this area and figure the total in other fees amounts to 4.5% per year.
Now, under THIS scenario, you must recoup 14.5% per year, or, over ten years, 145%.
What are the chances your home, currently worth 200k, will be worth 500k in ten years?
I wouldn't take that bet.
But Wells is, and other lenders are, too.
I believe this is top-level executive greed. These executives do not expect to be at the helm of Wells Fargo in ten years. In ten years they will have taken another 400 million in bonuses and be safely retired in the Caymans when the chickens come home to roost.
In the end, they will be on the beach, and the taxpayer will be on the hook for even more.
But. what's new?
It borders on treason, I say, honestly.
If you have suffered through all these numbers, I thank you. It is not pleasant, and it will become even more unpleasant before we are done.
Wishing you the best,
-dmc
Set those faint lifesigns aside, my friend. I am afraid that 2010 will be the real bloodbath in housing and in real estate as a whole. I have reasons for thinking so, and there are plenty of places you can look up the data I will generally quote. If you would like a specific link to any particular section I mention, please pm me.
Aside from my usual gloomy predictions, there are millions of Option/Arm loans that will reset this year. Many will reset early because of early-amortization, meaning that a lot of folks chose to pay the minimum monthly payment and ADDED to their principal. When the principal reaches 125% of loan value, the reset is automatic. And that's just for starters.
Below, I outline some other serious concerns.
First, the market is artificially driven at this point. You could say it is on life-support, literally. The last two years we saw the government propping up the housing market with the 8k first time homebuyer credit. This caused a churning effect in the lower end of homes nationally. This effect was felt strongest in the worst markets, places like Florida, California, Nevada, and so on. The idea was to encourage renters to make that first big purchase. Ultimately, the credit was available to use as a downpayment at time of closing. Eh, did someone forget that zero-down loans are a large part of what got us to where we are? So, many of these "first time home-buyers" were able to purchase homes without scraping up even a dollar to do so. Now, what will happen when these borrowers need to come up with taxes and insurance next year? If they didn't even have 8k for a downpayment, we will be in for round three (or is it four?) of the crash.
Late last year, the government expanded and extended this program. It now includes people who already own a home. Given this scenario, we bought our current house about two months early. We are letting our 600k McMansion go back to Bank Of America in foreclosure. Strangled by medical debt, we finally gave up the fight. But, apparently, we surrendered too soon. If we had waited a couple months, we would have received the 8k credit as well. And we are talking CASH here. Money from your pocket and mine. We could have had the 8k, even though we are letting our primary, original residence, go to foreclosure. Something stinks about this picture, no? The government just handed the final piece of the puzzle to anyone considering the "buy and bail" method of getting out of an underwater home.
But, wait! Step right up, it gets even better.
Bank Of America currently has 721 properties for sale, through foreclosure proceedings, in the state of Florida. SEVEN-HUNDRED. That strikes me as an unusual number. Why? TOO LOW. The Tampa Bay area (my home) booked 80,000 foreclosures in the third quarter of 2009. Bank Of America, and its new bed-buddy Countrywide, only have SEVEN-HUNDRED foreclosure properties in ALL OF Florida? I doubt it.
That brings us to shadow inventory. This is property the bank has (or should have) foreclosed on, but the property has not hit the open market or the MLS. Bank Of America claims it does NOT hold property off the market. This is a suspect statement, given the above numbers. With the Tampa Bay area going through record foreclosures, nearly 200k homes this year, it seems incredibly unlikely that BoA has only 700 properties in the entire state that are for sale after being foreclosed on.
Among all the large lenders, there must be millions of homes that are unaccounted for. In fact, there are reliable sources out there who concur. A quick search online reveals anywhere from 2-7 million properties that have, seemingly, disappeared.
They WILL reappear one day. Soon.
When they do, anarchy will reign. The banks cannot let these properties linger in the shadows forever. Nor can they afford to maintain them long enough to sell them at a decent price. Prices will plummet further. I am guessing the drop in 2010 will be around 20% in already distressed areas like CA, TX, FL, and NV. I could be optimistic.
Now, if you have sat through this joy-fest long enough to read this, let's discuss another, potentially more serious, problem. Some banks, Wells Fargo comes to mind, are tackling this issue in another fashion. Wells is rolling the dice as though they were in Vegas with unlimited funds.
Ah, who are we kidding. With the US taxpayer behind them, they have nothing to lose.
But WE do.
You see, Wells Fargo has decided that pretty much ANYONE who has an Option/Arm or Pick A Pay loan should be eligible for a ten year interest-only modification. Hey, sign us all up. The thinking goes like this: People didn't just buy a house, they bought a HOME. Their kids go to that school, for God's sake! They WILL want to keep it if they can.
Maybe.
Maybe not.
The result of these "interest-only" modifications is two-fold. One, it keeps bad debt off WF books and keeps the money (interest) rolling in. Therefore, WF does not have to account for these huge losses, and generate new reserves to cover the losses.
Second, it kicks the ball back into the borrower's court. Borrowers who accept these mods are making a risky bet that the housing market will increase by 14% PER YEAR for the next TEN YEARS. How do I arrive at this figure? More than 60% of borrowers are underwater. Of that percentage, about 80% are underwater more than 75%. The numbers are stark.
If you bought at 400k in 2006, your home is probably worth 200k, in the worst markets. That is a 50% drop in value. To recover from that, in the ten year interest-only mod, you would need to regain 200k, or a 100% increase in value.
But that is only part of the equation.
You must also factor in cost-of-living increases and future increases in tax, maintenance, insurance, HOA, and so on. So, let's be conservative in this area and figure the total in other fees amounts to 4.5% per year.
Now, under THIS scenario, you must recoup 14.5% per year, or, over ten years, 145%.
What are the chances your home, currently worth 200k, will be worth 500k in ten years?
I wouldn't take that bet.
But Wells is, and other lenders are, too.
I believe this is top-level executive greed. These executives do not expect to be at the helm of Wells Fargo in ten years. In ten years they will have taken another 400 million in bonuses and be safely retired in the Caymans when the chickens come home to roost.
In the end, they will be on the beach, and the taxpayer will be on the hook for even more.
But. what's new?
It borders on treason, I say, honestly.
If you have suffered through all these numbers, I thank you. It is not pleasant, and it will become even more unpleasant before we are done.
Wishing you the best,
-dmc
Bankruptcy Wizard
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