Alan Greenspan

Woody Allen

Check this out... to keep abreast of local sales trends, I activley monitor MLS inventory in the territory that includes: Solana Beach, Cardiff, and Encinitas.

This year 78% of sales in this territory closed below $1 million... while the current asking price for 63% of homes that are actively listed for sale are above $1 million.

I thought this was interesting, so I checked the stats for the entire San Diego MLS... 80% of sales closed below $500k... while the asking price of 58% of homes actively listed for sale are above $500k.

On 12/12/2008 I went on record in an article published on Seeking Alpha, called "Market Prices: The Great Chasm" calling for a significant "Prime market" correction. Here is an excerpt.

“Prime” homes will also decline in value. My call is 35%-40% off peak prices. Only this time, the real drivers of economic stimulus, the small business class, will cut back spending for real. And lay people off. And cash out investments. And sell assets below value.

Major banks who have just received unprecedented amounts of cash infusions to plug up cartoon-like, bullet-ridden lending ratios will have to address the fact that depreciation of portfolios to date only reflects subprime default-related losses.

Maybe I should have entitled this article, “Market Prices: Which Chasm is Greatest?"

It was the adjusting of prime loans from "interest/only" to "principal and interest" that I predicted would stress the system. These loans are starting to adjust now. Houston, stand by.

• Short Sale Listings- Click to see why. In addition to this link, which describes why I direct buyers to look at short-sales only as a last resort... I suspect, down the road, the folks who "successfully sell short" may look to place blame elsewhere if and when they find out they may still be on the hook for tax consequences and credit problems.


• Loan Modifications- Click to see why.
  


• Hard Money Loans- Click to see why. Also, while this could technically be a helpful tool for some specific scenarios, in my experience, the only deals the lenders make are the ones where the scale is tipped way in their favor... away from the borrower, who has everything to lose... and often does.


• Reverse Mortgages- Click to see why.

She has a mortgage client who is unhappy with their real estate agent, and she wanted to know if it would be ok to present my name and one other as a referral. She diplomatically explained why she is presenting more than just one name... that the client had requested several options.

I replied back straight away without thinking too much about it... and it really struck me, after the fact, how much my reply lies at the very core of my business offering... and then I wished for way to shamelessly self promote it... echemm:

• grant access to the same inventory as everyone else
  
• offer killer technology to make his life easier
  
• recommend ways to work smarter, not harder
  
• lend strong negotiation skills to protect his interests
  
• commit to showing him as many homes as it takes without any sort of pressure until he finds the perfect home at a price he likes
  
• give examples of how well you and I have worked together in the past, that he’s in great hands with you as their LO

In return, I will ask for him to commit to working with me as their agent. I won’t expect him to do this until I earn his trust and his business. It is our company policy to sign a “buyer’s broker” agreement along with the first offer submitted and my clients rarely if ever take issue.

Thanks a million, and I look forward to helping you close more purchases in this crazy market than ever before!

sc

• Loan Modifications are Good... Right?
• Loan Modifications: Helping Hand or Moral Hazard?
• Critique of the U.S. Mortgage Plan

Many SethEstate visitors, even infrequent ones, may be somewhat surprised to see a post go live that is even remotely associated with political bias.  Its not that I sit on fences to avoid alienation of either Democratic or Republican potential clientele.  On the contrary, just like I strive to separate my advice from commission, I also boldly assert my major displeasure with both parties.  And I trust new clients from both pools will continue to seek my advocacy, if for no other reason, then because the value I create for them outweighs disinterest in my political opinion.

In this video, Congresswoman Michele Bachmann simply kicks ass.  She speaks the raw truth so extemporaneously and so beautifully that it goes beyond commanding attention, to grab hold of our most core American values.

I would think this testimony would be received as bipartisan, or nonpartisan, or transcending politics altogether… but just in case it offends anyone… good!

Since I previously had no idea who Ms. Bachmann was, a quick google search yielded this:  Republican Representative from Minnesota.

Go girl.

Chase Bank is delivering a huge blow to its most creditworthy (i.e. least irresponsible) subset of cardholding customers by changing repayment terms in an unethical fashion.  This action also stands in direct contrast to Chase’s official testimony (to the U.S. Senate Committee on Banking, Housing and Urban Affairs) about providing “opt out” options when making policy changes.

Resisting the urge to hit people already down by asking why it is they racked up debt in the first place, consider asking these questions first:

• Were they paying it back?
• Can they prove a history of timely payments?
• Can they demonstrate a track record of over overpaying to reduce the principal?

If the answers come as a resounding yes to each question shouted by ~850,000 consumers in unison, then consider asking why Chase Bank should rock this boat?

Chase determined that “the total number of (these) customers (are) relatively low, but the balances that these customers carry amount to billions of unsecured debt”.

Great job Chase… way to solve the case!

Currently ~850,000 people who have been making timely repayments and overpayments for years have received notices that their minimum payments are being increased from 2% to 5%.

This may not seem like much, but to a consumer or small business owner struggling to pay off a $30k balance… the $600 monthly payment just increased to $1,500…

And a $60k balance with a $1,200 monthly payment just increased to $3,000.

Chase heavily solicited these consumers, and aggregated many more by buying up competing lenders too.  They posted record earnings while lending out money at 3.99%.  Then the realization hit home that they mismanaged the rest of their portfolio.  Then they took bailout money resulting in tax increases that will likely hit these same consumers the hardest.  Now they turn on their most loyal producers in a desperate attempt to make up losses.

Chase is effectively calling back loans they made to folks who paid a premium to receive favorable terms (similar to buying down the rate of a mortgage by paying a point), via balance transfer fees, and by the opportunity cost of forgoing a zero percent introductory rate for as many as 12 months.

The intention is clear:

Accelerate repayment of balances that were misleadingly, if not falsely, solicited as “life of loan” terms, and trigger usurious rate hikes on the resulting defaults.

Unlike bailouts for banks, car companies, and loan modifications, etc., there is not a single web message posted from any consumer affected by this, who did not communicate their history of unwavering determination to pay back their obligation.

Meantime, as an auto-reply to complaints filed by California-based consumers, Senator Barbara Boxer dismisses the matter as solved, by relating how she was “proud to work for passage of H.R.627, the Credit Cardholders' Bill of Rights Act”.  Her insipid self-congratulation is especially ironic, because it is this very legislation that has pushed companies like Chase to redistribute their usurious practices from non-performers onto those consumers who still have credit profiles left to defend.

So now the credit card industry officially joins healthcare, mortgage, and taxation as the most recent failed attempt to subsidize losses… you know… the new standard:  squeeze the few producers still standing to shoulder the burden of the ever-growing masses who do not.

This straw may be the one to break many of the 850,000 backs, which in turn, will create a further drain on the system.

So at the next cocktail party, when someone launches into the whole “problem today with the welfare-disability-loan-modification-unemployment-benefit-receiving-populous” discourse… consider mustering your most sarcastic reply… that it officially does not pay to produce.

• 73% of all sales this year have been under $400k
• 11% were from $401k to $500k
• 11% were from $501k to $700k
• 8% were over $700k

Breakin’ it down:

Let’s deconstruct this statistic by defining it’s parts:

• By “sellable listings” I mean mostly lower-end, mostly non-short sale. I hereby estimate 83% of active homes on MLS as “sellable”. If you care to know why, click here. If you clicked, and you still don’t like it, write your own blog.
• (The main reason higher-end homes are mostly un-sellable, is because there is virtually no marketplace for their financing. The main reason short-sales are mostly un-sellable, is because bank managers have incentives to make their banks money… not lose money… and so they are reluctant to approve losses).
• By “MLS” I mean the “Multiple Listing Service”, which agents use as the industry standard, and by which the vast majority of all US homes are sold.
• By “distressed loans” I mean any mortgage whereby the consumer missed two monthly payments in a row and who has not yet paid it back.
• By “out there”, I mean not on the MLS …yet.

Here’s where I did NOT get this statistic:

It did not come from the media, public records, the California Association of Realtors, or even omnipresent Google. Its not that I didn’t try… but rather that they all pretty much conclude that this statistic is virtually unknowable.

Not being a conspiracy theorist, I felt a bit paranoid at first suspecting the government and banks to be “in on it”… obfuscating the truth and all that. Then I settled on a far more satisfactory conclusion, which is namely, to not give these institutions that much credit… they’re not that smart.

Seriously though, there are some legitimate reasons why these entities can’t quantify the amount of what some insiders and bloggers are starting to refer to as “shadow inventory”.

In a brief interview with the President and CEO of the California Bankers Association… who actually does come across as one of the smarter people I know… Mr. Rodney Brown, explained that the term “shadow inventory” would imply that there is an actual inventory out there, i.e. a pipeline of bank owned properties that the banks are unable or unwilling to sell. He was quick to point out how banks are in the business of earning money on loans… not holding onto nonperforming assets or renting via property management. When banks take back inventory (from consumers who are in default), they place it on the MLS in short order.

OK, point well taken… however, maybe we should tweak the definition of “shadow inventory”… or better yet, as I have done with this statistic’s phraseology… just lump this mystery “inventory” into “distressed loans out there that have not found their way onto the MLS… yet”.

The thing is, people have short memories… 12 to 18 months ago, we had a record surplus of (bank owned, foreclosure, REO, short-sale, traditionally owned) properties flooding the market, especially on the lower-end.

So, what the heck?

Why are we agents… the ones still standing after staving off economic ruin… by powering through a 12 to 18 month period of unprecedented industry challenges, stalled transactions, massive lower-end price declines, inane legislation, and mass peer exodus, etc… why are we agents, who have now seemingly willed from the ether, a fresh batch of first-time home buyers to work with… some of which who actually have 20% to put down… why are we having to show each client literally 100+ properties, and make dozens of offers, while bidding 20% over list price, before we can get one to go to escrow??

Are all the problems solved? Did we hit a bottom while nobody was looking? Is it truly a seller’s market?

Being an industry insider… having executed both loans and real estate transactions for many years… having witnessed the stock market’s total dislocation from reality leading up to the subprime collapse… seeing how the stock market is still, perhaps, even more dislocated from reality… understanding that we’ve had no let up on defaults of loans since last year when we’ve had record surplus of distressed sales… I really started to wonder… where the hell is all this inventory? Did it go to the place where lost socks and faxes end up?

Where this statistic WAS found:

Shortly after I became a full-fledged broker, after serving for a while as a (half-fledged?) agent, I was somewhat surprised to quickly realize there was only one major difference behind the role that came along with the new title: there is no higher up authority to go to when you have questions… so you learn to trust yourself.

Now I’m just one guy… and when your own smarter than average father-in-law who routinely teaches you a thing or two, about a thing or two… looks at you sideways when you make such a bold assertion, its easy to second guess your thinking.

So I asked another insider colleague… who’s gut feeling not only confirmed my most aggressive projection, but was even more aggressive in his own projection… and so I asked another insider… and then another… each of which backed up my gut feeling within a small variance. It was then that I realized there was some juice to this.

In all, I asked 20 seasoned, professional, industry insiders, including loan officers, mortgage bankers, REALTORS, escrow officers, title representatives, real estate investors, and a former banker turned options trader.

The most conservative projection was that the MLS represents only 50% of the distressed loans out there.

Scientific? Controlled? Foolproof? Maybe not… but who to trust? Fickle media? Self-interested institutions? Politically motivated bureaucrats? California Association of Realtors, who just yesterday discovered a “computer error” responsible for drastically overstating home sales by more than 13 times? Or foot soldiers who eat, sleep, and breathe this business who have their fingers squarely on the pulse on the real life market?

25% was the average assessment. Put that in your pipe and smoke it.

Re-triangulation:

"This voice speaks San Diego"

In some great articles written by Kelly Bennett, Staff Writer for Voice of San Diego.org, I link with permission to these telling San Diego statistics:

• “This March, the 90-day delinquency rate shot up 2.6 percent from March last year… but the rate of home loans going into foreclosure was… up just 0.3 percent over the year. That means there were more loans falling delinquent than received official notice of default -- indicating a bottleneck and a potential flood of foreclosures to come.”
  
• “This March, 25 percent of the county's Alt-A loans were at least 60 days delinquent… (and) 38.5 percent of the active subprime loans… were at least 60 days delinquent.”
  
• In April, 5.74 percent of outstanding mortgages were at least 90 days late on payments… but only 1.5% of homeowners (received “Notices of Default”).”

“Google’s not too shabby after all”

The act of writing this post itself helped to adjust my Google thinking cap… and guess what happened after I dialed in my keywords using phrases like “how will the foreclosure moratorium effect shadow inventory”?

• 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."

How could this be?

“Government gets its peanut butter all over the banks’ chocolate”

• In one way or another, there has been some form of a foreclosure moratorium in effect for the last 18 or so months. This means, banks with some exceptions, have been disallowed from foreclosing on non-performing loans.
• Fannie and Freddy issued moratoriums.
• Banks issued some voluntary moratoriums… perhaps attempting to cut losses while getting some, rather than no payback… perhaps reluctant to drive the real estate market down further… perhaps to create demand, by limiting supply… or perhaps because they’re in no hurry to report more defaults to shareholders.

“Creation of even more irresponsible lending standards”

• Ever heard of “stated income”? This was when borrowers (over)stated income and assets to obtain loan approval. Want to know how loan modifications work? Borrowers (under)state their income and assets to determine a “fair” payment.

“Lowering standards” works especially well in conjunction with the “peanut-butter-chocolate theory”

• Don’t allow banks to foreclose on consumers unless they offer loan modifications to folks who have demonstrated that they need help… by missing their mortgage payments.
• We’ll just assume that the people who have been working three jobs to make their payments come hell or high water are less deserving than the folks who have missed their payments.
• Never mind that the folks who have missed their payments will default again the first chance they get. Don’t take my word for it? Did you know over half of the modifications already granted… are in default again?

“Fuzzy math shenanigans”

• Whew, good thing banking stocks rebounded recently… why bother adding up those tedious mortgage lates… is there really any rush to alert the shareholders and drive down stock prices?
  
• Right, and while we’re keeping share prices from dropping like an empty can of soda, how about we 86 that pesky mark-to-market accounting practice to “free up” our reserve requirements!
  
• Yeah… and “zero down loans” are so 2007… let’s call them FHA loans… we’ll make people cough up 3.5% so it won’t have that “zero down” stigma… good deal, but if the government is going to be in on it, they have to get theirs too… right, right… we’ll just tack on 1.75% to the loan balance to keep Uncle Sam happy.

“In marble lobbies we trust”

• Banks have no obligation to report statistics on loan defaults.
  
• Banks have no obligation to report statistics on loan modification requests.

“Working the system”

• Some folks seem to stave off the foreclosure man by making partial payments or pressing the right levers or I don’t know how but they are still in “their” homes.

And not factored into my homegrown statistic… “the mother lode of shadow inventory”

• Consumers who are 30 days late.
  
• Consumers who are current but can’t hold on for long.
  
• Per Bloomberg, nearly 25 percent of ALL mortgage holders are upside down.

The golden opportunity being missed:

The purpose of taking this poll, posting its results, and researching its guts out, was not to sarcastically attack the banks and government for perpetuating an already bad situation. The purpose is to call attention to a golden opportunity being missed.

While all this havoc was being wreaked upon our economy, a new freshman crop of first-time home buyers came online while nobody was looking. With good credit, a stable job, and 20% down from savings or from a little help from the ‘rents… the under $325k market is actually the one segment that does make sense to buy right now.

The rates are still low. People can qualify. More importantly, people can afford it. The post write-off payment is on par with rental prices. The sales prices have already taken a serious beating, and even planning for the worst… if the downward trend continues, future monthly payment savings will likely be offset by higher rates. There’s also that tax credit thing nobody really knows how to explain or whether it will be around long enough as advertised, but hey, it can only help too. In short… it makes sense.

And in this one and only market segment where it does makes sense to buy… the government is doing its darnedest to artificially limit supply.

This stance creates a head fake to higher-end markets that the tide has turned, which will irresponsibly cause more consumers to be caught off guard. It also sends a message to the hardest working class of consumers we have, who have not made room for any excuses, that it pays to quit.

We have a chance here to stop subsidizing more of what we don’t want. We likely have enough pent up demand to replace non-performing borrowers with performing ones. And if the demand on deck does not prove to be sufficient… then now is the time to find out. It is so important that we firm up a bottom to this madness in advance of the high-end displacement yet to come. A low end line in the sand is desperately needed to create a last chance foothold from which to draw a bridge when the high-end drops off the precipice. I say take the hit now while we still can:

• Remove the moratoriums.
  
• Set up an REO conservatory to rent to foreclosure displaced consumers.
  
• Enforce banks to report defaults and non-performing loans to shareholders.
  
• Let the market take care of itself.
  
• Adjust incentives for bank managers to execute short sales (rather than pretend).
  
• Recognize that new home purchases will stimulate the economy.
  
• Understand that nobody “deserves a home”.
  
• Stand up for the contracts that underpin our social fabric.

Invitation:

All ya’ all real estate junkies are cordially invited to revisit SethEstate in the next few days… to find out why we are so not even close to a high-end “real estate bottom”.

Imagine if the loan was $1.2m. Imagine if rates tick up.

We don't have a socio-demographic problem. We have a math problem. And a disciplined savings plan is not going to protect high-end homeowners from watching their value get erased.

Because once a few marginal folks are forced to sell an asset, for which there is virtually no market… in a market where low rates do not exist for refi's, where no attractive financing is available for purchases either, where there is little demand, in part because the rates on jumbos are high, and in part because folks are worried about their income stream trend and security… whose effect will, in turn, decrease discretionary spending further… which will put more pressure on the next level of marginal people to sell… while the neighbor who could afford making payments on their $900k loan but watch their value go down to $700k… Part II sucks.

The scariest thing about this whole mess is not that people don't see this coming... its that they don’t see it coming because they don't want to.

And way more than the “sub-primers” and way more than the “richest 1%'ers”... the upper middle class are the true stimulators of the economy. When their cash flow freezes... look out below.

Of course, home values will eventually come back up... in like 10 years or so... so if you plan on staying for the long haul, just make sure you are locked into a long-term loan, and don't read the news. But if you're not sure about weathering the storm... you may consider selling now, rather than risk trying to catch a falling knife later.

I say “is” and not “has to be” because its failure is already evident… we just have too much political inertia to change course.

Now, before judging this post as too harsh, first understand this:  there is a huge distinction between “loan refinances” and “loan modifications”.

Refinances are for folks who can:

• Truly afford the new terms, AND...
  
• Pony up good credit worth defending.

And while this model in which consumers can directly refinance with their loan servicing company, temporarily eliminates any revenue I could personally derive from executing refinances as a real estate broker, I’m all about separating commission from advice. And while banks are giving free money away, the best advice I can give anyone who will listen is to help bring this proactive servicer-to-consumer model mainstream.

Now, modifications on the other hand (as opposed to refi’s), are for people who have already missed their payments, and this reactive model is doomed before it starts.  Unless the propensity to repay can be demonstrated with a clean credit history, then like the Seinfeld sandwich guy would say…”no principal or rate reduction for you!”

Now personally, I don’t blame the “entitlement crowd” too much for feeling entitled, because if you extend an undeserved benefit to an otherwise hardworking person and then take that benefit away, of course they are going to get salty.

Nor, by the way, do I blame investors for getting fat while underwriting these loans in the first place. Who really is so naïve as to think that incentives for the common good will match up to incentives for individual gain anyway?

But I do blame in advance, the pundits being pressured to “do something” who will pave a new lane on this economic freeway and then act surprised when it gets jammed with more traffic.

Here is the point: the entitlement crowd could not afford the old payment… and they can not afford the new payment… and even if they could afford the new payment, they will not be able to afford it the first chance they get.

Am I being ruthless? You bet I am… because while the rest of us see our own income decreasing, we still keep paying our bills.  And now we get to pay more taxes on the meager income we do make to repay the mess the entitlement crowd helped make.

You know why? Because we still have a credit profile to defend.

If we offer loan modifications to people who have already destroyed their credit, thereby killing the integrity of the fundamental method by which we measure credit worthiness, then we not only reward the people who are undeserving… but we also provide an unprecedented incentive for well intentioned consumers to just stop carrying their burdens.

Well I guess not unprecedented, if we count healthcare… but I digress.

If I tell you that 50% of all loan modifications previously executed... are already in default... would you believe me? What if I tell you this statistic is four months old!!

Once the credit is damaged there is NO INCENTIVE to make payments on a depreciating asset while the opportunity cost of renting is cheaper. If values continue to decrease (and they will) then the modificationee will do the wrong thing... again. Because that is what they do.

If it were so simple to fix things this way, then how about the next time there is a traffic jam on the freeway, we all just hit the gas at the same time? Are you going to trust the car in front of you?

I am not complaining since this presents a good opportunity to recoup some commission after last year’s four-month dry spell, while all of the nations banks decided to take an undeserved break from lending.

What's moving?  Well predictably enough (achemm) the $250k to $550k market.  And while some clients recognize more potential downward pressure in the $700k-$2m range, all-cash buyers seem to be swinging a pretty big hammer in this segment too. 

But let’s not get carried away… people have been talking about today's news item that declared Solana Beach a big winner in 25% appreciation last year.  I have a healthy skepticism for all news items, so I pulled my own numbers to fact check.  I show a 12% increase but hey, this is still great.  Then again I also show that the 4th quarter average sales price tumbled 34% compared to the same period in the previous year.

This suggests to me, that my stance on market outlook is unfortunately shaping up to be accurate.  Let's hope not, but if I had to get off the fence, I would say that we are sitting in the eye of the storm.  Lot's of good deals out there if you know where to look, but lot's of pitfalls too if you don't.  I miss blogging, but not only does baby need a new pair of shoes... so does daddy.

• Unapproved Short-Sale- a homeowner is said to be "upside down" on a home when the proceeds from a potential sale would be less than the amount owed on mortgage and lien balances.  If they are unable or unwilling to continue making payments, they basically have two choices...  try to petition the bank to eat the loss... or walk away.  Short sales create slightly less havoc on credit ratings so homeowners have some incentive to cooperate.  Here's the problem: it's "someone's ass" at the bank if they sign off on the loss, so managers are often reluctant to do so.  The official party line is usually goes like this:  "we are so overworked with short-sale requests, we may take a few months to get to you".  And in fact they often do.  A prospective buyer will make an offer... sit around for 2, 3, 7, 8 months awaiting lender approval...  get their hopes up… get approved for their own financing… continue to waste money on rent payments… and in the end, most listing agents report back that the manager asked for a higher sales price… or just said no.  Meantime the buyer’s own financing gets dated and they have to start all over again, so they often give up.  My take:  stay as far away from this category as you can.
  
  
• Pre-approved Short-Sale- up until recently, I put all short-sales into the category above... but alas, banks are starting to get smart.  Once a short sale is approved, they actually move through the escrow process almost as smooth-like-butter as in the other categories.  The downside is the short-sale approval price is mostly non-negotiable.  The upside is the prices are usually set way low to begin with.  But I still say let someone else go through the rigmarole of getting lender approval.  You might ask, “Doesn’t this mean some other buyer will get the deal?”  In my experience, the other buyer will get so frustrated after months of waiting, they will move on to greener pastures. Later, the smarter banks (doesn’t say much) get real and approve the sales price.  A smart agent can distinguish which listings have been approved, though it is labor intensive.  This category represents good value.  I'm closing one this week for $240k... the original list price was $400k.  No joke.[Well its been about a week or so since I wrote this post and we did end up closing this sale... but it closed a week later than expected. As mentioned I have been advising clients against making offers on short sales due to their extremely poor closing ratio... and while I thought the pre-approval would address these nightmares, I learned a big lesson about one last step all short sales must go through that only luckily did not kill our deal. For more detail, see my revised take on short-sales.]
  
  
• REO- this category goes by many names (i.e.  "bank owned", "real estate owned", "notice of default", "NOD", "notice of sale", "NOS", "public auction", "tax default", etc.), but they all mean the same thing.  Usually these are short-sales that took so long in getting approval that never came, that the bank ends up foreclosing.  Once the bank takes back ownership, it switches to a different side of their balance sheet.  Then, the bank’s REO asset managers are empowered to get rid of the asset at very competitive prices once and for all.
   
  
• Re-Sale- good old fashioned homeowner looking to sell their home. Here's what I have to say about this category... anyone looking to sell in this market... really has to sell, so do not preclude them from your search in the name of getting a "good deal". Don't miss the forest through the trees, and get sucked into the vortex of REO marketing spin.

"Oh... alright then!"

Bottom line: when it comes to helping people buy the right house, at the right price, and with financing that meet's their goals… all at one point of accountability... I believe I am the best Buyer's Advocate in San Diego.  Don't just take my word for it... check out some testimonials to kick the tires.

Seth Chalnick
m: 619.251.8803
site:  www.SethChalnick.com
blog: www.SethEstate.com

Here is why bait-and-switch marketing practices are prevalent in the REO space:

• Public records indicate which properties are in default.
• Just because they are in default (i.e. late on their payments) does not mean they are available for sale.  The owner still has the right to catch up payments, and even if they don’t, there are about 120 days of processing that must first occur before they foreclose.
• REO's have tons of nick-names, like "bank owned", "real estate owned", "notice of default", "NOD", "notice of sale", "nos", "public auction", "tax default"... and the list goes on!
• Because anyone can pull public records, and because there are so many confusing names for REO's... some companies are making money by exaggerating the features of what you are looking for... namely "a good deal".
• In the end, they pass off homes (that may technically, at some point, go default)... as homes that are genuine REO's.
• They do this to attract as many "leads" as possible so that some percentage of them will end up buying other listings that are active... some REO's... some not.

In my experience, there are only two good ways to identify REO's:

• Go direct to lender's websites... but they only have their own listings, not other lenders.  And you will likely end up with an agent representing you who also works for that lender.
• Manually search the confidential remarks in the MLS database.  The only people who have access to these remarks are agents.  It is rather labor intensive to sift through pages of listings for just the REO's, but if you partner with me by providing specifically what you are looking for... I will do this for you.

So you see... I ask for your "registration" too.  But instead of trading your email address for bunk information, you get real value, and not just its mere perception.

Seth Chalnick
m: 619.251.8803
site:  www.SethChalnick.com
blog: www.SethEstate.com

•   See all listings!

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•   Set search criteria!

•   Have me search!

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•   See all listings!

•   Set search criteria!

•   Have me search!

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Here's a link to my article. In it, I pilfer one of my more catchy blog posts titles and condsolidate the underlying theme of my high-end market sentiment, but hey, its mine right?

• Prices have dropped below the cost to buy the lot and build the home.
• Net annual return on an all-cash purchase exceeds 5%.
• You have to win seller acceptance over competing offers within a matter of days.

For homes currently valued between $750k and $2m:

The correction has not even begun in earnest. A huge percentage of these homeowners have ARMs. None have reset yet. They will. Its not the interest rate adjustment that will push them over the edge… since their fully indexed rate will still be low, at least for now... but rather, the fact that some of these loan programs force principal and interest payment re-amortization over the remaining 25 years.

Some marginal folks will need to sell. And when they do, since there is exactly zero market for making loans in this segment, people will face increasing pressure to get out, which at best, will put downward pressure on prices, and at worst, spiral into another “sup-prime” type debacle. And that’s with LIBOR staying low.

We just saw the blueprint of how this plays out in sub-prime. It is not a socio-demographic thing, but rather a math thing. These homes will decline in value, 35-40% off peak prices, and the lower-end homes currently trading below intrinsic value will hold their own, or come up a bit to bridge the gap, as foreclosure displacement puts upward pressure on the rental market.

For help figuring out how all this creates challanges or opportunities for you, drop a line anytime with any questions.

So what we're seeing here is pretty simple really... once their credit score is damaged, people will likely fall behind on payments when their home's value drops below the amount owed. There are only three incentives to pay off a home loan:

• To profit from the home's appreciation.
• To preserve credit scores.
• For intangible benefits (...the reason the other 50% did not fall behind... yet).

Why pay the bill if the credit score is already damaged for years and it costs less to rent a comparable property? Why pay the bill if there was already one reward extended for not paying the bill?

If lenders are going to modify loans, then they ought to consider doing it proactively, before the credit is damaged.  But rather than plug all the cartoon-like bullet holes that riddle this housing crisis, we may want to let the pressure find its own inevitable equilibrium. How about letting over-priced homes fall to levels buyers can afford? We are already seeing a successful resolution in the low-end markets as buyers triangulate the market bottom to determine fair bids. As for the high-end market... watch your back(yard).

• Conforming rates drop to low 5%’s… could head lower!
• San Diego conforming loan limit increased to $546,250 (from $417k)!
  
  [click hereto see limits in other high-cost counties]

Bottom Line: Up until now, the $750k to $2m range has hung in there… fending off major price drops. The items listed above suggest that marginal folks will face increasing pressure to get out, which at best, will put downward pressure on prices, and at worst, spiral into another “sup-prime” type debacle.

If you have a jumbo loan that is re-setting soon, you should check the “Adjustable Rate Note” (received during loan signing) to see when it calls for re-amortization. Regardless, now may be a good time to consider bringing cash in to make a conforming refi happen.

If you cannot refinance, then make sure you have the resources to withstand payment shock from re-amortization and potentially much higher interest rates. If the outlook is sketchy, consider selling now, rather than catching a falling knife later as other people find themselves in the same situation.

Conclusion

So in this example, your ratio is a little high...   too high to be in the range lenders like to see, but not necessarily too high to make your deal work.  All scenarios are very dynamic.  You can reduce your monthly obligations by $165, or cut back (or negotiate lower) your purchase price by $15k-$20k, or lower your interest rate, or have an experienced mortgage broker present your compensating factors to the underwriter in spite of the 47% ratio.

Bottom Line

A good broker can help you play with the variables, set your price expectations realistically, and optimize your chances for approval.

Call for personalization anytime… Seth 619.251.8803

Demographics&Population

• Classic flip-flop culture meets beautiful upscale architecture.
• Ranges from country-like, multi-acre parcels approximately two miles inland... to thickly settled residences the closer you get to the coast.
• Spectacular homes sitting right along side multi-unit rentals.
• The smallest of North County towns, but still has its own 92007 zip code.
• Cardiff is the only North County town that doesn’t have structures built on the west side of Hwy 101… since the ocean cuts east up to the road. But its as if the Man Upstairs tempered this feature by tilting the whole setup along a fairly dramatic hill, offering more amazing sunset views per home than its North County neighbors.
• Cardiff... funky, real, cool.
  
  sample architecture
  
  

Statistics

• Can be found here.

Visitor Factor

• The campground keeps a steady stream of visitors flowing, but also lends a special sense of ownership to the locals. If you are thinking about avoiding out-of-towners by choosing a different North County town instead… fagedabouddit… they get pressure too.

Features&Attractions

• Composer District- named by its developer after the musical composers he loved, these coveted streets offer a sort of throwback to olde San Diego. The streets are winding... the views are spectacular... the architectural design is straight from a magazine. Here is a good article about is origins. Located north of Birmingham, west of I5.
  
  
  sample composer district street
  
  
• Walking District- highly sought after homes, plotted in a grid that surrounds Town Center. Walking distance to beach, shops, restaurants, and parks. Located south of Birmingham, west of I5.
  
  
  street view overlooking the walking district
  
  
• Crest Drive- a street that runs parallel with the coast, east of I5, along the highest point on the hill, overlooking the Pacific Ocean to the west, and the ranges of Mt. Whitney to the east.
  
  
  ocean view from crest drive
  
  
  inland view from crest drive
  
  
  random street between i5 and crest drive
  
  
• Cardiff Campground is one of the best places in America to pitch a tent. Its like being in Big Sur, but warmer, without the cool redwood trees, and closer to gourmet food. The oceanfront bluff offers breathtaking views... the cost is nominal... the experience is memorable. I actually camped here 10 years ago for four nights when I first landed in Cardiff (from back east). I used it as home base until I found a killer rental that allowed dogs. Speaking of dogs, they are welcome at the Campgrounds (on leash). The surf ranges from ok to epic.
  
  
  lifeguard tower by "campgrounds"
  
  
  

Cardiff Town Centre- where Seaside Market is located, as well as my Pacific Coast Homes office. Located in the heart of Cardiff, we get foot-traffic of 17,000 people per week! And I bet 16,000 of them wear flip-flops. You will also find here the best pizza place and dry-cleaner in North County. There’s also a surf art gallery, Starbucks, and several shopping boutiques. A new sushi restaurant is being built in the former location of Yogi’s (see below).


cardiff town centre

Seaside Market- the best gourmet food source in North County. Everything you (not so much need as) want at high (but not obnoxiously) high prices. The freshest meat and fish around, albeit sold in cuts so huge, you can’t eat again for days. Hey, maybe that’s how people can afford to shop here! Great produce. Staples you need at convenience store prices. Good wine collection managed by a great guy. In fact all the people who work there are friendly... sort of like “In-and-Out” style only sans the funny hats.


inside town centre: seaside market and my pacific coast homes office

Patagonia- a high-end surf store, out of which you’d love to buy many artful, enviro-friendly things if you didn’t have to also budget for food and diapers.


chlorine free merino wool lined wetsuit anyone?

Cardiff Lagoon- aka San Elijo Lagoon, contains 1,000 acres, 8 trail heads, 7.5 miles of trails&700 species of plants and animals. Run by this conservatory.


cardiff lagoon


view from solana beach side


overlook

Glen Park- clean, safe, and beautiful ocean view park with picnic tables, and tennis and basketball courts.


glen park

Train tracks- used by North County Transit District's Coaster and Sprinter lines.


even our trains have killer views

More features and attractions:


classic hwy 101


driving down birmingham


ancient structure on school grounds likely involving juicy history i don't know about


can still park on dirt in some places


rare plot of land west of crest drive


standard issue surf van

Restaurants

• Trattoria Positano- Quiet, cozy, romantic. Good bottle-of-wine-have-dinner-get-lucky-later-type place.
  
  
  date night
  
  
• Las Olas- the best sit-down style Mexican restaurant in North County. Located on famous Hwy 101, on the strand that connects Cardiff with Solana Beach. Semi ocean views... total beach vibe... better than average food... great margaritas, bloody maries, and bottled beer. And chips and salsa good enough that you never seem to be as hungry as you thought when the burrito comes.
  
  
  tacos meet surf
  
  
• East Coast Pizza- the best pizza in Cardiff. I like the sausage, meatball, pepperoni slices best.
  
  
  hits the spot
  
  
• Pipes Café- not sure what all the hubbub’s about… but its super popular with the surf crowd. When I first moved here I was excited to not only surf, but do all things surf related… and this includes Pipes for sure. Only the eggs came out steamed, I got, like one slice of bacon, the lines were long, and I don’t think I've ever been back since. Note: my opinion here does not reflect consensus.
  
  
  steamed eggs, brah!
  
  
• Chart House- you pay more for the ambiance and ocean view than the food. But the food is very good, and view is in fact, killer, so the next time you feel like valet parking your car to enjoy an artfully presented scoop of ahi…
  
  
• Cicciotti’s- formerly the Cardiff location of Vigilucci’s. While its just not the same as when it was Vigiliucci’s, and I honestly can’t put my finger on why… it serves up a diverse and yummy family style meal at “we’re not on a date” prices.
  
  
• VG's- when you're in the mood to add back calories burned during exercise, drop by VG's for the absolute, hands down, best chocolate-glazed donut you ever did scarf.
  
  
  best donuts this side of anywhere
  

Nightlife

• Yogi’s Sports Bar Restaurant- has sort of a monopoly on Cardiff nightlife. I think it has something to do with it being hard to get a liquor license here. I haven’t been to the new location which is next to Las Olas on the 101 strand that connects Cardiff with Solana Beach, but I imagine it’s pretty much the same.
  
  
  your next old stomping grounds
  
  
• The Office- one of those bars you visit a few times when you first come to town and decide whether you’re going to make it a hobby. One of the funniest quotes I can remember hearing about, was said in this bar, by a guy who resembles Cliff Clavin straight out of Cheers, after being asked… “why do you even bother coming in here?” He replied, “because it feels so good when I leave”.
  
  
  "honey, i was at the office"
  
  
• The Shanty- even more of a commitment than The Office.
  
  
  still here
  

• Cardiff Lodge- a place I recommend to my people… buy my people tend to stay where they want to stay... and give me my opinion when they ask for it. $185-ish.
  
  
  cardiff lodge
  
  
• Holiday Inn Express- an inexpensive alternative… recently remodeled and nicer than you think. $135-ish.

Surf Breaks

• Pipes- north of the campground… a fun peaky break, south of Swami’s.
• Campgrounds- the beach in front of the campground that shows why California is better than wherever you come from.
• Cardiff Reef- south end of the campground, by the river mouth, where grommets and oldie-but-goodies pretend they don’t irritate one another. Mostly long-boardable but can get epically epic.
  
  
  cardiff reef
  
  
• George's- is the stretch of coast in front of the Lagoon, aka “Restaurant Row”… ranges from frustratingly fat tide mush to fast micro-barrels.

Houses for Sale

• View listings here.
• Request listings by email here.

In most cases I believe these bailouts are the lesser of two evils... i.e. a lame banking system is better than say, no banking system.  But one that is patently corrupt?

You know they say its not effective for bloggers to rant... but I just can't seem to help myself on this one.  In my opinion Wachovia was the most predatory of all lenders, pushing their Option ARM's all over the place, encouraging brokers to make 3 or 4 points per transaction by tacitly implying they should mislead consumers into thinking paying LESS than interest only was safe.

These execs made so much money inflating the bubble it can make your head spin trying to count it all up.  And now, 10 of the individuals most responsible, get to split up $98m??

Is this a rant... or am I being too nice?

I wouldn’t have any problem stimulating the economy with capital injections into the banking and auto industries, etc, if it wasn’t being thrown down the toilet, like good after bad, out of panic that we must do something.  Fact is, the steps taken to date don’t come close to fixing the root of the problem, which is lack of true value creation, and is like making drops in the ocean.  The $700 billion dollar package previously rolled out represents enough capital to cover only 1.6% of the potentially toxic debt.

At least by creating jobs and fixing thing we use, we get something back from the debt we keep taking on.  More importantly, this step finally acknowledges, albeit indirectly, that if we not already in the beginning of what will become a full blown depression, then at least there is recognition that the potential exists.  I like.

• down payment
• principal
• interest rate
• private mortgage insurance
• property tax
• fire insurance
• hoa fees
• mello roos
• approximate income tax deduction
• realistic appreciation models
• reserves coverage time

Remember: everyone's scenario is unique, and some variables are time sensitive, so I encourage you to call for help in estimating with clarity and confidence.

• Example #1
• Example #2
• Example #3

For more perspective, click here.

The bulk of the ARM loans have not re-set yet.  They will.  A substantial percentage of North County homeowners have ARM loans.  It is true that the upper scale neighborhoods (i.e. $750k - $1.9m) are inhabited by folks who are a little more insulated than other neighborhoods... but only while their insulation lasts.  I mean mortgages as an investment vehicle were safe… until they weren’t, right?  Fannie/Freddie were AA rated… until they weren’t right?

Some marginal folks in the areas that haven't gotten hit yet will need to sell.  And when they do, we will see the beginning of the same downward moving spiral we just saw play out in sub-prime.  It is not a socio-demographic thing, but rather a math thing.  I see a big pricing correction coming our way.

I am not attached to being right about this... and rather really hope I am wrong.  But I was not wrong about the first wave of re-sets.  And anyone now claiming how obvious this "sub-prime debacle" was should also see this next wave coming in neon lights.  From a 10 year outlook perspective, I bet my career we'll see higher prices than peak.  In the next 2-3 years... we're going to get hammered.

My take:  if you own and can hold out, then do so.  If you are not sure about your staying power, sell now.  If you are looking for a place to shelter or reallocate paper based assets… then consider the smart money quietly flowing into lower-end rental properties.

1. You can’t buy vacant land and build a comparable home without spending $80k more than this list price.

2. A cash buyer at 13% above the asking price will still realize net annual return on investment of 7% (and that's after factoring 25% for operating expenses). Booyah this Jim Cramer!
   

3. Check back in a week to see whether this listing gets swooped before you can say “doh! who was that schmoozey realtor?”

Bottom line: smart money is flowing to select REO’s, in select markets, as vehicles to tie cash to hard assets, which are trading at or below the fundamental market cycle bottom, and at or below its intrinsic value, while earning a solid ROI of 7%... while at the same time, other investors are buying up similar properties to further validate this sea change. Smart investors are paddling into the wave of rental income inflation, not to mention long-term appreciation due to huge inflation, demographic explosion, and foreclosure displacement from properties that still cost more than renting.

“I’ll never leave home again”… except maybe to buy investment property.

• Fiscal policy can lower central banking rates, but long term mortgage rates are ultimately set by the supply and demand of investors.
• We can pour tax money into banks to free up liquidity, but before lending out new funds, banks must first repair their reserve requirements on the value of shrinking assets… assets, which have limited buyer demand and limited buyer liquidity. And apparently banks must also first fund take-over plays… and take care of off-balance sheet items and bonuses and Christmas parties…).
• Learning from mistakes to avoid our circumstances was a possibility… before we over-leveraged the whole financial system… but the mistakes have long been repeated already. And so, yes, another depression is possible (probable).

• This takes away the incentive of people who do not qualify to keep making their payments. The people who have already missed three or four payments have already damaged their credit something awful, so their incentive to make even modified payments on a depreciating asset is already reduced, if not eliminated.
• I don’t see this stopping the underlying problem, which is that people can not afford the payments. Once this small percentage of the worst troubled homeowners are helped, then more people will need loan modifications. The bulk of the loans that will be re-setting, have not even reset yet.

and…

“Banks and mortgage finance firms have a strong interest in trying to halt foreclosures. The market is already flooded with more homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures.”

My take:

• Yes they have an interest in halting foreclosures… the same way a person has an interest in getting their money back after buying a stock at 100 and watching it go down to 30. Cry me a river. I don’t remember a single bank complaining when they were making hundreds of billions of dollars.
• Yes the market is flooded with an oversupply of homes people can’t afford. Where I come from, this means the price is too high. Regardless of what anybody does, prices will come down anyway until the average household’s monthly payment obligations comes back in line with a reasonable percentage of that household’s income. And we now have a new problem, which is that incomes are going down and unemployment is going up.

Everyone has their heart in the right place on this attempt to help people, but the time for action was when banks were leveraging profits by 30:1. Now we are experiencing the de-leveraging process... and it is just not as fun.