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  • Ten Facts about the Real Estate market you need to know

    Ten Facts about the Real Estate market you need to know

    by Sean O'Toole


    I am long overdue to give you all an update on what is happening in the foreclosure market in California. Starting a company has been all consuming, but that is no excuse; the iTulip community has been a fantastic resource for me, and updating you on what I'm seeing at foreclosure ground zero is the least I can do.

    To that end, here are the top ten things you need to know.
    1. September foreclosure data are way off. National headlines declared foreclosures were down 8% in September. Problem with that reporting is that there were only 19 business days in September vs. 23 in August. Using daily averages, foreclosure volume was up 5 to 28% depending on the measure you use (Notices of Default +5%, Notices of Trustee Sale +28%, Sales at auction +18% - Stat's from www.ForeclosureRadar.com.
    2. Foreclosure data do not take process delays into account. There is a minimum of a 90 day, and typically a 120-150 day, delay between notice of default and the sale of a property at auction. While sales at auction are now at $200 million per day in California, they correlate with notices of default filed four to five months ago. Notices of default have increased 58% from five months ago. Expect a similar increase in auction sales in the next five months--or perhaps worse, as the percentage of defaults that end up at auction has been steadily increasing.
    3. ARM resets haven't happened yet. Despite all the talk about the problems with ARM resets over the summer, if you look at the reset charts we really didn't see big increases in resets until this month. Given that CA's foreclosure process is typically a minimum of six months from the first missed payment, don't expect to see the first big wave of foreclosures from ARM resets until March or April of 2008. Note that the next peak in resets is March 2008, and the foreclosures from that won't occur until Q3 or Q4 of 2008.
    4. The main stream media talk about the credit crunch in August being an indication that the worst is over. Ridiculous. Again we won't see the impact of that in the foreclosure market until Q1 2008. We are just beginning to see the impact of the credit crunch on the non-foreclosure market. New and resale home sales in CA are down to 24,460 in September, a 26.4% decrease since August, which now represent the lowest transaction volume since DataQuick began tracking it in 1988. Note: the current wave of credit tightening severely limits the ability of those in foreclosure to refinance or sell - virtually insuring a significant increase in foreclosures in four plus months.
    5. Much like government employment figures, current housing inventory level data, despite being ridiculously high, are grossly understated. No doubt many people are waiting for the market to improve in the spring before selling, especially in affluent areas. The belief is that this is temporary and conditions will improve after the Fed lowers rates and we get through the winter. I've been hearing this same argument since late 2005. At some point many of the believers will lose their faith, or be put in a position where they have to sell. There is massive, pent up, un-counted supply.
    6. Congress will make matters worse. Every effort on Capital Hill, no matter how well intentioned, exacerbates the problem. Tax relief for homeowners in foreclosure eliminates a final barrier for those who have struggled to keep going. Paying for the tax relief by reducing the tax breaks from the two of five year rule on secondary properties will kill demand for second homes, one area that has modestly helped keep sales up. As for government moves to tighten lending standards, that would have helped in the 2002 to 2005 period. The market has already self-corrected considerably and some of the current proposals are draconian and can only send the market crashing faster and harder.
    7. Recently announced mortgage relief programs make for great headlines, but don't expect much. There is nothing the Fed can do either. Take mortgage interest rates to 0% and most of these "home owners" still either can't afford the payments or don't want to, now that they know home prices are falling. Also, a high percentage of foreclosures now are on speculative homes; why keep paying payments on a property that isn't cash-flow positive and is underwater. In much of Califorina, even in areas where we have already seen 25-35% price declines, the cost of home ownership is still 50% to 100% more then the cost of renting, even with mortgages at zero percent. What's left, 50+ year amortization schedules? Isn't that how we got here in the first place?
    8. Builders continue to build. This is absolutely nuts, but there is a rush on to complete units before things get worse. I understand this from the builders' perspective - they've spent millions on infrastructure and the only way to recoup that cost is to build and sell homes. Much like GM, it is cheaper to sell cars at a loss than close the factory. But add this inventory to the resale inventory and it creates huge oversupply. Worse, builders have been the primary drivers behind declining prices. They are aggressively discounting to the point where the resale market simply can't keep up. This has been true in places like Stockton since late 2005 where discounts of 40% from the peak are not uncommon. I had a two bedroom, 1200 square foot hme in Stockton in early 2005 that I thought I'd be able to sell for $350,000. After some delays I put it in escrow for $320k. A builder put up a sign saying new homes from the high $200,000's. I lost my buyer. Finally got it sold for $280,000. I just visited those new homes. I can get a brand new 1,700 square foot, four bedroom home for $265k, and the model home has $75,000 of furniture and smells like fresh baked cookies. Builder discounts will continue to be the primary driver behind price declines, and price declines will continue to be a primary driver behind foreclosures.
    9. Median home price reports in the main stream media make conditions appear much better than they are. While Shiller attempts to look at changes in individual home prices rather than the median, the bottom line is that housing data are atrocious. Note that prices could decline 20% across the board and you could still easily have a 10% increase in the median price data. In fact this is not only possible but likely. All accounts are that the low end has been hit harder than the high end. A simple shift in the mix of what is selling can have a huge impact on median prices. Add to that the fact that until recently loan standard tightening increases in fees and credits were being built into prices at an increasing rate, skewing final prices higher than the actual value of the homes.
    10. Given the current trajectory of foreclosures, the current and future negative impacts to demand, pent up and continued builder supply, and the delays in the market's visibility to what is really happening, this market contraction has a long way to go. I predict at least a 50% increase in foreclosures, and likely a doubling in properties sold at auction with a peak no earlier than Q3' 2008.
    Any effort to fix this should be focused on supply and demand. It will require bold initiatives. Here are a few I have yet to see suggested. If they seem shocking, please only take it as an indication of the magnitude of the problem I see from my experience in the industry.
    1. Decrease supply with a national building moratorium. If necessary, cover the builders' cost to sit on the inventory and in-the-ground improvements. It will be cheaper than other bailouts. One clear downside: this will also have an impact on unemployment as contractors have to find other work.
    2. Decrease supply by provide an incentive to not sell your home for two years. Perhaps even a draconian incentive like disallowing the $250,000/500,000 capital gains exemption for two years, with exceptions for hardship.
    3. Create demand by offering citizenship to qualified immigrants who purchase a home and are not late on a single payment for five years.
    4. Offer tax incentives for lenders and the underlying debt holders to do short-refis where the borrower stays in the house and a portion of the debt is forgiven. Essentially a write down, perhaps to current appraised value. Create incentives for the homeowner as well; if they take the offer, eliminate tax relief on the forgiven debt only if they stay out of foreclosure for two years.
    I'm sure smarter minds can come up with better ideas. But Congress's current response of over-regulation, foreclosure incentives (tax relief), and demand killers that kill incentives to buy are the opposite of what is needed.

    Sean O'Toole writes for iTulip.com and is the Founder and CEO of ForeclosureRadar.com

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  • #2
    Re: Ten Facts about the Real Estate market you need to know

    Thank you, Sean, for your time and thought to put up this article. I love it when individuals with on-going experience in pertinent fields put forth their perceptions and opinions. Good work.
    Jim 69 y/o

    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

    Good judgement comes from experience; experience comes from bad judgement. Unknown.

    Comment


    • #3
      Re: Ten Facts about the Real Estate market you need to know

      Originally posted by Jim Nickerson View Post
      Thank you, Sean, for your time and thought to put up this article. I love it when individuals with on-going experience in pertinent fields put forth their perceptions and opinions. Good work.
      I second that. Really appreciated. Huge value to know what's really going on.

      Comment


      • #4
        Re: Ten Facts about the Real Estate market you need to know

        Ed.

        Comment


        • #5
          Re: Ten Facts about the Real Estate market you need to know

          Here's another 9 points that have helped me put real estate into perspective:

          The Stages of the Real Estate Cycle

          1. Population growth and commercial growth at the early stage of the economic cycle, often supported by government encouragement/ low interest rates, creates an increase in the demand for housing and commercial buildings in excess of current supply.
          2. It takes time for construction to gear up. This construction increases demand for vacant land. Bank loans are attracted to construction and real estate sales as prices begin to rise.
          3. As vacant land prices rise a boom in land develops, leading to sub-divisions and speculative resale.
          4. The real estate cycle peak is characterized by a high volume of subdivision and sales.
          5. Construction catches up with demand and a small surplus is created. Rents can't go up enough to support the higher property costs, making new construction and rental property investment unprofitable. Land values start to adjust downwards, the bubble/mania is broken.
          6. Rising interest rates hurt confidence and profits, adding to the downwards pressure on prices. Real estate enters a 'hanging' slow phase. Asking prices stay high but there are few buyers. Building, subdivisions, and speculation drops quickly. Sometimes a panic or crash begins at this point; often the market just slowly dies. Many keep speculating during this phase as they're unaware of the market having turned.
          7. Real estate starts to get marked down in price. This tends to take quite a while as owners tend to cling to mortgaged property longer than they would to other assets, like shares. Foreclosures rise but the foreclosure process is not quick.
          8. Mortgage costs/interest rates are higher, rents decline, and vacancies increase. The market is dying rapidly. Foreclosures increase; speculators and investors are forced to sell as the capital value of their property decreases below lending margins and rents decrease below holding costs.
          9. The bottom of the market has the following characteristics: high vacancies, low construction rates, foreclosures and no speculation. Debt must be written off and properties sell at a deep discount. Only those who entered stage 6 with little or no debt survive to buy the dramatically discounted properties.
          • Note that in a typical real estate cycle that non-residential (commercial & industrial) real estate follow residential trends with a time lag of about 5 quarters (the historical range is 3-8 quarters).
          http://www.NowAndTheFuture.com

          Comment


          • #6
            Re: Ten Facts about the Real Estate market you need to know

            Originally posted by Fred View Post
            [wrapright]Any effort to fix this should be focused on supply and demand. It will require bold initiatives. Here are a few I have yet to see suggested. If they seem shocking, please only take it as an indication of the magnitude of the problem I see from my experience in the industry.
            1. Decrease supply with a national building moratorium. If necessary, cover the builders' cost to sit on the inventory and in-the-ground improvements. It will be cheaper than other bailouts. One clear downside: this will also have an impact on unemployment as contractors have to find other work.
            2. Decrease supply by provide an incentive to not sell your home for two years. Perhaps even a draconian incentive like disallowing the $250,000/500,000 capital gains exemption for two years, with exceptions for hardship.
            3. Create demand by offering citizenship to qualified immigrants who purchase a home and are not late on a single payment for five years.
            4. Offer tax incentives for lenders and the underlying debt holders to do short-refis where the borrower stays in the house and a portion of the debt is forgiven. Essentially a write down, perhaps to current appraised value. Create incentives for the homeowner as well; if they take the offer, eliminate tax relief on the forgiven debt only if they stay out of foreclosure for two years.
            I'm sure smarter minds can come up with better ideas.
            Are you saying that collusion, price fixing, and central planning is the answer? Are you saying that your bad decisions and those of your fellow speculators are my problem? Here's a solution: Let the builders build, let the sucker's lose their money. When prices drop to affordable levels, then the prudent will buy. Take your medicine. Take responsibility for your actions. Stop bed wetting about what a victim you are. Speculators deserve to lie in the bed that they made. The only thing that your greed entitles you to is the beating that you have coming. You deserve it. Take it with some measure of grace. I didn't ask for a cut of the profits that you and your fellow speculators expected to make. Don't ask for a cut of my wallet now.

            P.S. Any effort to fix this will only cause worse problems. It's called the law of unintended consequences.

            P.P.S. I can't wait to see more severe declines. God bless the free market.

            Comment


            • #7
              Re: Ten Facts about the Real Estate market you need to know

              Paulhamann -

              No need to climb too high up the mountain of moral indignation here. O'Toole is probably not a proponent for outright bailouts if he's a regular contributor to iTulip.

              He's inside the industry, and his comments and concern for some ideas to arrest the freefall within real estate are probably expressed out of a broader understanding, that if you allow this thing to snowball to any extreme degree merely to indulge the morally purist desire to see speculators suffer - then all of us, you and I included, could get a lot more of the bad fallout than we bargained for.

              If you indulge that emotional catharsis, you may also inadvertently risk exacting a far wider damage across an unintended broader section of the economy, which could very easily morph into a "nuclear winter" for broad parts of the US (possibly will anyway!).

              There are a lot of good people out there, who are straining under the adverse turn in housing and were never remotely to be classified as speculators also, and we should not forget their numbers, and also that they are out there hoping their countrymen (you and I) will have the understanding to show them some scrap of solidarity. Many of these people believe it or not, did not create this fallout.

              This is not the whole story, of course, but it's maybe a moderating thought. It's easy to feel the "fires of liquidation" will reinstate a sounder moral attitude in the general public, but don't forget a very large number of people getting really hit hard by the housing downturn had nothing to do with the speculation, and just happened to buy property late in this heavily abused cycle.

              I suggest only we should be wary of feeling we as readers of informed communities such as iTulip are sitting on a high horse which allows us to merely sneer at the misfortune of families who were not alerted to these risks in 2005 for example, because most people are pursuing many other walks of life which have no contact with bearish communities and are less "sophisticated" on these matters. We are not "better" then them, just a little more forewarned.

              Mr. O'Toole's concern, as a regular iTulip contributor, is very possibly one which is informed by a sense of the implications at a very broad national level, and those concerns also encompass many very decent and prudent American households.
              Last edited by Contemptuous; 10-27-07, 02:52 PM.

              Comment


              • #8
                Re: Ten Facts about the Real Estate market you need to know

                Congress will have to "fix the problem"

                Vested interests will write laws to "fix the problem". They partly already did, with the bankruptcy law.

                Congress will rubber stamp these laws, probably without even reading them

                Originally posted by paulhamann View Post
                let the sucker's lose their money.
                One group of suckers, the bankers, RUN and OWN the system (IOW they seem to have undue influence)

                These suckers will lose no money. Others certainly will.

                Comment


                • #9
                  Re: Ten Facts about the Real Estate market you need to know

                  As the Dot.Com Boom collapse was obviously underway, I felt there was another recessionary downturn imminent that would put a brake on both residential and commercial construction. This coincided with a desire to let my commercial electrical contracting business of 22 years go, together with selling our large, custom home on country acreage in the SF Bay Area. We sold the house at a premium, for its time, and rented for the first time in 30 years while we planned our next move. Then the fed plunged interest rates to functionally zero and ignited the laying-in-wait housing bubble. We were screwed. Our conservatively invested (T-bills, CDs, etc) capital was hammered beyond recognition while our property buying leverage was all but dissolved by the rampaging pricing of homes.

                  The thought of bailing out any of the smug captains of the biggest ponzi scheme since the 20s, together with the bait-and-switch team, is repugnant, at best. I know the banks will be saved. I know the system we labor under. But save the 'understanding' for others. If I had my druthers, screw the bastards would be closer to mind.

                  Thanks, iTulip, I've needed to say that for some time. Just needed the right forum.

                  Comment


                  • #10
                    Re: Ten Facts about the Real Estate market you need to know

                    Don -

                    FWIW - my qualifiers posted above may indeed be all wet. I read your denunciation of this rigged market and understand it's sound basis 4X4.

                    I lost tens of thousands of dollars this past August because the market really was within a hair of a significant collapse, and looking around acutely I concluded that and sold a lot of positions at very degraded prices.

                    Then Bernanke came in and goosed this market with a half point cut after he'd been talking like a macho gunslinger on interest rates weeks earlier. The market had every reason to fall but Bernanke decreed it must do the opposite, and I was instantly screwed - along with all the millions of others trying to employ intelligence and rationality to safeguard themselves in a presumed "open and free" marketplace in August. LOL !!! He will make a bunch of bloody minded cynics out of us yet!!

                    I'm not a large investor, in fact it sounds like I'm of considerably less means than you, so believe me this was for me a significant setback. So I just want you to know there rings a lot of justice and truth in your stated opinion, and I am 2/3 on your side on this question.

                    Solidarity, in the face of fraud.

                    Comment


                    • #11
                      Re: Ten Facts about the Real Estate market you need to know

                      Originally posted by Lukester View Post

                      No need to climb too high up the mountain of moral indignation here. O'Toole is probably not a proponent for outright bailouts if he's a regular contributor to iTulip.

                      He's inside the industry, and his comments and concern for some ideas to arrest the freefall within real estate are probably expressed out of a broader understanding, that if you allow this thing to snowball to any extreme degree merely to indulge the morally purist desire to see speculators suffer - then all of us, you and I included, could get a lot more of the bad fallout than we bargained for.
                      I don't mean to be disrespectful, but frankly, we're going to get a lot more than we bargained for anyhow. I wouldn't call it a high mountain of moral indignation either. It's common sense. It's also how it's always been. While my heart goes out to those who just wanted a home for their family, the strong have always preyed on the weak. A bailout would be the weak preying on the strong--not a good turn of events either. It's not about ideology. I lived through the Silicon Valley tech bust. It wasn't pleasant. I did learn to be far more prudent. Once burned, people wise up, hopefully. Bankruptcy is not cancer. Harsh, but true.

                      I agree that bankers are scumbags. But we all know that now, right. I'm no fan of fiat currency and credit bubbles either. Maybe, just maybe, those that learn their lessons the hard way will learn self-reliance and demand greater accountability from their politicians. Otherwise, we will get more of the same. Frankly, the housing/credit bust will play out exactly as our politicians and bankers planned it all along. Not worse. Not better. In the meantime, I'm going to try to make the best moves that I can.

                      Why EXACTLY does being a housing insider give a person MORE credibility rather than LESS?

                      Comment


                      • #12
                        Re: Ten Facts about the Real Estate market you need to know

                        i don't think we need worry too much about "the weak preying on the strong" in any bailout. i've noticed that all the official bailout proposals are constructed to LOOK LIKE they are helping the little guy, while propping up the loans and feeding fees to the financial intermediaries. funny how they work out that way.

                        Comment


                        • #13
                          Re: Ten Facts about the Real Estate market you need to know

                          As someone who has built start-up companies, I greatly appreciate Sean taking the time to write this article for us. He's sacrificing time away from family and friends every day and night to build his business, and I'm sure he has little time for himself, yet he's found time to convey information for us that we cannot get elsewhere.

                          I also appreciate Sean's effort to offer constructive solutions to the severe problems that he sees rapidly developing in the housing market in California. Sean is not looking for a bailout for his business. He sold most of his properties on iTulip's call near the top of the market. In fact, now he's in the foreclosure data business, which is why he's so close to the data. Bailouts don't help him.

                          It's important to keep in mind that Sean sees the situation in a way that is difficult for us to see because he's been on the front lines of the market since the beginning of the downturn. Most of us aren't in the offices of town halls watching the foreclosure filings pile up. Maybe if we were we'd see what he sees: a frightening trend of accelerating foreclosures like a snowball rolling out-of-control down a mountain, while the government, builders, and banks line up with dysfunctional and ineffectual "solutions" that only serve to give the snowball an extra kick on its way down. And this while the economy is ostensibly doing well. What happens when unemployment starts to rise? Thinking about effective ways to slow snowball is common sense.

                          And then there's the matter of reasonable compassion. There are plenty of people who exercised bad judgment who are getting punished by the market for it, but there are also many who were lied to and defrauded by lenders, brokers, and appraisers, not to mention egged on by the National Association of Realtors and others during the bubble.

                          Yes, this debacle was foreseeable and bailouts are inherently unfair to the prudent. As always, these matters are never black and white; sound judgment and thought are needed to develop fair and effective responses.

                          Comment


                          • #14
                            Re: Ten Facts about the Real Estate market you need to know

                            Originally posted by paulhamann View Post
                            I don't mean to be disrespectful, but frankly, we're going to get a lot more than we bargained for anyhow. I wouldn't call it a high mountain of moral indignation either. It's common sense. It's also how it's always been. While my heart goes out to those who just wanted a home for their family, the strong have always preyed on the weak. A bailout would be the weak preying on the strong--not a good turn of events either. It's not about ideology. I lived through the Silicon Valley tech bust. It wasn't pleasant. I did learn to be far more prudent. Once burned, people wise up, hopefully. Bankruptcy is not cancer. Harsh, but true.

                            I agree that bankers are scumbags. But we all know that now, right. I'm no fan of fiat currency and credit bubbles either. Maybe, just maybe, those that learn their lessons the hard way will learn self-reliance and demand greater accountability from their politicians. Otherwise, we will get more of the same. Frankly, the housing/credit bust will play out exactly as our politicians and bankers planned it all along. Not worse. Not better. In the meantime, I'm going to try to make the best moves that I can.

                            Why EXACTLY does being a housing insider give a person MORE credibility rather than LESS?
                            I may have missed where the issue of "credibility" came into this thread, but if it is in reference to Sean, then his day job provides him insights into the housing issue in California. Whether he is credible or not, I really do not know, just as I do not know the same about most people who contribute here, but personally based on his contributions here at iTulip, I believe him to be truthful and given that, I take his comments to be very worthwhile.

                            There is nothing about being anything that in itself makes an individual credible.
                            Jim 69 y/o

                            "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                            Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                            Good judgement comes from experience; experience comes from bad judgement. Unknown.

                            Comment


                            • #15
                              Re: Ten Facts about the Real Estate market you need to know

                              Originally posted by Lukester View Post
                              There are a lot of good people out there, who are straining under the adverse turn in housing and were never remotely to be classified as speculators also, and we should not forget their numbers, and also that they are out there hoping their countrymen (you and I) will have the understanding to show them some scrap of solidarity. Many of these people believe it or not, did not create this fallout.

                              This is not the whole story, of course, but it's maybe a moderating thought. It's easy to feel the "fires of liquidation" will reinstate a sounder moral attitude in the general public, but don't forget a very large number of people getting really hit hard by the housing downturn had nothing to do with the speculation, and just happened to buy property late in this heavily abused cycle.

                              I suggest only we should be wary of feeling we as readers of informed communities such as iTulip are sitting on a high horse which allows us to merely sneer at the misfortune of families who were not alerted to these risks in 2005 for example, because most people are pursuing many other walks of life which have no contact with bearish communities and are less "sophisticated" on these matters. We are not "better" then them, just a little more forewarned.
                              It is my opinion that, with regards to the housing bubble, there are no "good people" in trouble who deserve any sort of assistance. The powers-that-be should let the affected parties be destroyed (either wholly or partially) and allow sanity to return to the markets. My take on the people who would be adversely affected by such a no-bailout stance:

                              Home "owners". They should have been intelligent enough to figure out that monthly payments based on the teaser rates would never pay off the principal. The mathematics required to run the numbers is third grade-level and ignorance is totally unacceptable as an excuse unless we are living in a Nanny State. Those who do not take even the minimal time or effort to be more careful with what will probably be the largest purchase they'll ever make in their lives deserve to lose their money.

                              For those home owners who took on a mortgage they could afford but are now underwater on, they should have no problems keeping up with their monthly payments. These home owners will only realize a real loss if they should need to sell their homes (and there should be no assistance to ameliorate the loss if they do need to sell).

                              Real estate complex. I put the realtors, builders, and associated support industries into this group. All entities mentioned are large businesses and, if they are in trouble, they should have known better how to run themselves. How could companies tied to real estate not understand that real estate is a cyclical business? Let's not even begin to mention the rampant fraud in the real estate complex. Rather than expect a bailout, this group should feel lucky if they don't get indicted and incarcerated.

                              Finance complex. Hahaha. I think it goes without saying that no one here wants to see these bozos bailed out. They had the greatest access to money and access to the best information and, despite these tremendous advantages, they still managed to lose money.

                              Investors. As it always goes with all investments, anyone invested in the financial products created from the real estate bubble should have been more rigorous in assessing the appropriate value of things. If the investors want their money back, they should file the appropriate lawsuits against the culpable parties.

                              Government should get involved only in collecting the facts (e.g., federal investigations of fraud at the banks, ratings agencies, etc.) and should not pass any new legislation to aid the affected parties. Once the facts are collected, government should let the legal system and the natural laws of economics straighten things out. New legislation, if any, should only be passed to prevent future abuses.

                              Comment

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