Monday Morning Coffee – Happy Thanksgiving!

Monday Morning Coffee

Thanksgiving Edition

Good morning,

 I hope you had a great Thanksgiving.  My Dad came into town with my step-Mom and Kayak the dog.  It was nice to have them over as we have not been able to travel the last couple of years.  Thanks to Skype, Zach said a perfect “Grandpa!” when they walked through the door.  We spent some time putting up the tree this evening and Cori decided she did not have the right color scheme, so she’s off to Michaels before they close.
It was obviously a short week for everyone, and it wasn’t any different in real estate.  The pace seems to have slowed, although the market under $650k is still seeing lots of activity.  I will have a look at November numbers next week.

We do not have anything new this week as we are advising most of our clients to wait until the new year to put homes on the market if they are not on yet. 

We are going to be launching a VIP buyer program in 4S Ranch early next year.  I should have details about it next week.

 That’s it – Enjoy the Coffee (this time inspired by Zach’s mandatory nighttime diapers with Big Bird and Elmo on them).

Barney

 A four-year-old girl was at the pediatrician’s office for a check-up.  As the doctor looked into her ears with an otoscope, he asked, “Do you think I’ll find big bird in here?”  the little girl stayed silent.

Next, the doctor took a tongue depressor and looked down her throat.  He asked, “Do you think I’ll find the Cookie Monster down there?”  Again, the little girl was silent.

 Then the doctor put a stethoscope to her chest.  As he listened to her heart beat, he asked, “do you think I’ll hear Barney in here?”

“oh, no!” the little girl replied.  “Jesus is in my heart.  Barney’s on my underpants.”

Author unknown

Hey, if you were looking for something deep this week – it doesn’t usually come from 3 year-olds!

 Have a great one!

Scott

Monday Morning Coffee – Sub-Prime and Alt-A

Monday Morning Coffee

Sub-Prime and Alt-A in California

Good morning,

I hope you had a nice weekend.  Cori and I saw Blind Side this weekend and highly recommend it (if you were in the theater, she was the one crying).  We are looking forward to seeing my dad and step mom who are driving out from AZ tomorrow.  It has been about a year since we have seen them and I am looking forward to it, even though I know they are much more interested in the grandson than the son:-)

I spent a lot of time going through data this week with the goal being to look at all types of mortgages that are currently out there and see what the delinquency rate is and when they are due for interest rate adjustments.  We know from historical data that the following has been true:

 Once a loan is 60 days late, there is a 98% chance that it will be liquidated through a foreclosure, short sale or a loan modification will take place.

• Over the past 2 years, it appears that for every 1 foreclosure or short sale there have been 3 loan modifications.
• Within one year, 58% of all loan modification are 90 days late and since the banks do not do 2 loan modifications on the same loan, at least 58% of the 75% delinquents that were modified the first time around will be liquidated within between 12 and 24 months of first going delinquent.
• Taking those together, once a loan is 60 days late, about 25% of the homes will be liquidated within a year (that’s the longest they are generally taking to process) and 44% (58% x 75%) will be liquidated in the second year.  (I could not find data on the second year after loan modification, most likely because there isn’t enough yet).
• This means that the effects of the mortgage defaults are felt over an extended period.
• These numbers will likely improve over the next couple of years as the Home Affordable modifications do more to reduce principle and payment that previous modifications.  However, there are many that don’t think it will make much difference.  The Home Affordable modifications allow for 5 years before the new loan adjusts towards market interest rates.

 With the above track record, I was hoping to look at all loans that are out there and overlay loan types with when they are adjusting and the forecasted foreclosure/modification rates to get an idea how long until we work through the distressed inventory of homes (and who said I’m not a fun guy to hang out with on a Friday night.)

Unfortunately, I cannot get my hands on all the data.  Those who have it are not giving it up without a lot of dollars and frankly, I think we can get a rough idea with what I did find.   

What I found is available on the Federal Reserve Bank of New York’s Web site (if you want to get really depressed, they have a map showing every county in the country with mortgage, auto, credit and student loan delinquencies).  I was able to download the data for Sub-Prime and Alt-A loans as of June 30 of this year.

 Quick note – Alt-A borrowers have better credit scores than Sub-Prime borrowers and typically longer time periods before adjustable loans re-set which is why you see lower delinquencies.  

So, the first wave of foreclosures that started last year was in the sub-prime market and the next (possibly this summer) is the Alt-A market.  But look at the number in bottom that is bolded – even after the loan mods and foreclosures of the past year 50% of the people in the country with sub-prime loans are delinquent!

I know this is getting long, but a couple more pieces of information on both types of loans, focusing on CA:

Sub-Prime:

• Of the 326,521 sub-prime loans in existence, about 208,000 are adjustable.
• 172,359 of those have already re-set (the introductory interest rate is over).
• There are only about 36,000 homes left to re-set.

Alt-A:

• Of the 613,650 Alt-A loans in existence, about 428,000 are adjustable.
• 181,898 of those have already re-set.
• There are 246,000 homes left to re-set (most of them more than 2 years out)
• Because of better credit scores, more Alt-A homeowners were offered negative ammortization loans which will be harder to modify because they have no equity.

 At least in California there is likely to be more damage in the second wave as the Sub-prime loans that were modified the first time default again combined with a larger pool of Alt-A loans that are re-setting over the next 3 years.

However, I don’t think this means a 20% drop in market prices.  I think we are likely to see another drop during 2010 and an extended period of up and down (the Alt-A loans will re-set through the next 3-4 years and then we will have the Home Affordable loans re-setting starting in year 5 which should be a smaller number (if the market stabilizes) but will still be a negative influence). I think we are mostly through the painful devaluation phase and moving into what I can best call (someone else’s term) an extended “muddle through” period.

In summary as I have said before, we have oversold housing as an investment over the past 10 years and undersold it as “home”.  We don’t have a choice anymore but to look at our homes as places we raise our families and with the help of 30 year fixed mortgages, slowly pay off so that our true  “investments” don’t have to pay for our mortgage when we retire.

 That’s it – enjoy the coffee (if you’re still awake! – I’m off to bed)

FRIENDSHIP AND LOVE

• Love starts with a smile, grows with a kiss, and ends with a tear.
• Don’t cry over anyone who won’t cry over you.
• Good friends are hard to find, harder to leave, and impossible to forget.
• You can only go as far as you push.
• Actions speak louder than words.
• The hardest thing to do is watch the one you love, love somebody else.
• Don’t let the past hold you back; you’re missing the good stuff.
• Life’s short. If you don’t look around once in a while, you might miss it.
• A best friend is like a four leaf clover: hard to find and lucky to have.
• If you think that the world means nothing, think again. You might mean the world to someone else. 
• When it hurts to look back, and you’re scared to look ahead, you can look beside you and your best friend will be there
• True friendship never ends.
• Friends are forever.
• Good friends are like stars….You don’t always see them, but you know they are always there.
• Don’t frown. You never know who is falling in love with your smile.
• What do you do when the only person who can make you stop crying is the person who made you cry?
• NOBODY IS PERFECT UNTIL YOU FALL IN LOVE WITH THEM. (Isn’t that the truth?)
• Everything is okay in the end. If it’s not okay, then it’s not the end.

Most people walk in and out of you life. But only True friends leave footprints in your heart.

Have a great week!

Scott

First Time Buyer's Tax Credit Extension – The Good and the Bad

Now that the tax credit has been extended and the details of the extension are out (I know, I should have posted this last week, but hey, I have to work too) I think there are a couple of things about the extension that are worth noting both for the short term and the long term.

In the short term, I think we will see an increase in activity in the $650k – $800k price range.  Prior to the extension, a couple became ineligible for the credit if their joint income was over $150k or if they had owned a home in the last two years.  The extension removes the limitation on not owning a home within the past 2 years, but more important (speaking in terms of the San Diego market where prices are higher than they are on a national level) is the increase in income levels.  Over the past six months, we have seen prices of homes (focusing on North County) that are under $600k increase about 4-5% while homes above that level have come down 2-3%.  I believe that this is a result of the tax credit and that the gains will now also be seen in homes from $600k to $800k.  This will help move some of that inventory over the first quarter and hopefully stabilize prices.

In the long term, I think that the program is similar to most of what the government is doing – pushing today’s problems into tomorrow.  NAR estimated that 40% of all home purchases have taken advantage of the tax credit.  That most likely means that people who are on the fence or who have to stretch to qualify, are doing what they can to buy now rather than wait a year.  The problem with that is that in a year we are expecting more foreclosures to hit the market as the Pay Option Arms (Pik-A-Payment Loans) reset in large numbers and we start to see the fallout of failed loan mods done over the last year.  So right as we are seeing an increase in inventory, we will have a shortage of buyers because a large number of them took advantage of the tax credit and purchased early.

So what?  Who cares if the price moves up now or later?  Well, I think it would be better for the market to have it be level to slightly down for two years and build a stable base rather than go up 5-6% to create a feeling that we are recovering only to have it fall back again a year later.  The first helps build stability (although not a happy stability) while the second shakes people’s confidence further.   It’s like the Cash for Clunkers program.  It produced great 2nd quarter numbers for the auto industry.  It was a short term fix that politicians could point to and say, “See, we know what to do.  Trust us to …”  Problem is, auto industry numbers going forward are going to be worse because the people who traded in their clunkers in the second quarter won’t be purchasing again.

So although the tax credit makes things look better and makes us feel better short term, it’s more like a drug fix than a solution.  There’s nothing in the bill that will help build a healthy economy and help with the housing recovery unless Congress continues to extend it indefinitely.

Monday Morning Coffee

Monday Morning Coffee 

November 16, 2009

 Good morning! 

I hope you had a great weekend.  We went to a Brewmaster’s Dinner with some good friends and had a great time.  Of course, five different high octane beers paired with dinner on Saturday meant it was a lllooonnnggg Sunday with a 3-year old.  Last week I mentioned I was going to try and break down the foreclosure market and what I want to do is look at each different type of loan and when they re-set and project the number of foreclosures vs modifications to create a timeline that might give us an idea how long the housing “crisis” will last.  I had two problems with getting this done last week.  The first is that finding the detailed data has been very difficult and second, the data that is available is about to be updated with Q3 numbers, so it doesn’t make sense to use 5 month old information.  So, I will keep trying to put it together and hopefully have it in the next couple of weeks.

Now that the First Time Home Buyer’s Tax Credit has been extended, I think the changes they made to it are going to be very positive for values in the short term.  By applying the law to people who have owned a home recently and allowing the maximum income for a couple to reach $225k before they lose eligibility, we might extend the market gains we are currently seeing on homes under $625k up to homes in the $800k level.  Let’s hope so anyway.

Nothing new on the market this week although we are talking to a couple of people about putting homes on the market in early January.  We do have one offer in on the short-sale home we showed last week and are planning on taking it to the bank early this week.  If anyone else wants to get in and see a 4 bedroom in 4S for under $600k, let me know.

That’s it.  Enjoy the Coffee!

I am a week late with this one.  This was supposed to run last week for Veteran’s Day at the request of Kim (who keeps things running smoothly around here).  She recently married Brian, a Marine pilot who is heading for Afghanistan in a couple of weeks.

Ten Tenors Tribute to the Military

Have a Great Week!

Scott Voak

858 688 0189

Monday Morning Coffee – Links to Foreclosure Data

Monday Morning Coffee – A Lot of Interesting Research

November 9, 2009

A busy weekend saw me asleep very early last night, but feeling a lot better and trying to catch up this morning.   I will try and be very quick because the work is piling up.  I have been working on a prospectus for a bulk foreclosure deal and while I can’t share the details, I can share a lot of the research and what I have found.   I will summarize the findings, but a couple of interesting articles to read if you are interested are: 

http://www.occ.gov/ftp/release/2009-118a.pdf

and 

http://matrix.millersamuel.com/wp-content/3q09/Amherst%20Mortgage%20Insight%2009232009.pdf

The main points of the first report are as of the end of Q2:

• 11.4% of all first mortgages covered are non-performing.
• Loans in foreclosure were 2.9% of all first mortgages, a 10.5% increase from the previous quarter.
• 3% of all Prime loans are 60 days or more delinquent – Prime loans are made to the most credit worthy borrowers.
• The Pay Option ARMs (also known as Pick-A-Payment loans) have a foreclosure rate of 10% plus a 60-day delinquency rate of 15.2%
• Driven by the Making Home Affordable program, homes that newly entered loan modification or payment plans totaled 439,574 for the quarter.  Up 74.8% from a year ago.

The report also called into question the viability of moan modifications noting that more than 56% of all loans modified in the second quarter of 2008 were back in default a year later.  Even more troublesome was that more than 1/4 of all loans modified in the first quarter of this year were back in default in the second quarter – owners never made another payment, they just re-started the foreclosure clock.  The report also noted that foreclosure completions are ramping up as the national, state and local moratoria have expired.

The second report looks at the the amount of inventory that is on the market and compares it to the amount that the banks are will have to put on in the near future.  This report, from Amherst Securities contends that once an owner is 60 days late on a payment, there is a 95.6% chance that the home will be taken back by the bank.  Using that number along with the number of homes that are 60 days late, they conclude that there is approximately 16 months of inventory that the banks will be putting on the market based only on homes that are delinquent today. 

The reports both also noted that another wave of loans is about to reset which will cause a similar number of defaults as we have seen already. 

After reading the articles, you might come to a different conclusion, but it looks to me like the data is pointing not necessarily to another large drop  in prices (although that could still happen), but definitely to a much longer time period for real estate to be depressed.    I will try find the numbers and put together a quick report for next week, but it seems to me that the following is likely to happen:

• We will be through the first wave of foreclosures about 3 – 3 1/2 years after the first loans reset.
• Then have to work through the defaults of all those loans that were modified which could extend the fallout from the re-sets to 5 years. 
• Add on top of that a second wave of resets that is supposed to hit next summer and assume that takes another 5 years to work through which extends things until 2015. 
• At the end of that period will be any fallout from the Making Home Affordable Program which is another type of loan modification program, but with loans that don’t reset for 5 years.  So, if people are not able to increase their incomes in 5 years to a point where they can make their payments when they adjust, we will start another wave just as the second wave ends. 
• Longest case scenario is we are still working through foreclosures from the Real Estate Bubble in 2019. 

Not that’s that that is the worst case.  I think we avoided the worst case.  By doing loan modifications now, the banks have lowered the amount of inventory on the market and created some stabilization that we would not have had if all the homes had hit the market at the same time, and although that extends the length of the recovery  I look at it as slowing the bleeding so we can figure out how to save the patient.  The overall effect is likely to be that the drop is less than it could have been, but depressed values will hang around for a lot longer than they would have.  On the bright side, that will give everyone a good opportunity to take advantage of the lower prices.

Speaking of taking advantage of good opportunities.  Take a look at the new short sale we have listed in 4S Ranch.

That’s it – time to get to work – Enjoy the Coffee!

Ghandi

Mahatma Gandhi went from city to city, village to village collecting funds for the Charkha Sangh. During one of his tours he addressed a meeting in Orissa. After his speech a poor old woman got up. She was bent with age, her hair was grey and her clothes were in tatters. The volunteers tried to stop her, but she fought her way to the place where Gandhiji was sitting. “I must see him,” she insisted and going up to Gandhiji touched his feet. Then from the folds of her sari she brought out a copper coin and placed it at his feet. Gandhiji picked up the copper coin and put it away carefully. The Charkha Sangh funds were under the charge of Jamnalal Bajaj. He asked Gandhiji for the coin but Gandhiji refused. “I keep cheques worth thousands of rupees for the Charkha Sangh,” Jamnalal Bajaj said laughingly “yet you won’t trust me with a copper coin.” “This copper coin is worth much more than those thousands,” Gandhiji said. “If a man has several lakhs and he gives away a thousand or two, it doesn’t mean much. But this coin was perhaps all that the poor woman possessed. She gave me all she had. That was very generous of her. What a great sacrifice she made. That is why I value this copper coin more than a crore of rupees.”

Have a great week!

Scott

Monday Morning Coffee -

Monday Morning Coffee – Tax Credit Extended

November 2, 2009

Good morning,

I hope you had a great weekend.  Just a couple of quick notes – a few weeks ago I mentioned that I thought the government would extend the first time home buyer’s tax credit in an attempt to keep the economy rolling so they can keep their agenda moving.  I also said it wouldn’t be done until late October or early November.  This time, I was right on both counts as it was passed by the Senate last week and is expected to get Obama’s signature this week. 
Don’t know if you caught this on the news, but this guy had the market pegged.  Cori said he’s pretty good looking too.

We accepted an offer on one of our silent short sales in 4S, but still have a very nice condo in Torrey Highlands (3 beds, 2,000 sf with about 400sf of additional storage off the garage that is not included in the sf).  If you are interested, please let me know.

We also will have a short sale in 4S listed this week.  4 beds, 2344sf in Garden Walk.  Let me know if you would like an early peak at it.

Enjoy the Coffee!

How To Love Yourself

Stop All Criticism – Criticism never changes a thing. Refuse to criticize yourself. Accept yourself exactly as you are. Everybody changes. When you criticize yourself, your changes are negative. When you approve of yourself, your changes are positive.

Don’t Scare Yourself – Stop terrorizing yourself with your thoughts. It’s a dreadful way to live. Find a mental image that gives you pleasure (mine is yellow roses), and immediately switch your scary thought to a pleasure thought.

Be Gentle And Kind And Patient – Be gentle with yourself. Be kind to yourself. Be patient with yourself as you learn the new ways of thinking. Treat yourself as you would someone you really loved.

Be Kind To Your Mind – Self hatred is only hating your own thoughts. Don’t hate yourself for having the thoughts. Gently change your thoughts.

Praise Yourself – Criticism breaks down the inner spirit. Praise builds it up. Praise yourself as much as you can. Tell yourself how well you are doing with every little thing.

Support Yourself – Find ways to support yourself. Reach out to friends and allow them to help you. It is being strong to ask for help when you need it.

Be Loving To Your Negatives – Acknowledge that you created them to fulfill a need. Now, you are finding new, positive ways to fulfill those needs. So, lovingly release the old negative patterns.

Take Care Of Your Body – Learn about nutrition. What kind of fuel does your body need to have optimum energy and vitality? Learn about exercise. What kind of exercise can you enjoy? Cherish and revere the temple you live in.

Mirror Work – Look into your eyes often. Express this growing sense of love you have for yourself. Forgive yourself looking into the mirror. Talk to your parents looking into the mirror. Forgive them too. At least once a day say: “I love you, I really love you.”

Love Yourself .. Do It Now – Don’t wait until you get well, or lose the weight, or get the new job, or the new relationship. Begin now — and do the best you can.

– Louise L. Hay Educational Institute

Have a Great Week!

Scott Voak

858 688 0189