Let us bring our attention to the Westside of Los Angeles.  Today we salute Palms, Santa Monica, and Culver City with our Real City of Genius Award:

Source:  Wikipedia

Even within this niche area, there is a wide variance of properties.  The halo effect permeates to other cities from the big movers.  Maybe breathing in the Beverly Hills air gets to other surrounding cities at least when it comes to valuing real estate.  These mid-tier markets within a prime area are the next, I believe, place that will face price adjustments.  Even with all evidence pointing to this with massive amounts of shadow inventory building because people can’t afford to pay their mortgage, there is still a lot of doubt as to the extent of the price correction.  There is definitely a trend of more short sales making it to market.  Everyone by now has an understanding of a short sale (the lender agrees to sell a home for less than the mortgage balance) and the impact it has on the market.  Yet short sales are now part of the SoCal real estate market especially in prime locations.

I was meeting with a colleague, good guy but definitely a perma-bull on housing so you can imagine the conversation, but he is actually looking to jump back into Westside real estate.  His impression is that since prices haven’t fallen drastically in this disastrous climate, then nothing will jolt values later on.  However, the collapse of prices at the higher end is merely in the first stages.  The process is sequential and fluid; just because it hasn’t corrected doesn’t mean it won’t.

Let us look at our first short sale example.

Short Sale #1 – Palms, Mar Vista

12844 GREENE AVE, Palms – Mar Vista, CA 90066

Listing Details

Listing price:                      $495,000

Last sold (6/1/2007):       $655,000

Current difference:        -$160,000

Beds:                                     2

Baths:                                   1

Square feet:                       972

Built:                                      1952

On market for:                  90 days

The above property is located in the Palms, Mar Vista area of Los Angeles.  A nice area and certainly a good place for a starter home for a young professional family.  But prices are very much disconnected from fundamentals.  Look at the above home.  It is listed at 972 square feet and supposedly has a sale pending.  However, we are still talking about close to $500,000 for 972 square feet.  Now this is a big discount from the $655,000 peak sales price back in 2007.  So we are definitely seeing more movement with banks being more aggressive on certain homes in terms of taking lower offers.  But again, these are typically the lower priced homes in each area.  There are many higher priced homes with missed payments that are simply sitting in the shadow inventory.

Short Sale #2 – Santa Monica

2712 6TH ST, Santa Monica, CA 90405

Listing Details

Listing price:                      $850,000

Last sold (12/6/2006):    $1,155,000

Current difference:        -$305,000

Beds:                                     3

Baths:                                   2

Square feet:                       1,064

Built:                                      1914

On market for:                  27 days

It’s easy to be a millionaire when you don’t count your liabilities.  Just because you “own” a million dollar home doesn’t make you a millionaire.  The above Santa Monica home is listed for sale at $850,000.  It is 1,064 feet with 3 bedrooms and 2 baths.  At one point, it did sell for $1,155,000 in 2006.  Can prices fall in prime locations?  Absolutely.  And to most, a $300,000 haircut in 4 years is a significant deal.  Still think the Westside is immune to the correction?

Short Sale #3– Culver City

4178 CENTER STREET, Culver City, CA 90232

Listing Details

Listing price:                      $600,000

Last sold (12/2/2005):    $850,000

Current difference:        -$250,000

Beds:                                     3

Baths:                                   2

Square feet:                       1,918

Built:                                      1950

I’ve covered Culver City many times before and the above is a typical short sale in the area.  This home was bought back in 2005, half a decade ago, for $850,000 and is now listed for sale at $600,000.  It is listed at 1,918 square feet with 3 bedrooms and 2 baths.  We still have people willing to pay at these levels but only with the right lending.  For this home, let us run the numbers assuming a 10% down payment:

Sale price:                           $600,000

Down payment:               $60,000

Mortgage PITI:                  $3,606

Is this a good deal?  At the lower end you will need a household income of $175,000 to $200,000 a year to purchase this place.  The Westside is already showing major cracks in housing values.  $100k to $300k discounts are large for most people, even those in the Westside.

On a side note, I’ve added a new forum where people can discuss the specifics of certain areas so make sure to check it out.

Today we salute the Westside of Los Angeles with our Real City of Genius Award.

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Inventory in Southern California is still growing:

Source:  MLS

Now this growth in the MLS inventory is only in the subset of properties that the public can see.  The bulk of properties are sitting hidden in bank balance sheets and are part of the shadow inventory.  I wanted to show you how big of a difference this discrepancy can become when you include these additional properties:

Source:  MLS, MBA

The above chart is looking at MLS and MBA data for the entire state.  For Southern California, the actual breakdown of distressed properties looks like this:

The above chart is probably one of the most telling in regards to where things stand today.  Over 140,000 properties in Southern California have at least a notice of default, are scheduled for auction, or are now bank owned.  The amount of these properties that show up on the MLS is sparse.  We are seeing virtually a 2 to 1 ratio here.  For every one property on the MLS we will likely find two properties being distressed.  In mid-tier areas, it is higher as we will show.

Let us run an experiment to test this out.  We’ve covered Culver City and Pasadena many times in the past so let us use those two areas here again.

MLS Pasadena

Total Listed:                        678

Short sales:                         71

Foreclosures:                     44

Total distressed:               115

Foreclosure Data Pasadena

NODs:                   225

Scheduled for Auction or Bank Owned:                 400

Total distressed:                               625

For Pasadena, for every one listed foreclosure or short sale, you can be assured that there are 5 other properties sitting in the depths of a bank balance sheet.  Keep in mind this is for a highly desirable area.  But if you look at the data closely it wouldn’t appear that way:

Let us run this data now for Culver City:

MLS Culver City

Total Listed:                        148

Short sales:                         25

Foreclosures:                     7

Total distressed:               32

Foreclosure Data Culver City

NODs:                   74

Scheduled for Auction or Bank Owned:                 98

Total distressed:                               172

Well what do you know?  It turns out that the numbers look nearly the same in Culver City.  For every one distressed property on the MLS, you have 5 others hidden in some bank balance sheet.  Now when I look at this data what I see is a façade in Southern California real estate.  Prices in these areas are still extremely high relative to household incomes.  Unless you go out there and buy with an Alt-A or option ARM (no longer available) you will have to show a decent income.  But let us dig deeper a bit.  How much are those foreclosures selling for in Culver City versus what is off the balance sheet?

This is incredibly important.  Banks are listing (what appears) the bottom barrel homes here.  The average listed foreclosure price for Culver City is $330,000.  This is interesting given the median sale price for Culver City in zip code 90230 is $605,000 and in 90232 is $775,000.  Seems like a tiny bit of a discrepancy don’t you think?

I decided to jump deep into the data for this area and pulled up 19 bank owned homes in the area.  This is where you actually see bank behavior stand out.  The “estimated value” of the 19 bank owned homes in Culver City are $443,281 and the average estimated loan balance on each place is $552,159.  These places are massively underwater yet banks seen to be cherry picking which homes they funnel out to the MLS.  So right now you see a trickle at the bottom end but make no mistake, the bigger suckers are only a few months away and are already falling massively behind on payments.  Banks are basically trying to avoid facing the music and realizing the reality that these properties are overpriced (people can’t even keep up with their payments).  Does any of this data look like a healthy market?

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For better or worse, actual foreclosures are still elevated:

Actual recorded foreclosures show up as recorded trustee deeds went up by over 11 percent from Q1 of 2010 to Q2 of 2010.  This jump of course occurred because of a variety of reasons including a crappy economy but also the abject failure of HAMP which merely bought a few more months for many homeowners.  Notice of defaults fell by over 13 percent over the quarter.  I would only take this as good news if actual late payments on loans were also falling at this rate but they are not.  We are still near record territory for actual loans that are distressed in the state.  Then we hear about areas like Los Angeles that will now fine banks for homes that are left to disrepair.  Banks being the patron saint of taxpayer money, are now going to have even less of an incentive to file a notice of default.  Let the sucker borrower mow the lawn.  The amount of time for a foreclosure has gone to record levels because banks are simply ignoring late payers.  They are overwhelmed or simply don’t care (both are not good reasons).  So the decline in NODs is probably a bigger reflection of this trend as opposed to the actual market suddenly turning some proverbial corner.

Keep in mind that the housing market still sucks.  I’m not sure how else to put it especially for California.  Things are so bad, that people actually think 47,000+ recorded foreclosures in Q2 of 2010 is some sign of progress.  Let us put this into context for you:

In the aftermath of the last California housing bubble, the apex of recorded trustee deeds occurred in Q3 of 1996.  At that time, 15,418 foreclosures were actually recorded.  In Q2 of 2010 we actually recorded some 47,669 foreclosures.  So we are foreclosing at a rate of 3 times what was being experienced at the peak point of the last real estate crisis.  Yet this is somehow good?  For absurdity purposes, look at how low things got in Q2 of 2005 at the height of insanity.  Only 637 foreclosures were recorded during the entire quarter!  This is absolute insanity.  I mean think of how out of sync things had to be.  People always lose homes for a variety of reasons including divorce, loss of job, or medical illnesses.  Did life suddenly come to a pause in this quarter?  Actually, anyone and everyone could qualify for a loan so it is surprising that we even had 637 foreclosures.

There is still a large contingent that thinks housing is all of a sudden gearing up for housing boom 2.0.  Keep in mind that we are only tasting a tiny respite thanks to the Federal Reserve flushing over a trillion dollars down the toilet to buy mortgage backed securities and has also artificially kept the interest rate low.  Add to this the expensive and horrible policy blunder of the home buyer tax credit and the market was juiced on easy money steroids.  What more can we do?  Give homes away?  As absurd as that sounds, not really because the big gimmick is that banks need to keep homes valued at bubble levels and have home borrower suckers making their payments to keep the massive debt current.  Banks need an army of debt slaves.  So what if you stop paying on a $500,000 loan even though the home is valued at $250,000?  The bank still pretends the loan is valued at that level and this is where the gigantic gap appears:

Source:  MLS, MBA

This is where the excitement over the drop in NODs is basically hot air.  Currently on the MLS California has 137,000+ homes for sale.  This is what the public can see.  This does include some distressed properties but not many.  If we look at distressed properties including those currently in foreclosure, we find that the market has 255,000+ homes.  Some of these appear on the MLS, most clearly do not.  Yet the next column is where the sham is really happening.  Nearly 800,000 loans are 1 payment behind or even worse, already in foreclosure.  Naively some think that many of these won’t enter into foreclosure.  Actually, recent data shows otherwise.  Of loans that get behind one payment roughly 90 percent enter into foreclosure.  But let us be generous and say that only 80 percent will go into foreclosure.  We are talking about 640,000 properties here.  So much for the drop in NODs (it was a drop of roughly 11,000 from Q1 to Q2 of 2010).

I’m highly suspicious of the data because the actual real economy, you know the thing people use to pay their mortgage with, is actually still in a big mess.  California is flying off a budget cliff even though people pretend all is well.  We still have no budget for the next fiscal year and the gap of $19 billion still lingers (even as we give tax credits to those to buy homes!).  So we are in for some serious financial issues going forward.  Not much has changed.  If I saw wages increase by 50 percent in one year and all of a sudden high paying jobs were available for many unemployed Californian then maybe we can jump on the recovery bandwagon and justify high home prices.  But this is the reality:

Source:  BLS

In other words, the drop with NODs is largely based on funny math.  Banks are not moving on homes which is something that is already documented.  Extend and pretend programs also took some of these homes out of the NOD landscape.  But this is largely a distraction because the housing market is still in a giant toilet bowl.  I vividly remember talking about the massive rise in housing inventory in 2007 right before the market imploded.  People were laser focused on price and ignoring the major headwinds.  Home prices peaked at the moment we were heading for a rollercoaster price decline.  We are in a similar position today.  Ignore the data at your own peril.

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HUD is seeking public comments for the next 30 days on the below:

Source:  HUD

Now some of you might be thinking why we are asking these basic questions three years deep into the housing implosion.  The first question focuses on the credit score of borrowers.  Can you believe that a 580 credit score will enter you into the “flagship” 3.5 percent down payment FHA insured loan program?  No wonder why defaults are off the charts.  No bank in their right mind would lend their own money so banks are basically using the government as their lender and sucker of last resort to continue to make these financially troubling loans.  The second point relates to seller concessions.  Yes, this stuff is still going on.  Serious reform apparently doesn’t involve basic common sense.  Finally, the third point focuses on tighter underwriting.  If we are asking these questions today from an agency that now insures approximately 4 out of every 10 loans we have some major issues coming down the pipeline.

Bank of America released their second quarter earnings report and you can see how poorly FHA insured loans are doing:

BofA saw a jump from $7.5 billion in Q2 of 2009 to $22.5 billion in their 30+ day late delinquent FHA loans.  This is nearly a 200 percent increase in one year.  Now how is this happening?  Well refer to the questions that are being asked from the agency overseeing FHA.  Did we not learn that a low down payment is a recipe for disaster?  It is also the case that a low down payment inflates housing values because it takes away the focus from actually saving money and going into massive debt instead.  What if you had to save 10 percent as a minimum to buy a home?  Think people would be willing to walk away from a property so quickly?  Plus, having a down payment creates a buffer.  I seem to be one of the few that think a good sized down payment is necessary in protecting us from future asset bubbles.  As you can see from the BofA chart above, the FHA is now in a big mess and this came about with income verified and documented underwriting.  But if you don’t correct the bigger issues, then what use is it?

The government will not voluntarily tighten standards on mortgages because the only lender right now is the government.  And even with these ridiculously low down payment programs, the demand for housing is waning because the economy is in a major funk.  A house can cost $100,000 but without a job, it might as well cost $1 million.

Deed-in -ieu of foreclosure

Banks are catching on that people are willing to stay rent free in homes for 12 to 24 months in some cases.  At first, this might have made sense with a handful of borrowers but the flood is now growing.  Banks realize that losing 12 to 24 months of mortgage payments might not be a good idea.  So some are now going after the deed-in-lieu (DIL) of foreclosure option.  Why would they do this?

I think there are a few reasons for the DIL of foreclosure option now being explored more carefully by banks.  For some areas, banks may realize that spring and summer (clock is ticking) may be the prime time to put some properties back on the market.  After all, we don’t know where interest rates will be next year and it already seems that the government is going to have to tighten lending standards more given massive defaults.  So banks would rather get a property back, ignore going after the borrower, and simply get the home back ASAP so they can put it back on the market while the government mortgage liquor is still flowing.  We don’t have clear data on this but I will venture that banks are only going the DIL of foreclosure path on select properties in more targeted markets.  How many DIL of foreclosures did banks pursue in Detroit?

Some are arguing that this has more to do with HAFA:

“(WaPo) To qualify for a HAFA short sale or deed-in-lieu, the mortgage must be for a borrower’s principal residence; the loan balance may not be more than $729,750; the borrower must have incurred some hardship such as a medical emergency or a drastic reduction in income; the loan must have closed before Jan. 1, 2009, and first-mortgage payments (including property taxes, insurance and mandatory homeowners or condo fees) must be more than 31 percent of current gross household income.

For a deed-in-lieu arrangement, borrowers must also be able to deliver clear and marketable title to the home, free and clear of all liens or encumbrances and leave the home in “broom clean” condition. Homeowners are given a minimum of 30 days to vacate the home from the date the short-sale agreement expires or the date of the deed-in-lieu agreement.”

I’m not sure I agree with this assessment.  I think the bigger motivating factor is the amount of money being lost by strategic defaulters and the prospect of taking a property back and selling it in the current market while government cheese is still flowing out of politicians’ pockets like mozzarella.  Next year it might be a very different picture.

Neglect and pay a fine

Another issue that might light a fire under banks to move shadow inventory is fines for neglected properties.  L.A. launched an effort to fine banks that don’t maintain foreclosed properties.  The biggest landlord today is the banking system with the entire shadow inventory out in the market:

“(LA Times) A dilapidated South Los Angeles home with tall weeds, a fallen fence, broken windows and graffiti was chosen to serve as the backdrop for a news conference Saturday as city officials announced the launch of new efforts to clean up foreclosed properties.

The beige stucco bungalow on West 77th Street is a neighborhood eyesore, playing host to drunken transients and stray animals and reeking of urine and feces, neighbors said.

“A lot of vacant homes have become a nuisance in the neighborhood because of the foreclosure crisis,” said Betty Steele, one of several community activists who canvassed the 77th Street neighborhood encouraging residents to report problem properties via the city’s 311 hotline. “And the banks should be held accountable for cleaning them up.”

As local governments hurt for money while the Federal government is off bailing out Wall Street, cities are going to try to get their funds from somewhere.  We are starting to see some of this trickle out into the market.  While all this is happening, a large number of Americans now have little faith in Social Security:

Source:  USA Today, Gallup

60 percent of non-retired adults believe Social Security won’t be able to pay them a benefit when they retire.  Ultimately people get that the party has ended and major changes need to be done.  But the choices we have aren’t pretty and very few politicians have the backbone to make the changes happen especially in an election year.  So what will happen?  We’ll have more public comment on things that should have already taken place (the public is very clear on the bailouts by the way) and more bread and circus for everyone.

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Today we salute Culver City with our Real City of Genius.

A Condo Will Do

The substitution effect is taking charge in Culver City.  We need to look at June sales to see the trend:

Source:  MLS

In June Culver City had 11 homes sell but at the same time 22 condos were sold.  Before someone tries to say that all cities operate like this, take a look at Diamond Bar (31 homes sold and 25 condos sold).  So why the big divergence?  Well for one, the median price of homes sold in Culver City for both zip codes were $605,000 and $775,000.  At the same time, the median condo price was $330,000.  There are two markets within one city here.

The shift in the makeup of sales has caused the median square foot price to plummet:

Source:  Redfin

The cost is falling because the shift in real estate sales for Culver City is being dominated by condos.  Home sellers are still holding out for insane bubble like prices and the amount of homes selling is falling.  That is why inventory for Culver City is now at a high not seen since 2008:

Source:  Redfin

What exactly is happening here?  I think Culver City is one of those markets that can draw a large number of people that one would call “aspirationals.”  You know what I’m talking about; these are the people that registered their iPhone cell numbers out in the 310 while living in an apartment or go to fancy restaurants and simply order off the appetizer menu.  Since owning has a strong pull even after the market implosion we have seen in California, many are willing to skip owning a home and substituting it with a condo.  At current prices, you have a good amount of people willing to pay and given easy FHA insured financing, buying a condo or townhome isn’t so tough.

I find this trend incredibly fascinating because it signifies a tipping point in the market.  People are starting to pull back on buying the incredibly expensive homes thus home inventory is up while buying up the condos at a much brisker pace.

Let us break down the current market:

MLS listed inventory

Condo/townhomes        -              97

Single family homes        -              63

We have 4.4 months of condo/townhome inventory and 5.7 months of single family home inventory.  We shouldn’t forget about the shadow inventory here.  173 homes are listed as distressed properties with the bulk not making it to the MLS.  Of the distressed data we have:

63 single family homes

88 condos and townhomes

The other properties are a mix of commercial, multi-unit, and land.  But you can see that we still have a large number of homes sitting in the back for an area like Culver City.  If we want to understand why condos are dominating sales we should probably look at the income data for the city:

Source:  Census

The median household income is $70,568 with an average household income of $86,694.  The current median home price for single family homes just doesn’t compute with current income data.  To purchase the current median priced home a family would need an income of $200,000 or more per year.  Only 6.8% of the entire area can go for that level of price.  And what does $885,000 buy you in Culver City?

This is a 4 bedrooms and 3.4 baths home.  It is listed at 3,377 square feet so it is certainly a good sized home.  Yet does this look like an $885,000 home?  It has been listed on the MLS for 428 days and has a sale pending.  People are still willing to buy in these markets but again, the bulk of the sales are coming from lower priced units.  This is similar to what happened in lower priced markets back before they tipped over.  You see expensive units stall and sit idle while inventory builds up and lower priced units move.  You can’t stop the momentum unless incomes double overnight.  What other markets are seeing a big jump in condo sales?

Today we salute you Culver City with our Real City of Genius Award.

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