Real City of Genius: Today we Salute Pasadena. When losing $300,000 is Actually a Gain for Housing Values. Shadow Inventory Twice as big as Public Data.

Attorney General Jerry Brown has most likely received a response from the top 10 option ARM lenders in California given that November 23rd was the deadline to respond to his initial request for data.  Hopefully we’ll have a better sense of how deep the mess goes in the state but given the massive amount of shadow inventory, I can tell you that the rabbit hole is much deeper than you may think.  Yet some would rather wallow in denial and somehow expect that an economy with no job growth is suddenly going to reinvigorate home prices up to the bubble heydays.  I understand the nostalgia but that doesn’t mean we’ll be seeing peak prices any time soon.  The state of California is looking at $20+ billion deficits annually until 2015.  We have some serious rebalancing to do.   Household balances sheets are riddled with debt and the allure of real estate is forever shattered for a generation.

Ultimately property values need to reflect local economies.  This might be hard for some to grasp since we really haven’t seen this for over a decade in California.  But bursting bubbles have a way of unraveling the yarn.  If California has an unemployment/underemployment rate of 23 percent, it is important to correct the employment situation before thinking about rising property values.  That is why California has seen tax revenues plummet because in the reality based economic system most of us live in, incomes are tight, stocks have taken a hit, and real estate has seen values collapse.  So the negative wealth effect is in full force just as people load up on Thanksgiving dinners and gear up for the Black Friday hamster consumer madness.

Even with the rise in the stock market, negative equity has exploded:


The number of underwater homeowners is mind boggling and a recent report now has 1 out of 4 borrowers underwater.  Here in California with toxic Alt-A and option ARMs, we have so many people underwater that we might need some scuba gear to get out of this housing abyss.  Yet we are in the eye of the hurricane here.  This is what we know:

-Alt-A and option ARMs are imploding but not making their way to inventory.  The current state is see no evil, hear no evil.

-$8,000 tax credit has spurred home buying

-FHA insured loans now finance about 4 out of 10 California home purchases

-The Fed has purchased over $1.2 trillion in mortgage backed securities pushing mortgage rates to historical lows

-Fall and winter are seasonally weaker selling seasons

-Commercial real estate defaults expected to explode in the next few years

With that said, what happens if one of these factors is removed or turns out to be worse than forecasted?  In fact, as we have discussed many times with FHA insured loans, defaults are so high that the government is now forced to confront reality:

“(SF Chronicle) Higher down payments. FHA’s current minimum cash down payment is 3.5 percent. On a $200,000 house, a buyer can bring just $7,000 to the table, aside from closing costs. A purchase of a $500,000 house in a high-cost area requires only $17,500 in cash.

Critics say 3.5 percent does not force purchasers to have enough “skin in the game” to discourage them from missing payments or risking foreclosure. Rep. Scott Garrett, R-N.J., introduced legislation last month requiring a minimum 5 percent down payment for all future FHA loans. Ed Pinto, who served as Fannie Mae’s chief credit officer in the 1980s and is now a mortgage industry consultant, says FHA needs to move to a 10 percent minimum.”

I agree with Mr. Pinto that we need to bump up the minimum down payment for FHA insured loans to 10 percent.  That is politically not likely in this crony banking and government environment.  But 5 percent is now on the table.  As the defaults rise and the FHA goes the way of Fannie Mae, people are going to need to start forcing actual change.  Otherwise the government is simply the new subprime lender.  So what that you have a strong FICO score?  Many of those no-doc folks had strong FICO scores and how did that turn out?

The Shadow Knows – Pasadena

Today we are going to spend some time looking at Pasadena.  I want to dig deep into this city because we can see many of the above trends in full force.  Today we salute Pasadena with our Real City of Genius Award.

Let us first look at the total listed MLS inventory:

519 MLS listings

Foreclosures 22

Short Sales 42

So this is an interesting perspective of the area.  519 properties listed with 22 foreclosures and 42 short sales.  12 percent of inventory is distressed.  Not bad right?  Well let us look at the overall picture:

In reality, there are 742 distressed properties in the city that break out as follows:

pasadena distress

Bank owned:                           101

Auction scheduled:                  349

Pre-foreclosures (NOD):           292

This is how the data breaks down:

pasadena inventory

Plus, how many other homeowners have stopped paying altogether and have no NOD filed?  That is another large part of the shadow inventory.  But you can see from this data that the actual MLS only has roughly 64 properties of the total distressed list of 742.  The 742 number that the public cannot see is 42 percent larger than the entire MLS data.  There are literally two markets running parallel to one another.  The façade world of everything is okay and smiles everywhere and the other world where properties are defaulting in mass and borrowers are simply not paying their mortgages.

The real action is going on in the pre-foreclosures.  Let us look at a specific example:

pasadena home 1

This home is listed as a 4 bedroom and 3 baths home.  The data has it at 2,763 square feet so it is a good sized home.  Let us look at the sales history:

Sale History:

03/23/2000:                        $245,000

Not a bad price for this sized home in Pasadena.  Yet the action is in the details:

pasadena note details 1

Another home equity withdrawal machine here.  The $245,000 mortgage in 2000 was modest.  Then in 2001 $345,000 in mortgages were secured by the property in what looks to be a major cash out deal.  In 2003, Wells Fargo graciously gave a $411,000 mortgage on this place.  Let the bubble continue.  In 2004 the property got another refinance up to $555,000.  Then in 2005, it was party time.  A $750,000 note and a $100,000 note making the value go up to $850,000.  Finally in December of 2006, a $925,000 loan was secured on the place almost getting to $1 million from $245,000 in 2000.  Sure seemed like a fun decade in this home.

But now this person owes $25,779 just to get current.  Even the optimistic Zestimate places the value of this home at:

zestimate home one

To be abundantly clear, someone is likely to lose a lot of money here.  But for the time being, they can claim this place is worth $925,000.  This is the kind of world California real estate is in.  This is a historical, once in a lifetime kind of bubble.  For example on this home let us assume it sells for the Zestimate.  You would naturally think that a $300,000 loss would be reflected somewhere and it will be.  Yet the Case-Shiller is going to see a sizable jump here.  After all, the last recorded sale was for $245,000 so a sale of $600,000+ is a giant leap.  The magnitude of this bubble throws so many metrics off that we have no historical parallel.  Yet anyone that claims things are going well simply is not looking at the more nuanced data and the building pipeline.

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

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37 Responses to “Real City of Genius: Today we Salute Pasadena. When losing $300,000 is Actually a Gain for Housing Values. Shadow Inventory Twice as big as Public Data.”

  • great post..will you check out glendale one day? some homes there are selling for way way over bubble prices. people are such idiots.

  • “So what that you have a strong FICO score? Many of those no-doc folks had strong FICO scores and how did that turn out?”

    Right on!

    I’ve seen that happen here on the westside of Los Angeles (Santa Monica, Venice & Pacific Palisades) — couples where one/both earned lots in entertainment/real estate/etc… filing no-doc w/ good FICO, then the job goes away (or the clients go away) and BOOM!

    That’s what’s different about “Round 2” here — it’s not the sub-prime folks who (forgive me) probably should have never been able to buy a home. It’s people who got greedy/aggressive/arrogant/selfish & bought more home than reality would support over the long term (“OK, so you two are pulling in $275K as a couple right now. How likely is that to continue if Mike loses his job, or Jenny becomes pregnant & doesn’t work for a year.”)

    I’ve never lived in such a delusional area, so detached from responsibility & reality.

  • Wall St. Finds Profits by Reducing Mortgages

    As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.

    Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

    But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

    While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.

    He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”

  • 1 in 4 mortgages ‘underwater’

    NEW YORK ( — In a sign that more foreclosures could be on the horizon, 23% of people with mortgages owe more than their home is worth, according to a report released Tuesday.

    Almost 10.7 million U.S. mortgages were “underwater” as of September, said research firm First American CoreLogic.

    Another 2.3 million homeowners are within 5% of negative territory, the report said. The two figures combined comprise almost 28% of all residential properties with mortgages.

    Negative equity, also called an “underwater” or “upside down” mortgage, has become more common as home values plummet. The report is closely watched because borrowers who are underwater are more likely to be foreclosed.

    Foreclosures have been rampant for some time, but lately the tide of decay had seemed to be slowing — so Tuesday’s report could dent optimism for the housing market over the next few months.

  • I think the shadow inventory cannot be accurately assessed until we get some numbers from the HAMP team regarding successful permanent loan mods. Many, many of these NODs are just people trying to get mods and many of them are on trial mods right now. I believe those numbers come out in December sometime (after they were not given to us in November).

    We’re at minimum 6 months away from any meaningful inventory increase, and I believe we’re closer to 12-15mo from a real inventory increase (after the trial mods are reforeclosed on and after the successful mods redefault and are reforeclosed upon as well). Prepare for the NAR onslaught from hell this spring: prices up, sales up, inventory down, unemployement peaking, stock market and commodities through the roof.

  • In the paper again today (11/24/09 Union Tribune) housing is on the way back up……….
    Do people really believe this???

  • “…gear up for the Black Friday hamster consumer madness.”

    Okay, so I’m visiting your site from Canada and I’m not familiar with all your traditions. Do you really eat hamsters on Black Friday?

  • People are crazy. Up here in the Almaden Valley portion of San Jose houses are going for over asking price and in less than a week. It really makes it hard for me to hold out but I know that these proces are not sustainable. I don’t wan’t to be a slave to the mortgage for 30 years.

    I just don’t see how someone can think that a 1800sq/ft fixer-upper in an OK neighborhood could be worth $825k. Ugh.

  • @ Scott- I hear you. My wife and I live in San Jose and have been looking for years. I thought by now the madness would be gone and normal homes in normal neighborhoods would be reasonable (i.e. $300-$500k). But as you said, not even close. Almaden, Campbell, Willow Glen, Los Gatos, prices are unreal.
    How people can pay these prices? Either everyone makes a at least $200k, the valley is full of “old” money (family help, years of equity buildup, etc.), or people still think its a good way to make a quick buck. I just don’t get it, and for now, refuse to play.

  • No mention about Case Shiller going up again Doc? Too bad – I came here to watch you “fight that tape’!!!

    Remember, you control the market. It will bottom when you say so and not a moment earlier!!!

  • Scott and Joe, Almaden is a prime neighborhood in the the south bay area, one of the best in all of SJ. If you are expecting to live there on the cheep, you are going to be very disappointed. We currently have an opportunity to buy mid-range homes at a steep discount off the peak, but if you expect to live in a SFH in Almaden, LG, WG or Cupertino for 300-500k then you are out of your minds, and essentially the flip side of the bubble coin (ie overly exuberant on the *downside*).

  • Hamsters are a tasty treat after turkey day. They cleanse the palate and eviscerate the bowels…especially in a light cream sauce.

  • I agree with Scott and Joe Average. I am also one who would be happier with a little deleveraging, and deflation because these prices are not rooted in anything except paper profits. The same houses went up too fast too quickly. What is wrong about just letting them fall to reasonable values. By the way, since houses are selling at auctions to investor groups, why not let real estate agents list the houses so ordinary people can actually get a shot at the same houses. All the investors do is put a coat of paint, and change carpeting anyway, and decide whether to sell the house as is without warranty or not. It seems like another way to make a crooked profit ie. 40-50 thousand dollars to apply a coat of paint. Another great article, and this makes me actually scared to buy anything in California right now….

  • Dr. HB, can you do some Agour Hills, Calabasas, Thousand Oaks properties. Prices just don’t seem to be coming down much in those areas. What’s going on? Thanks.

    Al – are you the Al from Canada from Ben’s blog?

  • Taney,

    Do you read the articles?

    The good Doc often not only mentions, but explains *why* the Case Shiller Index goes up.

  • For those who do not believe in the “shadow invetory” – here’s a REAL LIFE current day example:
    I was renting this house on the date the “owners” were forclosed and needed to find a new rental
    Currently this property is vacant, and has been since I left it in in October of 2008. I think the bank took ownership in Dec2008 – so it’s been sitting there in purgatory for quite some time.
    The “sale” noted in Redfin on 8/7/2009 is strange (must be a false statement). I lived there and no known sale took place. A N.O.T. was posted on the property on 10/12 with a date of auction noted at 12/3/2008…
    There is no doubt that Shadow invetory exists. But the real story that needs to be told is “why/how it can exists at the level it does?”. Think about who all must be in agreement to hold up hundeds-of-billions of dollars of asset sales that abolutely need to occur…. Who all must be in agreement to keep this going?

  • I really got excited about Jim’s hamster thanksgiving idea. We were going to eat at McDonalds for the $1 deal burgers. Then I thought, if I could only get that cream sauce recipe..?

    My kids would never miss them. I clean up their cage all the time anyways…

  • From where are you getting this data on the number of bank owned, auction scheduled, and NODs? I’m interested in finding out the shadow inventory in the neighborhood we’re interested in moving to.

  • Most people I know still think that housing prices will go up. The bubble psychology has not changed very much for most people.

  • Eviscerated bowels for Thanksgiving? Gaah! Yet another reason to spend it hiking in the mountains, and Black Friday out at the ocean. Eat Sparingly With Thanks Day on Thursday, and Buy Nothing Day on Friday.
    DHB wrote:
    > Ultimately property values need to reflect local economies.
    We recently received our 2010 real estate assessment and were stunned to see it had been reduced by over 25% from the previous year.
    Then we jumped up and down, high-fived, bumped fists, and went out for dinner at the Irish pub. Yes, this means that the county acknowledges that we cannot cash out for 2X what we paid for the place in ’01, as we’d been offered several times in ’07. Yes, this means that the county is seeing hard times. (They may of course raise the mil rate, since they lowered it as housing prices skyrocketed.)
    But also it indicates SOME kind of recognition of just what Doc says: that housing “values” have got to reflect a larger reality. And that doesn’t mean pricing (because people are not cutting prices as they should, and there is a HUGE hidden inventory). It means income/jobs. What working families can afford to pay for a house. Provided their jobs continue, and even if not.
    Needless to say the California retirees who paid well over local market value for their places–driving our assessments up–are screaming. HOUSING ALWAYS GOES UP! Now that they have to live like the rest of us–on income rather than speculation–it’s a whole new ballgame. Seriously, who did they think they were going to sell to when they paid $100-350K over assessment? Other future Californians? Pathetic.
    The local joke is that we Mossbacks (wet side Pacific Northwesterners) are underwater most of the year meteorologically, so try to avoid it fiscally. Seriously, in our immediate quasi-rural area, which is not thickly populated, there have been six foreclosures in this year [all on flips], and three houses on our street are underwater, so the grapevine asserts. Closer in to town, new housing developments stand either mostly empty, or cleared and empty. In all directions: scams, trying to suck the arithmetically illiterate into the game.
    PS–Rob, I’m glad to learn you clean your kids’ cage all the time. It really is the best choice. 😀

  • “Foreclosures have been rampant for some time, but lately the tide of decay had seemed to be slowing — so Tuesday’s report could dent optimism for the housing market over the next few months.”

    Doug – had you been paying attention, you would notice that same report 3 months ago said that 32% of homeowners and 15 million mortgages were underwater. Going from 32% underwater to 23% underwater is actually a rapid improvement.

  • I live in the Bay Area I have been looking at getting a house to live in and not to make a profit. I am amazed at all the people paying over asking just to get into a house because “we will never see prices this low” I figure to myself, if i cant purchase a house at a non-bubble price, i will not be a homeowner. If its not meant to be, its not meant to be.

  • Excellent point of CS data!! It doesnt account for the current debt accumulation of a property, just it’s sales transaction data. In CA, that can be very misleading. Debt/asset valuation is really all that matters. Because once growth stops, this is the piper that must be paid.

  • 9% of all mortgages are now in late payment status and 4% are in foreclosure status. This number tells the story as it’s not only still growing, but it’s the real danger zone compared to the indicator of under water homes. But I wonder how accurate this data is at this point. Since I think it comes from the lenders and they may be hiding the truth. Any one know?

  • Looks like the can has been successfully kicked down the road: And I had such high hopes the financial bedlam would prove opportunity for this country to learn from its mistakes. I am embarrassed at this moment by those institutions charged with the economic stewardship of America; they have managed with printing press and oblique policy to reduce this country to one of moral rot.

  • Moral rot? I’m assuming you mean the elected officials YOU voted for correct? Rotpublicans. Demorots. Yup, it fits.
    The whole damn system is backwards. You try in good faith to work things out, and the banksters laugh. You default, and then they work with you. I hope 40% of homeowners stop paying their mortgage. Maybe…just maybe, someone i our government will grow a pair and stand up to the banksters. As it is right now, there is a revolving door between the Federal Reserve (an un-constitutional institution) and the senate, house, and president.
    This country does NOT represent freedom anymore, but rather, crony capitalism, and greed greed greed. Is it any wonder that the rest of the world is beginning to hate amerika? Hell, I’M beginning to hate our country because of what the politicians and banksters have done.

  • I am almost certain that some of what is going on is the moral hazard coming to roost. People saw that many of those who wildly bought during the peak of the bubble are maybe coming out okay, getting mortgage modifications, not paying at all, hoping for principal reductions to be implemented by our government. So at least at the back of their minds, they are thinking, “Well, if I buy this house, it might go back up, we may have another bubble, and then I’ll be rich! And if we don’t, well, nothing much bad will happen. I’ll just stop paying,, and I bet I’ll end up with at least a year of free rent. And maybe they’ll modify me. Or I’ll walk away, and if my credit is hurt, so what, good credit doesn’t matter much any more.” And who is to say they are wrong in thinking that? That is what has been created by our abominable policies in dealing with the bubble crash.
    I am absolutely certain that many of this new wave of buyers will not be able to support the mortgages they have just entered into. DHB has done the math several times. There aren’t all that many people making $200,000-300,000 a year. And even if the unemployment rate starts to decline somewhat, many of the jobs won’t be nearly as well-paying as the ones people had before. It is a pure matter of mathematics. There will be a very high rate of default on these recent mortgages. Now, if the government’s plan is to keep printing money every time we have a bubble pop, well, we’ll end up with the Weimar Republic. But my guess is that they don’t have a long-term plan, they just want to paper things over for now, and somehow hope that it will magically go away because they want it to. Fast forward three years, and let’s see if it has gone away, or if they have made it much worse.

  • In Housing Bust, Government Increasingly Favors Homeowners Over Renters

    During the housing boom, critics increasingly complained that the government devoted too many resources to homeownership and too few to more affordable options, such as renting. Now, during the bust, the government’s commitment to ownership has grown even larger, according to a new report (pdf) from the Congressional Budget Office.

    This year, the government devoted four times the amount of budgetary resources to homeownership as it devoted to rental housing, or around $230 billion in spending and tax breaks for homeowners compared to around $60 billion for renting, the CBO reported. Around two-thirds of Americans are homeowners, according to the Census Bureau, though the rate fell to around 67.5% earlier this year, from a peak of 69.2% in 2004.

    The report notes that, until recently, most government support for homeowners came in the form of tax breaks that don’t require government spending but result in the government collecting less in taxes than what might be owed.

    But recent efforts to help stabilize a fragile housing market means that government spending now accounts for around half of federal support for housing…

  • Swiller–
    Suggesting fault with a misplaced vote is really nihil ad rem at this point, isn’t it? Really, damned if I do, damned if I don’t. But I agree–the system is backwards.

  • Taney – You wrote “Doug – had you been paying attention, you would notice that same report 3 months ago said that 32% of homeowners and 15 million mortgages were underwater. Going from 32% underwater to 23% underwater is actually a rapid improvement.”

    Uh NO it is NOT an “improvement.”
    Corelogic changed the methods by which it was calculating how many were underwater. All it means is that the earlier number (that 32%ish) was OVERSTATED.
    You are trying to bootstrap a change in form (methodolgy) into a change in substance (value of homes versus amount owed on them.)

    The method Corelogic had been using had not taken into consideration (a) any payments on principal on a loan and had assumed that the entire amount originally borrowed was still owed and (b) assumed that every single borrower had maxed out their home equity line of credit on theri 2nd and 3rd loans.
    The new method has been adjusted to take into consideration (a) principal payments and (b) that not all home equity lines of credit have been used to 100% of availability.
    ALWAYS look at the methods of how data is derived. If you don’t you can draw very wrong conclusions.
    So prices/values are NOT going up. It just turned out that not as much money was owed as was originally thought. That in turn means that the number who owe more than the house is worth is fewer – not because the house value went up but because they didn’t borrow as much as thought or had repayed more than thought.
    This was widely reported in the WSJ, LAT and other sources. Pretty sure Calculated Risk mentioned it too.

  • Having lived/worked in Pasadena for 5 years now, Doc is spot on with this post! The median income is about 80K in Pasadena, yet most indicators tell us that median home prices are still hovering around 400K. The math doesn’t add up, especially in a declining/stagnant economy.

    What boggles my mind is the government intervention of the Obama 8K credit and the rise in FHA loans (where buyers can be leveraged 25/1 versus their cash outlay). These interventions are like trying to melt an iceberg with a Zippo. If you want real change, make 15-year notes with 20% down the only loans available. Then we would have a return to normalcy, albeit a painful one.

  • What was your rent?

  • to CB. The house I was renting in Almaden Valley just sold for $820k. It sold to the prior owners in 1998 for $404k. Do you think that in 10 years it is reasonable for the price of this house to more than double? 30 to 40% seems reasonable.

    I’m renting in the Los Gatos school district area now for about half of what my mortgage would be. This seems simple to me. When renting and buying come closer together then it is time ot buy. When interest rates rise (and they will) that will knock down houses some more. I sold my house in 2006 and I’m glad I did.

  • I lived in California, what a joke! The people so dumb, they keep saying,
    ” my house is going up in value!” “my house is going up in value!”
    I said your house is not going up in value. It may increase in price but the house value is the same as it was built, plus and minus additions and maintenance.
    A house generally decrease in value because the maintenance that is required keeps going up over the years. It was amazing people paying $600,000 for a shack house and paying for it!
    WE all pay the Banksters one way or another.

  • I live in Old Pasadena in the 91101 zip code. The reason Pasadena is so desirable and hasn’t gone down much is that it is a great city. It is well run, has great public transportation and is a walking town. I can walk to 2 trader joe’s, Von’s, Pavillions, Gelson’s, my denstist and doctor, 2 movie theatres and the metro gold line all within 4 blocks. The reason I moved here is that I have 2 metro gold line stations nearby….one only a block away. Pasadena prices will stay supported where they are give or take a little because people love to liver here.

  • I am also a landlord here in Pasadena and my rents have been very stable. Since the housing bubble popped around the country, I have not had to lower my rents nor have I been without a tenant.

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