The Short End of the Stick: Examining Short Sales in Southern California
Another trend that is emerging is in the short sale market. Even as early as July of this year, the number of short sales in
Keep in mind that larger counties such as
County Percent Short Sale to Overall County Inventory
Los Angeles 5.59%
Orange County 2.80%
San Diego 8.78%
Riverside 11.19%
Ventura 3.41%
San Bernardino 6.54%
Resetting into the New Year
This will happen for various reasons. First, we have an alarming number of mortgage resets that will occur in Q1 and Q2 of 2008. In fact, by most estimates this will be the largest amount of mortgage resets ever recorded. With the bulk of 2/28 loans being issued in August of 2005, we are hitting the wall of mortgage resets. It would be one thing if your payment increased by $200 a month and you had to layoff the cable to make up for the bill. It is another thing when your payment jumps by $1,500 or $2,000 a month. Unless you got a generous end of the year bonus or a significant raise, this will cause a lot more strain on the budget of many homeowners. There is also the lack of refinancing options. After all, the reason many people took these high risk loans was to cut down on their monthly payment. Even a 30 year conventional note with a low rate cannot compare with a 1 or 2 percent teaser loan.
The Housing Santa Clause isn’t Flying This Year
Next, we are entering the fall and winter doldrums. Fall and winter are always slow selling months. That is why having a horrible spring and summer is a shock for a housing market that for the past 10 years has always seen healthy times during these 6 months. The slow down during these times only creates pent up demand that will be hitting the market at the worst time of the year. Why is it that fall and winter are slow? For one, a large group of buyers are families with children in schools. They don’t want to take their kids out in the middle of the school year. Another reason is the shopping season and the oncoming hangover during January and February when the bills come due. There are other various psychological reasons such as temperature but suffice it to say that the next few months are never ideal for selling a home. On the flip side, whenever you are looking to buy a home winter is the absolute best time to go house shopping. If you can pick a rainy weekend day to attend an open house, even better. This tactic also works for buying new and used cars.
Tighter Credit and a Falling Market
It also doesn’t help that getting a mortgage is a lot harder now. Even early in 2007, you were able to get dangerous mortgage products that for all intents and purposes made no financial sense. In fact, these products were equivalent to buying stock on margin and making a speculative bet. The bet was hoping that before your rate reset, you would be able to sell and profit a nice sum of equity ala Donald Trump. Plus, we had a hard selling real estate complex that used absurd housing mantras that much of the public ate up like strawberry cheesecake. “Housing never goes down!†or “Renting is flushing money down the toilet†became battle cries for the lieutenants of the housing machine. Try digging up an article from a housing bull showing that incomes and local area prices make any economic or fundamental sense. That is why hyperbole become the rubber stamp of moving homes. There were many participants in this credit and housing orgy. Now that the market is falling, all rules predicated on pure appreciation need to be thown out the window. It turns out in this decade long Pollyanna of housing there was no room left for the mere option of a declining market.
Shorting it Out
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16 Responses to “The Short End of the Stick: Examining Short Sales in Southern California”
Yes, the piper must be paid.
And that means biting the bullet on the losses.
On my site, this month I have free audio files from an anonymous real estate agent who has a lot to say about Short Sales and the mess we’re in.
http://www.AnonRecordings.com
Here in Santa Monica I’ve been watching a game of musical chairs, but with houses. Everyone’s looking around at everyone else nervously, waiting for something to happen. Specifically, 3 neighbors had their 2-bedroom 2-bath 950 sqft crackerbox homes (all +/-) for around $1.1M. Yes you read that right. For 3 months, no activity. Even the open houses were lethargic. Then suddenly (panic? common sense? necessity?) one seller dropped from $1,099,000 to $849,000. Sold within 2 days. 2 more weeks passed. Another seller dropped from $1,079,000 to $919,000, then $899,000 a week later. House sold. Now the third cat, he’s slowly come down, now he’s at $879,00 and nothing. He stopped doing open houses. 7 months on the market. Panic. I feel bad for him, but then again he’s a greedy SOB who’s lived here for 30 years and felt entitled to the “big money” he saw everyone else getting the last 5 years (pretty much in his own words). Oh well.
We have 3 short sales in our community of 62 new homes in OC. CA
guess what they have been on the market as a short sale for approx 4 months…NOTHING.. Now they will go back to the bank. don’t feel to bad for these so called families..they are all investor bought properties…and empty.
Here is a piece by itulip about the geography of a housing bubble they did a while back. It explains a lot.
http://www.itulip.com/housingpriceregionscascade.htm
As I see it, Short sales are for real estate agents—- who else wins???
I was in northern California last week and read with fascination in local papers the “death watch” on southern California housing and the opinions that the north would be spared the clear cutting beginning in southern California. Do sophisticated observers conclude that the bubble did not extend to the Bay area? A couple of years ago I was talking with one of the larger, independent land developers and builders in Texas and he turned to boast to another land developer about all of the real wealth they had created for people. When I asked what they meant, they said the homes they had built and sold and the subsequent equity that the owners had accrued over the years. I said that I could understand a farm that had been improved or a factory rennovated as building wealth but could not see a home as any thing other than a consumption item. I think the author of this blog and the contributors may help others think differently about real estate and urgently as the bubble pops!
It’s all about Team Bush notrealestate vs Jerry Jerry Jerry Jerry realestate.
Would make a great TV sickcom..
The ggod news no one would understand and the bad news is the ggod news.
Go Newsestate,,Not for U…
wow they don’t get it, they can bring interest rates down to 1% and THERE AIN’T NO BUYERS………..this has never been a subprime problem this is a devaluation problem……………and it hasn’t started yet, they just brushed off homeplate and probably Christmas will be the wake-up call,
they have been closing mortgage companies all year, 178 we know about and probably hundreds of little ones that probably didn’t even make the news and now the stock market cuts begin,
investment bankers are on their way to “what the heck happened land” . By the time it sinks in that there are no mortgage AND investment banker jobs, ouch, big, fat, financial industry shut down in months. Usually the caring companies make sure they fire everyone right at the end of November, or before the end of the year.
Add to that the drop in 401K’s (i.e. volume on stock market) the surrounding money associated with all these laid off employees AND the creepy empty houses littering the land owing taxes and insurance.
Meanwhile I think from the news out now, houses will probably fall 50%,maybe 65% by next spring. This is a supply and demand problem and there are probably 3-5 houses for every borrower. By blaming subprime the government got rid of all mortgages for anyone not squeaky so if you do find a buyer, they won’t get money.
Next spring is going to be ugly. And I know how DARN GLOOM AND DOOM THIS SOUNDS, BUT COME ON I HATE IT AS MUCH AS YOU DO BUT DO YOU SEE ANYTHING THAT SAYS THIS IS WRONG. A is falling (PMI going down)and when you look where all those MORTGAGE BACKED securities are lurking, when you add “A” paper falling it is real scary…….so this is a time I hope I am wrong as it gets, the only positive I see is that within 4 years maybe 3 if they really open the mortgage loans back up, the backlog will be gone and right this mess
@Dan,
Santa Monica is another story in itself. Price in SM are some of the highest in Los Angeles County. Some houses will fetch high prices simply because of their location. However a house like you mention should not go for the price simply by being in the city boundaries. We are now starting to see this change to a certain extent. Some buyers are still like a deer in headlights.
@Jim,
We also have the mortgage brokers and banks. Wall Street is trying to protect its earnings through all the layers of protection. Not sure how much this super SIV fund is going to do aside from giving money to the managers of the fund. More money down the drain.
@all,
I’ve started a section in the forum section for graphs, charts, and pictures that should give an overview of the housing market. I’m finding it necessary to have a central place for this data:
http://www.doctorhousingbubble.com/forum/viewforum.php?f=15
A realtor friend of mine who currently lists REO’s, and who prospered during the mid to late 90’s during the last housing bear market, commented that “100% of REO’s sell, but only about 1/4 of Short sales will.” The difference is that 3/4 of SS’s finally go back to the bank rather than selling during the foreclosure process. The banks must offload the properties. At some point the bank board will decree, “off with their heads” and sales prices will be dropped, hard. The economics are irrefutable.
When Congress gets around to “temporarily” increasing the conforming loan limit, ostensibly to help homeowners, rates may or may not still be at their current low high 5 / low 6% range. Hyper-inflation and the devalued dollar will at some point, the tipping point, cause foreign investors to demand higher yields to buy US debt. The US is so far behind the 8-ball when it comes to balance of trade, plus the national debt, that we have no choice but to finance our consumption. Who buys that? Foreign investors. They might swoop in to buy cheap US property – after all, the pound and Euro are at generational highs – but what will they buy? Choice properties by the beach, in the mountains, in resort areas. Not the mid-LA /OC/ San Berdo short sale on what was once a middle class street.
No-cal’ers who think they’re immune will discover otherwise.
The bulk of those 10,000 short sales will become REO’s, the banks will ‘dump’ them, and prices for not-yet-short sale properties will have no choice but to follow.
Wow! You are so negative. I can share with you that buyers are out there now. I host open houses where you can really see that buyers who were on the fence from many different walks of life are creeping back. When you say that no one can get a loan, you are wrong. It’s all about the fico score and you just have to know how to help the buyers improve their score. I entered this market as a Loan Officer in Feb 2006 and couldn’t believe the scams I saw. I was told I didn’t need to know about Option Arms to sell them. I have never put someone in that loan although it paid the best. I continue to work for my deals by building a client base that is long term. I’m happy that the LO’s who burned people have been dropping like flies. No one would refer them and so their business is dried up. I feel that next Spring will NOT be as bad as you said because I can see what’s happening and the media is not reporting. Buyers are not in droves but they are definitely interested in the deals! They must be educated though on the reality of what they can expect in the negotiation process. Sellers will slowly realize that they have to come down. I do feel sorry though for the sellers who cant come down due to owing too much. I have referred 2 of my neighbors to list their properties as short sales due to different issues they had. Lost jobs and divorce…..not investors caught holding the bag. There really is another side to all of this. Hard working Real Estate Licensed Loan Officers who don’t cheat people and host open houses for their agents, mail marketing to their client base, do first time home buyer seminars, and have 100% client satisfaction.
No, I dind’t make the money that the guys made the last few years but I’m doing well and I enjoy the business. It’s not that the loans have gone away….it’s that the menu has shrunk.
Like short sales with the Realtors, you have to change with the market, educate yourself and build clients with honesty.
But don’t be fooled because the buyers are out there.
Long Beach, CA.
The pie chart reflecting the short sales in Southern California is staggering and a bit frightening! Unfortunately, I agree with you, there is more to come. Our company, HouseBuyerNetwork.com, is on the front lines every day assisting motivated homeowners nationwide,sell their homes. Most of them are pre-foreclosure. We have seen a tremendous increase not only in southern CA, Florida, Phoenix, Las Vegas, and the Rust Belt,but in other markets not documented, yet, by conventional data reporters. This is in large part due to the fact that we look forward rather than backwards. Our forecast is for batoning down the hatches and preparing for stormier weather.
@Jose
Wow. Can I sell you a bridge in Brooklyn, swamp land in Florida, and snow in Alaska, too? If the people stomping through your open houses were “buyers”, wouldn’t it make a little sense for them to have, well, you know, “bought”? And not just looked? Buyers write offers. Lookers don’t. In case you haven’t done the math, the money factor for a PI payment at a 6% rate is $600 for each $100k borrowered. At 7% it’s $666 (what a nice number). So for a median priced LA home at $550k, 20% down = $110k down, JUMBO loan – but let’s be generous and still give you the conforming 6% rate – that makes the PI payment 600×4.4, or $2640. Taxes and insurance add another 640 or so. So that’s a $3280 payment. Take out tax benefits of some $600 per month and that leaves you with a net $2600 payment. When you can rent the exact same house for about $2000.
But what about ‘wasting your money on rent’, the classic newbie realtor / LO chant? Um, it cost you $110 THOUSAND dollars, plus closing costs, in order to acquire $440k in debt, for the privilege of paying $600 monthly over market price, for an asset that is declining in value and will likely decline for another 2 to 5 years, depending. Let alone the monthly negative – even if you to remove that from the equation, dropping value for an illiquid asset plus the lost opportunity cost of the $110k plus closing costs, makes purchasing a property right now an ill-advised financial move. Go to patrick.net for a good in depth analysis.
“I feel that next spring” – to quote Bill and Ted on their excellent adventure – “Dude”. If this were about feelings, we’d be holding hands chanting Kumbaya.
I say let it crash. Let it crash quick, let it crash soon.
The mortgage problems are a symptom of a philosophy. A philosophy that goes against common sense, a philosophy that states that no problem is so bad that it can’t be ignored until solved by someone else.
A philosophy that says that debt is good, and that everyone (by virtue of breathing) is entitled to live beyond their means.
Not a privilege earned through years of hard work, not a reward for saving against the tide of blind consumerism, but a RIGHT, manna from heaven due to even the most reckless individual, a birth right.
America will be OK once this mortgage crash is over with. From the ashes common sense will once again come, the philosophy of “look big, be big” will finally be thrown away, and we will rebuild on a foundation far more solid than the house of cards created by the “quick buck artists” that have ruled us for too long.
“Housing bulls are now starting to argue that only certain counties will be impacted from the oncoming housing downturn.”
Uh huh…. my county is a 2nd home summer mecca. 40% of all housing (single family & condo) is 2nd homeowners. These are expensive 2nd homes – anywhere from $375000 – 3,000,000. Here are the stats to date:
1 foreclosure per 92 homes
1 foreclosure per 58 2nd homes
87% of the foreclosures are 2nd homeowners – and it could be higher but it wasn’t clear from the data
98% of the loans in default were made between 2002 -2006
It is not the locals who are defaulting – it is the upper income 2nd homeowners/property owners. They are going down to the tune of $285,000 (land only), $570,000 2 bdrm condo, and (the grand prize winner) $1,700,000 waterfront ‘cottage.’
The lenders are the usual suspects – WaMu, Countrywide, New Century etc, none of which even have offices within 150 miles of the place.
Even the realtors have faced reality and admit that whatever they thought the price should have been last spring, the selling price is now 31% lower at minimum.
One homewas on the market for 20 months. Started at $430,000, Dropped to $409,000. Dropped to $399,999. Dropped to $309,000 and said “consider any offer.’ It finally sold for $292,0000. Seller was the owner, not a lender, not an REO.
The two neighbors within rock throwing distance of that house are still in fantasy land. One is still asking $399,000 for a house thaat is 100 sq ft smaller although they did come down from $430,000 after the one sold. The other (brand new -never occupied) is hanging around at $343,000. Both have been on the market over 18 months.
One house just down my street just sold after 10 1/2 months on market – and a listing price that dropped 25% until it sold for 31% off the orginal list.
This is NOT an area where the locals used subprimes or 2/28s or option ARMS. (The small local bank deliberately steered people away from those and in a very small community, locals don’t use out-of-area banks or lenders.) That was one by 2nd home buyers trying to leverage themselves into a ‘summer’ place that cost more than the median house in the US in 2005-06, and in an area that can give Calif. a good run for its money on prices but doesn’t even have a freeway or an airport with a terminal bigger than a football field.
When the upper income people are crashing and burning on their 2nd home toys, there is a fundamental problem..
Old post.. but still worth it to read. Thank you for posting
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