bubbleinfo.com

The other day I was in someone else’s car, listening to XM Radio, when a real estate ad comes on.  The pitch was to get you to invest in real estate with just your good credit, and they’ll do everything else – it sounded like the Jenae program!

The hucksters are coming out of the woodwork now, tempting you to make huge profits flipping houses.  Don’t believe it – their plan is to get rich quick selling you books and tapes!

We saw yesterday some investors jumping in around Oceanside where there was some promise of a positve cash flow.  Is that all you need to invest in real estate, and can you get rich quick?

No way – and here’s advice on how to go about investing in real estate today:

1. Get a good contractor who can give you accurate quotes easily and quickly

2. Decide how to manage the property – do it yourself, or a mgmt. company

3. Look at 100 houses

4. Make at least 20 offers

5. Look to pay 2001 prices, or less

These five simple points are just for starters, and cover the first three before tackling number four.  Doing these will help you lay the foundation for smart decision-making. 

I mentioned the sale that closed last week for $75,000.  If you are looking to get started on building a portfolio, it’s a great way to go – buy the cheapies.  The buyer, who is an occasional commenter here, had amassed a group of a dozen lower-end rental homes over the last ten years, and sold every one of them in 2005 and 2006.

Now he’s back in the hunt, but no reason to jump at just any old property.  The one that closed had listed in February for $199,000, but you’re not going to get a one-bedroom condo to cash flow at that price.   The buyer has seen at least 100 properties this year, and we have literally made at least 20 offers – most of which don’t get a response.  You have to be patient, and stick to the game plan!

In the last run-up, there was a client named Steve that had bought four 2 br/2 ba condos in the early-to-mid 1990s that had been foreclosed on by Great Western.  The bank didn’t want to have anything to do with them, and Steve picked them up for $40,000 to $50,000.  When we met around 1995, we agreed that selling those condos and exchanging into houses would make for a nice upgrade.  In 2003 after doing 15 deals together, he retired with seven figures in the bank – and it all started with those four condos.

If you’re thinking about investing, start with property that is manageable and cheap – ones that if they sat vacant for months, you’d still be able to handle it without stress.  Be in it for the long-haul – you could see others nearby selling for less in the coming years.  Use that as one of your tests – would it bother you to see others around it selling for less?  If not, it must be a decent buy.

Steve’s #1 mantra?  Buy the best, and forget the rest.

Yes, we’ve been seeing some market clearing in North Oceanside. An orderly decent market clearing has some common denominators: Highly-motivated sellers, similar product-types to feed off each other, and an expanding buyer pool because prices get low enough to attract investors – of the 22 below, almost half were purchased by investors, and four paid all-cash. (The rents are $1,000 to $1,200 per month, and there is no HOA fee.) These are sorted in order of recent sales price, the SP @ Peak are the sales prices on those that previously sold between 2004-2007, and LP @ OMD is the list price the day the buyer was found,

Hermosa Half-Duplexes 2 br/1 ba 800-827sf 1-car Gar Closed Since May 1st

There are a few things to take away from this chart, some of the obvious being that the banks are getting killed, that there is market clearing when you see 50% to 60% off-peak pricing, and that investing at the low-end of this range doesn’t look too bad, etc.

The part sellers should notice is the fact that the banks and experienced listing agents tried in many cases to beat the odds and list high – only to have to come down to reality before finding a buyer. With the exception of the second deal in which the listing agent represented the buyer too, there aren’t any lowball offers here. The buyers aren’t going to make an offer unless the list price is very attractive. Sellers, the selling season is wrapping up – if you’re not in escrow, it’s time to drop your price.

A reader sent this in:

Jim,

I come to your blog as often as I can, but I might have missed it if you have talked about this. First, some background: I put my house on the market 3 weeks ago today and distinctly remember hearing my agent tell me how important the first 21 days are when selling – when a house is new it is exciting and that is the best time to get people to see it.

So here we sit, 21 days later and my house has yet to make it to realtor.com. Apparently the T5 upgrade has made it so NO San Diego MLS listings are propagating over to realtor.com, which just happens to be the most popular real estate web site.

I knew going into this that selling would be difficult, but when you have NO visibility on the largest real estate site in the country it really hurts, and possibly is costing me a lot of money!

I called realtor.com yesterday, and they verified that the Tempo 5 system has prevented any new listings from being uploaded to realtor.com.  They’ve had the new program running now for 30 days, and they can’t find a way to connect to realtor.com?  Unbelieveable.  I can’t wait for the lawsuits to start flying!!  Please somebody design a new public-MLS!!

It was noted on the last post that the lower-end market has been on fire lately, with recent closings 125% higher than last year. The foreclosures/REOs are leading the way, and in markets like Oceanside’s they are beating each other down on price. The demand has been incredibly strong though, with many investors competing with owner-occupants to gobble up the good buys.

Here is how the foreclosure agents are doing, compared to last year:

They have almost surpassed last year’s production in less than six months, primarily selling the cheaper homes – ones that many thought would struggle to get financed without subprime loans available. Fourteen of those above were buyer sides, here is how their closed listings break down by price:

The foreclosures/REOs are leading the price squishdown, with the higher-priced homes dropping down into lower categories as needed. Accordingly, the sales are racking up – there is NO SHORTAGE OF DEMAND these days. There are lots of buyers in the marketplace, waiting for the real plums, the good-looking houses with an attractive price on them.

I’ve already closed as many this year as I did last year, and had SEVEN new pendings this week alone. Four of the new pendings were from my REO group that recently listed, and the other three were the detached condo on Tallus Glen, the short sale on Calle Arquero that fell apart earlier in the week that I got a full price all-cash offer in to take it’s place, and a Downey Savings REO that was originally listed for $510,000 that my buyer got for $300,000.

What’s more intriguing is that we had multiple offers on five out of the six listings that went pending, and what seemed like hundreds of phone calls from buyers and agents. One mentioned how he had made offers on behalf of his client on over 20 houses and couldn’t get one because they were selling so fast and so high. Two other stories on listing agents getting buried, one had 20 offers on a house I think was on Baywood, the other had 18 offers on a house on Johnson.

It goes to show you, there’s nothing that price won’t fix!

There were more quotes in the Kelly’s article at the Voice of SD about the market getting hammered statistically: Link to Article

How bad are the stats?

The numbers are skewing from all the action on the lower-end:

# of Total Listings Jan 1 to June 27 in SD County (Att & Det):

Once you get into the closed sales, you really see it. Here are the closings between May 1st and June 15th:

You’ll be hearing about how sales aren’t that bad compared to last year, but it depends what segment of the market you are looking at – more later today!

I couldn’t resist pointing out this statistical oddity among the four foreclosure agents we’ve been following:

Jun 11 – 328 Actives/98 Pendings = 3.35

Aug 21 – 382 Actives/111 Pendings = 3.44

Sep 20 – 425 Actives/97 Pendings = 4.38

Nov 9 -  486 Actives/128 Pendings = 3.80

Nov 25 – 484 Actives/138 Pendings = 3.51

Dec 14 – 446 Actives/147 Pendings = 3.03

Jan 15 – 474 Actives/149 Pendings = 3.18

Feb 7 -   482 Actives/187 Pendings = 2.57

Mar 13 – 477 Actives/205 Pendings = 2.33

Apr 18 – 467 Actives/247 Pendings = 1.89

May 13 – 418 Actives/298 Pendings = 1.40

June 10 – 344 Actives/288 Pendings = 1.19

June 27 – 261 Actives/261 Pendings = 1.00

The dramatic drop in active listings is surprising, given the foreclosure news.  Either the new inventory is being spread around to more agents (finally!) or are the banks holding them back? 

There is an additional category in the new MLS system, Tempo -5, that asks if the listing is an REO.  There are only 323 active listings and 176 pendings marked as REOs in SD County for both detached and attached, so the agents inputting their listings haven’t found and utilized the new category yet.

Alt-A loans have been around a long time.  Back in the day, alternative documentation was allowed by Fannie Mae and Freddie Mac, but all it meant was that you could leave out the tax returns – you still had to provide the rest of the loan package.

Where did the Alt-A loans veer off-course?

As the lenders became more sophisticated, and the real estate market started cooking, three things developed:

1. Automated underwriting

2. Reliance on FICO scoring

3. Private label mortgage-backed securities

Because there was a voracious appetite on Wall Street for higher-yielding vehicles, the scramble began to process the loans quicker and easier.  Around 2001 or 2002 Countrywide and others began to accept and approve loans based on FICO score only, and no income documentation was required to get A-paper rates.  Normally, Alt-A loans paid a rate premium of 1/4% or more for the convenience of low-doc, but not any more. 

Then they bypassed Fannie and Freddie and sold these loans direct to Wall Street, bundled up to look like agency paper with the focus on yields, not documentation.

These loans are still available today. 

In yesterday’s chart we saw that 83% of the Alt-A loans were low or no-doc, and as JMS correctly pointed out, that is the definition of Alt-A – a loan with alternative documentation.  The other 17% were full doc but must have had another kink, like a lower FICO score, that kept them from being a regular package.

Note that the average FICO score was 709 on the Alt-A loans, which is a decent score.  Borrowers who were cast into the Alt-A pool weren’t necessarily bad credit risks – it has as much to do with the lenders wanting to hurry their loans to Wall Street as to why borrowers ended up as Alt-A.  I sent many well-qualified buyers to Countrywide because of the convenience of FICO-score-only underwriting, and they were getting A-quality rates, or very close, because the secondary market was so competitive.

In summary, just because a loan is in the Alt-A pool doesn’t automatically mean worse-qualified borrowers – it means easier-qualified. 

The bigger concern is the type of loan – it’s the resetting ARMs that will cause the bulk of the trouble over the next few years.  Today I added to yesterday’s chart the mix of fixed-rate and adjustable loans.  There are 72% of the subprimes and 73% of the Alt-As that are adjustable-rate loans in California. 

It works out to roughly 31,691 subprime loans and 278,132 Alt-A loans that have yet to reset their adjustable-rate terms in the Golden State, using the NY Fed’s numbers.

Here’s another Alt-A reset chart through Jan. 2010, with this month circled:

We’ve seen around the blogosphere the mortgage map from the NY Fed, and for future reference here is the link:

Link to NY Fed Mortgage Map

Poking around the website provided additional data about subprime and Alt-A loans in each state. We’ve been wondering what’s in store for resetting ARMs over the next few years – here’s what the NY Fed’s research department has published on the State of California (they credit FirstAmerican CoreLogic, LoanPerformance Data):

Facts About California Subprime and Alt-A Mortgages

This chart is for all of California, at their website you can plug in your individual zip code but not get specific counts, just a colored map. The NY Fed decided to stop publishing the numbers last month – sounds to me a little like when the government quit publishing the M3 – they don’t want you to know how bad it is specifically, “but here, have a colored map instead”. BTW, the percentages don’t add up on when the resets are coming, but I think you get the gist of it – steady diet of subprimes resetting the next two years, followed by solid neg-am action. Though the stats here are probably based on planned resets for the neg-ams, they will start sooner if/when they hit their cap limit.

Here is a copy of Alt-A loans in North SD County zip codes marked for those who missed a payment in the last 12 months, with an inset of the total Alt-A chart for California:

Here’s more ammo for you conspiracy theorists; they aren’t publishing data for RSF’s 92067 zip code. Everyone knows that there is no mail delivery in the Ranch, residents only have a P.O. Box. That’s about the only excuse I could think of as to why the 92067 zip isn’t included, but notice that the darker cloud over the Ranch is marked as 92091.

Frank wrote:

“Jim, do you see Prop 13 and capital gains taxes as contributing factors in the reluctance to move? Here in Santa Clara County, if you ignore the hot and cold stretches, the overall number of sales has declined dramatically over ten years as empty nest boomers have decided to hang on to their low property tax basis and put off capital gains taxes. Should the government do something (capital gains exemption if held for 15 years) to free up more housing which should, in theory, reduce the cost of housing for everyone? Are we not painting ourselves into a corner of reduced sales irrespective of current market conditions?”

Yes, one of the the primary reasons for long-time owners NOT moving is Prop 13, even if they can afford to pay a higher tax.  It’s only when they are forced to move, by either health or money concerns, that alternatives are considered.  

The squeeze is getting tighter and tighter – the state’s budget is in the hole for more than $17 billion, gas is nearing $5 per gallon, and inflation is climbing.

What are YOU going to do?  At what point would consider leaving town?

For most it would probably take a Mad Max-type environment to force you to leave California, or would it?  If the state government is forced to raise taxes, and possibly tinker with Prop 13, would you hit the road?  And what role would real estate prices play in your decision?

As you’ve heard, George Carlin died last night.  His love for the English language, and his willingness to challenge the status quo inspired many of us to push the boundaries. 

In tribute, here is a YouTube video from his HBO show in Phoenix in 1978.  A certain blogger is seen at the 2:08 mark, wearing a yellow shirt in the front row.

http://www.youtube.com/watch?v=T_i37RaXuxE

Warning – this video contains vulgar and obscene language.