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It seems a day doesn’t go by without hearing a baby boomer say,

"Sell my house?  I’m going to wait until the market comes back."

We’ve already identified that the neg-ams mortgages that will be resetting over the next three years will be creating havoc for those sellers waiting for higher prices.  But what will happen in 2010 or 2011 once the reset wave concludes – will the market just magically "come back"?

There are 76 million baby boomers counting on two things to get them by: social security, and the equity in their house.  But what will happen as 76 million boomers try to sell over the next ten or more years?

From Wiki: "In contemporary economics, Harry Dent has popularized the baby-boomer age-wave theory. According to him, as a result of baby-boomers retiring, the US stock-market will peak between 2007 and 2009. This prediction is based on his observation that consumer spending peaks near age 50.  Some experts expect the worst consumer recession since 1980 as aging boomers start retiring, adding to rising unemployment, decline in house values, and declining stock prices. However other experts have suggested that immigration to the US and rise of emerging economies will offset the demographic impact."

The other common assuption among boomers is that real estate always goes up in the long run.  It might, but this could be a very long run, and how old are you?  Do you have the time to wait it out?

A guy I met yesterday while doing open house mentioned the  3,500 sf house in Redlands they were trying to sell.  He said he didn’t have much of a loan on it, but had already moved to Carlsbad and hoped to get rid of it.  They had it listed last year for six months, but no sale, and they’re on a six month listing currently.  The list price?  $850,000.

I told him I could solve all his problems – just lower the price to $699,000, and if that didn’t work, keep lowering.  No way, he said, he’ll wait.

I hope he is reading this – there are 75+ million boomers thinking just like you, and they’re all going to want to sell in the coming years – who is going to buy that many houses, for more money than what you could get today?

Don’t forget to factor in declining health – if you wait too long, and end up either needing the money for health care, then you’ll be forced to sell in whatever market there is that day.

My Dad had a stroke two years ago, and thankfully he and my Mom saw that moving into a one-story house about six months prior was a good move – it saved a load of problems since.  (Pops is doing great, by the way).  

Boomers – Move now while you still can, and while you can still get, as much as you can get today.

Jason commented again on his plight:

I just spoke with my bank last week about doing a loan modification. The girl I spoke to was trying to convince me in the direction of a short sale instead, to which I said I’d rather do a loan mod if possible.

She said they just approved 5000 short sales last week alone. Why would they rather lose money on a short sale than modify a loan and still have a good income from the loan?

By the way if anyone in the same boat as me is reading this, they take your financial information and then it takes a little over a month to get back to you for a loan mod. I’m not sure what they will do yet.

Here are my thoughts, but welcome other comments too.

1.  While it may seem to be good income to you, the note-holders got into this game because they were promised double-digit yields.  Whatever the new yield is, it’s less than they expected.

2.   Because the original lender/packager sliced and diced these loans, there are multiple owners of each note.  It has become too cumbersome for them to calculate and approve loan modifications.

3.  The modification that will stick is one that cuts the payment in half, or less.  The modifications the bank is willing to do won’t help enough – the payments are still too high.

4.  There must be some financial benefit to the servicer to do a short sale.  For the person answering the phone to tell you to short sale, rather than loan mod, is surprising.  There must be something in it for them.

Jason, who is the lender you talked to?

Short sales are a great idea, if the banks/servicers can figure out how to do them quicker. 

Asking buyers to wait 30-90 days to get bank approval is a deal-killer – they don’t want to wait, or if they do wait for a while, it’s inevitable that they’ll either see better deals and/or get talked out of buying altogether.

The buyers, and buyers’ agents, are already sick of short sales.  The listing agents leave them in the MLS as active listings after the seller has signed a deal, so you don’t know if they’re available for sale, or not.   If it is for sale, the buyers don’t know what price will work - did the listing agent put an artificially-low list price on it to generate more action, and can he close the deal at that price?  Can I offer less?

The buyers’ agents don’t want to show them either – they want a clean chance at getting paid, and spending time trying to hold together a short sale is nerve-racking. The agents know the deal could fall apart any minute by problems on either side, and then to face the threat of having their commission cut by the bank at the end, is unattractive.

Unless the banks can streamline the process, don’t be surprised to see short sales become less popular, in spite of what the banks might tell you.

This REO at 16865 Saintsbury is on the western edge of 4S Ranch on the way to Del Sur, in the La Vina tract.  It was sold for the second time in August, 2006 for $655,000, but didn’t last long - it was just foreclosed on May 28th. 

It’s a 4 br/3 ba, 2,181 sf detached condo, and as you can see in the photo, it backs up to apartments and has power lines/power pole adjacent to it as well.  Once in the backyard the 3-story apartments are towering above you. 

The bank priced it at $505,000 and has had it on the market for 36 days, so they must have put it on the MLS before the foreclosure was completed. 

As of this morning they had six offers on it, and were over list price.

Because I like to mix it up – I’m jumping right in the middle of this one.

My new foreclosure listing around the corner at 9745 Tallus Glen (below) is the same 2,181 sf model, but it backs to open space.  It is the former model home, and has some nice extras. 

List price?  Just a measly $535,000!

I’ll be there tomorrow (Sunday) morning for an early open house, 10 am to 12 noon – if you are in the area, come by on the way to the beach!

For more photos, click here:

http://www.jimklinge.com/Properties.php/Details/84/#viewdetail

Here is the latest count of SD County properties owned by lenders, and how they compared to September 24, 2007, plus some additional banks to track for next time:

Bank                  9/24/07            6/21/08

Deutsche             628                       904

Bank of NY        363                       579

HSBC                    262                      414

CFC                          87                         98

Total                 1,340                  1,995       +49%

WFB                                                    524

WaMu                                                278

BofA                                                     87

Total                                              2,884

These are SFRs and condos only, but include a few properties whose owner has deeded over the ownership to a bank in a trust – maybe a couple of dozen?

Here are the REOs in our target neighborhoods held by Deutsche, HSBC, BoNY, and CFC – I’m going to check to see how many of these are on the open market.  Care to guess the percentage? :

Jim,

Here’s a question. I am renter & have never owned. My husband and I have saved ~$225k for a downpayment and have good jobs. We rent an apt in Carmel Valley and want to buy in Carlsbad or Encinitas. We’re thinking a SFR $500-600k range with a yard on the east side of the I-5.

Personally, I think it is still a horrible time to buy, but my husband is desperate to own a house. He wants to buy right away and it has been a point of contention in our relationship for a while now.

In your expert opinion, (if I relent and agree to buy a house soon) do you think that it would be wiser to buy the house we want to raise a family in? Or (if I relent and agree to buy a house soon) should we buy a smaller, crappier house than we want and temporarily live in it, then rent it out as soon as another house comes along that we want to raise a family in at a better 2010 price?

Answer:

Congratulations on saving a healthy down payment, that’s a great start. 

When to buy?   Now, or 2010, or both? 

I’d recommend that you only buy a house that could last you forever.

In the event that 2010 arrives with lower prices, and you can find a satisfactory replacement, then oh-happy-day, you hit the jackpot.  But you don’t want to find yourself having to move – at any point – for the rest of your life. 

It’s too difficult to find a great house at a great price – you don’t want to find yourself in a position where you had to move at some specific point.

This strategy could have a few benefits:

1. You won’t feel under the gun to buy just any old house now.

2. It’ll probably take some time and energy to find a suitable house now, and as time passes you should reap the benefit of further price declines.

3. You wouldn’t feel under the gun to buy just any old house in 2010.

For most people, this package sounds safe and comfortable, and it is.  But don’t think that being able to saunter out and casually look for a house will cause it to happen.  Unless you are lucky and/or have a great realtor, it is a long, arduous process to search through different areas, view the specific houses for sale, and be willing and able to act in a timely fashion if a good offering comes up. 

Chances are that if you come across a good buy, you won’t be the only one interested in it.  That’s where having a great realtor can pay off – by getting you in front of the pack and securing the deal, ahead of the competition.

I’d suggest that you keep looking, you never know when you might find the right house.  If you found one that satisfied your wants and needs, go for it.  It could happen this week, it might take you until 2010 to find it – but keep looking!

Buy when you find the right house, at the right price.

Where are the foreclosures in North County? This summary came directly from the county records via title company, not from some wimpy, half-baked MLS – so its accuracy should be better:

2008 SD Foreclosures by Zip Code – SFRs Only (through May 15th):

The combined total of the last six areas is higher than the the cumulative of the other 27 zips (680 vs. 671). If you laid the subprime map over this, it would probaby coincide pretty well.

A certain blogger keeps saying the local market will be toast in another 30 days, if it’s not already. To back it up, here are the stats of monthly closed sales, which were decisions made 30-60 days prior:

SD County Detached Closed Sales

Though we had a 3% increase last month, that can be attributed to a late Spring Kick – the market started slower than normal this year (see March). Between mortgage rates creeping up and the MLS debacle, this year is likely to show fewer sales this summer. Where will the most problems be? Even Lawrence Yun has said that it’s been the higher-end market that’s had the most trouble, due to the lack of jumbo financing available.

SD County Detached Closed Sales, $800,000 and higher

It is conceivable that we’ll see 100-200 closings per month of houses over $800,000 for the rest of the year. Currently there are 2,904 active listings in SD County that are $800,000 and up. If you are in this category, you need to sell THIS WEEK! Knock 10% off your price today, and if that doesn’t work, do it again!

We can get a glimpse of what’s ahead by looking at the recent pendings:

SD County Detached Pendings, as of 6/19/08

The pendings from last month have already passed their 17-day inspection period and presumably signed off their contingencies, so most of those should close over the next 30+ days. There have been 723 closings this month so far, so we might see as many as 1,300-1,400 total closings for June – but still lower than last year. There have been 105 closings over $800,000, so if that number gets up to 153, it’ll equal one-third of the sales of June, 2007.

San Diego is listed as one of six bargains in America, according to Fortune Magazine:

"The housing downturn’s upside? You don’t have to go overseas anymore for your dream retirement home. We found the six best markets for deals."

http://money.cnn.com/galleries/2008/fortune/0806/gallery.Fortune40_real_estate.fortune/4.html

The others listed?  Miami, Las Vegas, Phoenix, Tampa, and Denver.

When confronted with the fact that they made a mistake, some homebuyers resort to alternative means.  Jason’s example could be called an unintentional buy-and-bail, with a delay component.  It wasn’t obvious at the time, but after a few months the homeowner realizes that keeping both isn’t prudent. 

Here’s a classic example of a B-N-B, delayed, on Highland Drive in Old Carlsbad.

We featured it here before – the owner paid $1,700,000 in September, 2006, using a  $40,000 down payment.  

Yes, you are reading that correctly, he financed 98% of his purchase of this 4,193 sf house on an ocean view, 1/3-acre lot.

After checking this out, I think this is what might have happened. 

The buyer, facing monthly payments around $12,500 counting taxes, got a knock on his door.  It was the owner of the adjoining vacant lot.

The lot (#2 in pic) has a 25-foot wide driveway going down the right side – but the house is built 10-12 feet over the property line.  If both lots were once owned by the same person, you could see how that could happen.  But now owned separately, the lot owner probably needs full access to his 25′ to be able to install his driveway and get going on his new house.

The owner of Property #1, buried in debt and faced with having an encroachment problem that had probably gone undetected, has some decisions to make.

Do you go after the title company, hoping they might do something for you after months or years of battle?  Nope.

Do you let Property #1 just go back to the bank?  Nope.

Instead, the owner of Property #1 purchases Property #2 for $550,000 in February, 2007 with a 15% down payment.  Property #1 is in his name, Property #2 is in her name, and she has since refinanced, getting a loan of $800,000+ presumably for building the new house.  What’s left?

Let Property #1 and the $1.66 million in debt go back to the bank, and then torture them or the new owner for full access to the 25′ driveway!  Plus wifey probably still has good credit!

Front shot from street looking down driveway towards rear:

Looking towards street – survey stake at 25′ mark

In the last post Jason was grappling with the choices – does he hang in there with his two over-encumbered houses, or consider letting one (or both) go back to the bank?

What are others doing?

You can check out Oceanside, California, which may be leading the country.  Look at a street like Thunder Drive.  Of the 122 properties on the street, there are 7 NODs, 6 NOTs, and 7 REOs.  Over 16% of Thunder Drive has defaulted.

Think it’s just Oceanside, or other lower-end areas?

Whip into Carlsbad, and check out La Costa Greens, a newer tract of large luxury homes with high HOA and Mello-Roos fees.  Looking at the section built by Pulte Homes, you’ll see that the vast majority sold over $1,000,000 when new – and a number of them over $1,500,000.

Currently there is only one REO, but behind it are more coming.  There are three notices-of-trustee-sale filed, and six NODs.  Only one of the nine in default are on the open market – most go down with the ship these days.  But there are another 11 active listings asking $1,095,000 and higher.  So there are a number of homes either on the market currently, or coming soon.  Can they afford to hold out on price?  What about the remaining homeowners, will they be pressured into thinking like Jason?

A random review of 100 houses showed that only 36 had loans under $1,000,000.

If almost two-thirds of the homes have loans over $1 million, what will those homeowners think about the sales under $1,000,000? 

They’ll be in the denial stage, thinking that it’s a distressed sale, and it doesn’t count.  But when there are nine others following right behind, soon the distressed sale will become the norm in La Costa Greens. 

Here is the REO currently on the open market:

6861 Citrine

4 br/5.5 ba + guest house  4,745 sf

$1,192,500  SP 9/05

$989,900  LP (unsold)

100 days on market

HOA = $273, MR = $141 other = $56

Buyers don’t like this one at the current list price – how much lower will it have to go?  You can bet that the other properties that go back to the beneficiaries will be considering this as a valid comp.

What about the other recent sales – don’t they mean something?

They do to the sellers, and fuel more hold-outs through the summer. 

Here are the last five sales:

$998,000  4/2/08

$1,345,000  5/1/08

$1,150,000  5/13/08

$1,895,000  5/19/08 cash

$1,047,000  6/3/08

We covered the high sale here earlier – buyers will conveniently ignore that one.  With bookends of $998,000 and $1,047,000, most buyers will be thinking sub-$1 million from now on, with maybe a premium for a great golf view.  But how many are comfortable enough on the fence that they’ll expect the view for free? Plenty.

Jason – you aren’t the only one.  There will be entire neighborhoods that will provide spectacular fireworks as this mess rolls out.  In the coming years having a foreclosure on your record probably won’t be much of a hitch – there will be thousands like you.  I have already heard landlords say they don’t mind a foreclosure on a tenant’s crdit report, as long as the rest is clean.  And you’ll be able to get a mortgage in 4-5 years as long as you can fully-qualify and have a decent down payment (probably 10%).

I’m not a proponent of getting foreclosed on – but when confronted with the choices, many will decide it is the best move. 

Accept it.