Strategic Defaults

The L.A. Times’ Ken Harney wrote this article on the study of homeowners with good credit histories intentionally defaulting on their mortgage:,0,2560658.story

An excerpt:

* Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.

* Two-thirds of strategic defaulters have only one mortgage — the one they’re walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.

* Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore — a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion — are far more likely to default strategically than people in lower score categories.

* People who default strategically and lose their houses appear to understand the consequences of what they’re doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters “are clearly sophisticated,” based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.

Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: “Well, I’m $200,000 in the hole on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.

Here’s an example where the high foreclosure rate is feeding on itself, leaving many more possible defaulters behind with high mortgage balances and little hope.

I’m not picking on San Elijo Hills, just trying to help – because if there isn’t a pot of gold at the end of this rainbow, there’s more trouble ahead:

Fron the WSJ:

Strategic default is most likely when home values have fallen by more than 15%, according to the study by authors of the Financial Trust Index, a joint project of the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management.

The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%.

“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”

CSI July?


There was another tick-up in home prices in July, a further indication that housing markets may be stabilizing, according to a report issued Tuesday.

Prices for the S&P Case-Shiller Home Price index of 20 cities rose 1.6% from a month earlier, the third consecutive month of gains. They went up 1.4% in June.

Prices were still down 13.3% compared with July 2008, but even that performance was better than expected. A panel of industry experts surveyed by had forecast a 14.2% loss.

“The rate of annual decline in home price values continues to decelerate and we now seem to be witnessing some sustained monthly increases across many of the markets” said David Blitzer, chairman of the Index Committee at Standard & Poor’s.

The Case-Shiller index compares the sale price of a home to its price the last time it was sold, then factors in changes in prices over time.

That, ideally, yields a more accurate picture of home price fluctuations than simply calculating the median or average prices of all homes sold during the month. Those averages can be skewed by changes in the mix of homes sold during any one period.

Anyone paying attention will shrug this off for a number of reasons:

1. July closings were buying decisions made 1-3 months earlier, which is old news.

2. Government intervention renders all data suspect.

3. The data is too nebulous – who cares about national stats, or even county stats.

There not much we can do about #2 above, but let’s fine-tune #1 & #3, and look at more revelent data – the 31 detached September sales so far in Carmel Valley, 92130:

Eight of the 31 were previously purchased in the 2003-2009 period, or, in other words, 74% of the sellers had owned since 2002 or longer. 

Only four sold for less than they paid:  -2%, -3%, -18%, and -20%.


15 buyers had more than 30% down payment.

One short sale, and no REO sales.

In areas like Carmel Valley, the market seems to be getting stronger the last few months with multiple offers on virtually every well-priced new listing.  The $8,000 tax credit and FHA loans aren’t going to be much of a factor when the average sales price is $914,516 – only three FHA loans in September so far. 

Here are monthly detached stats for 92130:

Month # of Sales Avg. Sales Price Avg. $/sf Avg. DOM
$1,191,868 $351/sf
$799,750 $328/sf
$1,010,925 $343/sf
$1,035,074 $353/sf
$840,567 $324/sf
$1,032,654 $344/sf
$976,281 $345/sf
$981,823 $326/sf
$914,516 $315/sf

Pricing appears to be easing, which should continue – as should the demand.

10 Things Brokers Won’t Say

Reader Susie sent in an article from called “10 things your real estate broker won’t say”, which first appeared on as one of their regular ’10 things your ________ won’t say’ series.  Because the original only had seven comments, and’s has over 200, here is their link:

My comments on the noteworthy items on their list:

1.”Your open house is really just a networking party for me.”

There are many myths about open houses, mostly made up by realtors who don’t like to work weekends, or those who just kick their feet up on the couch and watch the ballgame – and then wonder why they never sell anything.

If you are thinking of selling your home, ask the agents you are interviewing about how they feel about open houses.  Their answer will tell you EVERYTHING about whether they are the realtor for you. 

This is the right answer:

Buyers are energized by the internet, and gravitate to the fresh new listings. When they see a hot one, they’ll jump in their car and drive by – you’d be smart to have an open house to make it easy and convenient for them to see the property when it is hot. 

When done right, OPEN HOUSES INSTILL URGENCY IN BUYERS.  When the market is hot, like it is now, the only reason a professional open house wouldn’t sell is because the price is wrong.  Get the price right, and use the open house as a tool to incite urgency. 

2. “My fees are negotiable.”

They say you should shop around, but let’s be clear. You should compare the services provided, and then measure whether the corresponding fee is worth it.  You can list your house for $100, so if you just want to save money, just call one of those guys.  But don’t expect that their service, and sales price, will be the same as mine.

9. “My Web site is a dead end.”

Excellent idea to check the agent’s website, particularly for relevant content.  But I disagree with this quote they included by a sales manager, “If a broker has to advertise properties that are already sold, it tells you that he doesn’t have enough inventory to keep his (roster of houses) full.” 

The sold listings help identify the agent’s track record, both in the area you are looking, and how they did price-wise.  Plus, if they have a lot of active (unsold) listings, they are a lousy agent.

10. “You can probably do this without me.”

Absolutely true, but not for everyone.  Whether buying or selling, if you think you can do it yourself, I encourage you to give it a try.


The article was another one of these sensationalist pieces, whose intent seemed to be to rile up the reader into thinking all agents are lying thieves.  Speaking of thieves, their article sure sounds a lot like the youtube on broker tricks, which you’ll probably see in the sidebar if you click on my youtube at the bottom. 

One of’s own authors wrote this article, a much more balanced summary of what to look for in a listing agent:

If you prefer youtube, here’s one of my first videos, on interviewing listing agents from 2006 (back when my hair really was brown):

(Almost 18,000 views – thank you!)

More $8,000 Tax Credit?

For those who want to take advantage of the $8,000 tax credit, time is running out – unless of course, it gets extended…….which doesn’t appear to be a slam dunk, because of that pesky little problem of having to pay for it too. 

Should the tax credit not get extended, don’t be surprised if the market loses some of its current luster, as frustrated buyers pack it in for the holidays.  Heck, just the bidding wars and tsunami threats have to be making buyers think about taking a break anyway.

From yesterday’s U-T:

An excerpt:

It now appears likely that there will be an $8,000 tax credit available a year from now — at least for some purchasers. Which raises the question: Why not leave it in place for all first-time buyers?

There’s growing support for that on both sides of the Capitol, but there are also some complicating issues. In the Senate, the most outspoken advocate for months has been a Republican, Sen. Johnny Isakson of Georgia, a former real estate broker. He wants not only to extend the credit to Dec. 1, 2010, but to raise the maximum to $15,000, and make it available to all home buyers next year.

But recently, key Senate Democrats produced their own version of an extension, limited to six months, retaining the ceiling at $8,000 and targeting only first-time purchasers. The bill’s primary sponsor is Sen. Benjamin Cardin, D-Md. Democratic co-sponsors include Majority Leader Harry Reid of Nevada and Debbie Stabenow of Michigan. Republicans John Ensign of Nevada and Isakson have signed on as well.

In a statement, Cardin raised what may prove to be the crucial issue affecting the scope and duration of any credit extension: Cost. “A six-month extension is a fiscally responsible way to provide adequate time to nudge even more prospective home buyers off the sidelines,” he said.

Estimates of the revenue costs of the current credit vary widely, from $3 billion to $8 billion and up. How do you pay for any extension without worsening the budget deficit?

The new Rangel bill includes the answer: You raise taxes somewhere else — you “pay as you go.” The Rangel bill pays for most of the servicemen’s credit extension by increasing IRS penalties on taxpayers who fail to file partnership or “S” corporation returns.

This would raise an estimated $327 million over the next 10 years. Where and how to raise taxes to cover the far larger cost of a six-month or 12-month extension of the current tax credit could prove much more controversial.

Less Boxer, More Common Sense

Hat tip to Rick for passing this along:

An excerpt:

By the end of this month, Senate Environment and Public Works Committee Chairwoman Barbara Boxer (D-Calif.) is expected to unveil new legislation along the lines of the Waxman-Markey bill, which passed the House on June 26.

That bill contains 397 new regulations. One of them would affect almost everyone who buys or sells a home. If Waxman-Markey becomes law, homes for sale that qualify as “federally related transactions” — which is almost all of them — would be required to undergo an environmental inspection.

Many politicians are upset about depressed housing prices. And true, environmental inspections are one way to raise them. But this is not the way to do it. Sen. Boxer should see to it that the Senate version of cap and trade leaves the environmental inspection provision out.

Inspections are not free. Nor is fixing the inevitable violations. Compliance with new energy-efficiency standards would make homes, especially older ones, more expensive. Selling one’s home would become even harder than it already is in this down market if Waxman-Markey-style cap and trade becomes law.

And that is just one of the unintended consequences.

Suppose you have a window that isn’t quite airtight or your appliances are a little too old. Maybe they’re not Energy Star certified. You’d have to replace them before you would be allowed to sell your home.

The result could be the end of fixer-upper homes; surely, this is not what Congress has in mind. Some families prefer to buy a home in less-than-stellar condition on the cheap and make repairs and upgrades themselves.

For people who don’t have a lot of money, or who enjoy working with their hands, or who want to customize their home, this can be a very fulfilling path to homeownership. Waxman-Markey would take that away.

If the sellers are required to make all these improvements pre-sale, buyers lose the opportunity to, say, choose what kind of appliances they can have, what kind of insulation to put in the attic or what kind of doors or windows they would like.

To sum up: Inspecting homes for sale for their environmental friendliness would raise home prices. Buying or selling a home would become an even more onerous process than it already is. And there’s an easy way to dodge the bullet: Rent instead of own. If enough people did that, the inspection requirement would fail to achieve its goal of making homes more energy efficient.


No Gem Giveaway Either

We’ve featured some of the architecturally-significant homes around the southland, here’s an article from the about how they are selling these days:,0,5878820,full.story

An excerpt:

A recent sampling of area listings shows scores of homes by architects with followings, including Schindlers priced from $595,000 to $3,995,000, Lautners from $1,495,000 to $5,895,000, and Neutras from $795,000 to $14,995,000. Wright’s La Miniatura is listed at $6,950,000 and the Ennis House at $15 million. Although not officially tracked, the inventory is higher than several years ago, said real estate agents who specialize in such houses.

“Usually there’s one, and then it’s gone,” Doe said. “Now there are options.”

Following the pattern of the overall market, which has been driven by foreclosure sales and first-time buyers, “the majority of buyers are looking for total bargains,” he said.

At the high end of the price range, some sellers are simply biding their time.

“For the most part, these homes are faring well because they have fallen into very strong hands,” Doe said. “People understand what they have and are not willing to slash the prices and give them away.”

the ending excerpt:

Maggie Navarro of Coldwell Banker, Pasadena, had the listing on the Greene & Greene-designed Spinks House, which was taken off the market in late summer.

“My seller got discouraged,” Navarro said. “We had great showings, people loved the house, and then they didn’t write an offer.”

The 1906 Pasadena house with six bedrooms and six bathrooms in more than 5,000 square feet was listed at $4,625,000.

“Those Greene & Greenes attract a real specific audience, and unfortunately most of the people who love them can’t afford them,” she said.

As for the dollar premium once associated with architectural homes, Linder doesn’t expect it to return in the current market and, in fact, thinks prices haven’t found the bottom yet.

“If you can afford to wait,” he said, “there probably will be better deals to be had.”

House Value = 15 x Ann. Rent

Hat tip to stephen for sending this over, from zero hedge – check the comments at this link too:

This is a vexing question for millions of Americans. There was a time when most people had a reasonably good idea of what they could sell a property for.  There were enough purchases and sales to create comps. Not any longer. Homes that have been foreclosed on come to the market at distressed prices. This is happening in every neighborhood across the country. When one property sells at a distressed price it influences all the properties around it.

So what is residential real estate worth today? The answer to that question is, “About 15 times the annual rent”.

RE professionals are going to write me and say that this simple calculation is wrong. They will say that the number is lower. Possibly as low as 12 times rent. They might be right. However in areas of the country that I watch the 15 times rent number is a pretty good indication of value.

Based on this calculation the following rent/price guidelines can be determined:















It is still difficult for a homeowner to make a reasonable estimate on what the rental value of a property will be. But I have found that most people have a better handle on this number than they do on what their home can be successfully marketed for.  There are regional considerations for rental values, by and large this formula works well for metro versus rural properties as a valuation tool.

This analysis creates a tremendous problem. There are very few homes for sale at 15 times rent. The only ones that come up for sale in that price range are those that are in foreclosure and are being sold by bank lenders. We know that there is demand for properties when those conditions are met. That has been proven in just about every area of the country.


Water’s Rising

Reader Jeff P. noted the MERS case that was outlined in detail at drhousingbubble yesterday:

The link has comments at the bottom that help define the case.  How it’ll affect the mortgage industry at-large has yet to be determined.

But a legal finding is another event that could set off a panic among lenders and/or servicers too.  I don’t think MERS is it by itself, but pile it on top of any more moratoriums or political directives, and you could see a renegade in the industry get fed up and push the sell button.

Barratt Auction

Barratt is making its way through the liqidation process, though this is only their office gear:

Hopefully we’ll be seeing their real estate make it to the surface before long.

Wonder what happened to the Lambos?

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