Last night was the third annual panel discussion of real estate at UCSD, put on by the Financial Executives Networking Group of San Diego. About 60 people attended.
The panel consisted of Bruce Norris, Alan Nevin, Gary London, and a certain part-time blogger.
Here are some of the thoughts:
Gary London, The London Group Realty Advisors, consults with developers of residential and commercial real estate. Two weeks ago the San Diego Business Journal featured his article on the commercial market: http://www.sdbj.com/article.asp?aID=142541&link=perm
He noted that the recent ‘Pending Home Sales Index’ that was up 32% was “not meaningful” because last year’s numbers were so anemic. He agreed that the number of transactions are what counts when surveying the market. Until we get back to ‘normal levels’ of sales, we really won’t know where we are at.
He mentioned that there is hardly any new homes being built, and when demand returns there won’t be any new-home inventory because it takes a while for builders to identify properties, prepare them for construction, and to build the houses.
Alan Nevin and Market Pointe Realty Advisors, has been consulting with real estate developers for three decades.
He mentioned that “we don’t learn” from our mistakes, and that California is a cyclical state. Traditionally there have been around 10,000 houses per year built in SD County, but this year there will only be about 2,000, and almost all of them north of the I-8 freeway.
Bruce Norris, The Norris Group, had a seven-page handout. He noted that he has purchased about 50 homes to flip this year, primarily in Riverside County.
He had a list of 30 homes that had $10,141,900 in loans against them, that he purchased at the trustee sales for a total of $2,921,717 – many in disrepair or stripped. He has had trouble with appraisals when re-selling, and has kept some as rentals, rather than lower the price when a buyer is willing to pay $125,000 but the review appraisal comes in at $85,000.
The most powerful data of the evening was his chart that showed that there were projections of 549,383 foreclosures to happen in California by now, but only 238,054 have happened. The shortage of 306,329 is what is haunting the market – when will the shadow inventory hit the open market?
He suggested four solutions:
1. FHA 203k rehab loans be expanded.
2. Change the Fannie/Freddie loan limit for investors from a max of 10 mortgages, to unlimited. If they qualify, why should they be denied?
3. He supported zero-down financing for qualified owner-occupiers, and allow those loans to be assumed by the next buyer without qualifying.
4. Get rid of the 90-day FHA flip rule.
He’s convinced that the primary reason that the foreclosures are dragging is because banks don’t want them back. Currently the average bank loss in California is around $250,000 per foreclosure.
We talked about trustee sales later, and he mentioned Ward Hanigan, and how beneficial Ward’s trainings are: http://www.foreclosureforum.com/
Yours truly mentioned that I thought next year will be exciting, with many more buyers getting in the game, but not much more inventory for them to consider – could be the Big Stalemate. I also said that I thought buyers will tolerate a mortgage rate under 7%, but higher than that would bring trouble.
As long as the banks stick with the ‘drip system’ for liquidating the REOs, they’ll have us right where they want us – and that this could take 10 years to resolve.
Those are some really interesting extend and pretend solutions
1. FHA 203k rehab loans be expanded.
Fine. I have no problem with this one.
2. Change the Fannie/Freddie loan limit for investors from a max of 10 mortgages, to unlimited. If they qualify, why should they be denied?
The appraised value should be under the income method for the 11th and higher mortgages though, such that if the investor is wrong about the resale value, the bank isn’t just making future foreclosures.
3. He supported zero-down financing for qualified owner-occupiers, and allow those loans to be assumed by the next buyer without qualifying.
Bring back 0% down now, and create liar loans starting 9 months from now? What a terrible idea. Liar loans should not be a part of any “solution”.
4. Get rid of the 90-day FHA flip rule.
This might be okay. Certainly a way to get the homes off the bank’s hands and into investor hands. But I’m not sure I want more FHA buyers in the pool of potential knifecatchers in a market where by adding more liquidity you’re also adding potentially high volatility….
I didn’t know Fannie & Freddie loaned to investors? HOw are the terms different from regular homeowners?
They always have loaned to investors, but have the cap of 10 financed properties only. Guys like Bruce could rehab more dumps if there was more financing available.
Rates are slightly higher.
“Change the Fannie/Freddie loan limit for investors from a max of 10 mortgages, to unlimited. If they qualify, why should they be denied?”
Ok, but once designated as investor, loans should be FULL recourse,secured by ALL investor’s assets and the debt should NEVER be discharged- you know, sorta like student loans. As a taxpayer I am tired of getting stiffed- if those houses go up, investors keep $$, go down, stiff bank/taxpayer? No more of this!
“Yours truly mentioned that I thought next year will be exciting, with many more buyers getting in the game, but not much more inventory for them to consider – could be the Big Stalemate. ”
Why do you think more buyers will be entering the game?
Also:
low inventory + more buyers ? Stalemate
low inventory + more buyers = More bidding wars
No?
Foreclosures are the solution, not the problem.
How about we force the banks to foreclose instead of moratoriums on foreclosures?
How ’bout that for a solution to the high cost of housing?
Interesting thoughts.
A zero down loan is nothing more than a lease with the option to sell for a gain if the place appreciates. It basically puts the housing market back into speculation mode and drags out this boom bust cycle for years and years. I would argue that the tax credit + FHA financing is already practically zero down financing so unless you lower standards even lower than FHA you don’t get any benefit from zero down financing (the people that can qualify for zero down financing can already get it, their inventory choices are limited because of FHA rules).
I think we need to realize this is going to be a long drawn out process. With the government intervention we helped avoid rock bottom prices and getting this over quickly, but now we’re probably going to have a generation of new home owners that are trapped in their houses. They won’t be able to count on significant appreciation to cover selling costs and you know the state going to come for more property taxes as they get deeper in the hole.
What’s the point of owning now, so you can transfer tax dollars from federal income taxes to state property taxes. So you can pay more than renting. I guess the biggest argument to purchase would be the inflation scenario but I’ll wait until people are actually getting jobs and wage increases before I worry about that.
As long as the banks stick with the ‘drip system’ for liquidating the REOs, they’ll have us right where they want us – and that this could take 10 years to resolve.
Yep – sadly that means 10 more years from doomsters predicting a TSUNAMI which will never materialize.
Re: Bruce’s suggestions.
Why don’t we just go back to giving a $700k loan to anyone who can fog a mirror? That worked out so well last time…..
San Diego is real estate crazy. $700K is not the new $400K home unless salaries support it.
1. FHA 203k rehab loans be expanded.
* Why not use regular loans? Oh that’s right banks aren’t like the government and expect to payed back and won’t lend on stupid terms.
2. Change the Fannie/Freddie loan limit for investors from a max of 10 mortgages, to unlimited. If they qualify, why should they be denied?
* Why not use regular loans? Oh that’s right banks aren’t like the government and expect to payed back and won’t lend on stupid terms.
3. He supported zero-down financing for qualified owner-occupiers, and allow those loans to be assumed by the next buyer without qualifying.
* Isn’t this what go us in trouble before. Only this time you want government $$$ to finance risky loans?
4. Get rid of the 90-day FHA flip rule.
* Why not use regular loans? Oh that’s right banks aren’t like the government and expect to payed back and won’t lend on stupid terms.
FHA Frannie and Freddie need to be eliminated.
And btw go back to Russia comrade Bruce Norris. You’re big government fixes are garbage.
Totally off topic, but does anyone know how long homeowners are allowed to stay in their house once it goes back to the beneficiary. I thought Pres. Obama had signed something that gave them 90 days, but haven’t really kept up with it. Anyone know? (for the state of California)
Maybe they can drag this out ten years but these loans back some form of investment — likely some pension fund somewhere. If enough of these supposed to be but not yet foreclosed homes are paying zero, the owners of these mortgages will sooner or later not be able to pay those whose money they invested to buy these mortgages. That will be when the holders of these loans will no longer be able to hold off foreclosing and pretending the value of their investments is unimpaired (per the change of accounting laws whcih now allows them to do this). Which will last longer?
And insn’t it iteresting that BofA suddenly pays back Tarp right after Treasury suggests that it could penalize banks for not modifying enough loans…..Once TARP is paid back, the government won’t have much leverage….
I had no idea investors (speculators) could line their pockets using these programs–I thought they had to pay cash or borrow from a commercial bank.
Thanks Jim, I’m writing my Congresswoman tonight to demand they stop lending to investors.
…nice for showing Norris’s “cure” to be his own self-interest.
Mike S.
Why do we listen to these shills anymore? Didn’t we learn our lesson?
Those of you who are leaning on the snark button, or have your negativity blinders on, should re-consider.
Bruce’s four solutions are great ideas.
1. If there is more money available for people to buy fixers and rehab them, isn’t that good for the neighborhood and society? It is, and somebody has to step up and buy, unless you don’t mind fixers sitting around unsold in your area.
2. The Fannie/Freddie loans for investors have always been around – they require more equity and a slightly higher rate. You must qualify to get one, 10, or unlimited. Investors who flip or hold for rentals are both helping clear the market, and helping society at large.
3. Zero-down financing isn’t much different than 3.5% down, and at least it’s truthful. With all the credits and gifts available, we’re just kidding ourselves to think there would be a difference. And don’t compare to last time, all buyers have to qualify for the loan now.
4. Who does the 90-day flip rule help? We’ve already had a buyer who was told they were approved for 90% financing, then get turned down by PMI who now wants 85% LTV. But we couldn’t change to FHA because of the no-flip rule, and they lost out on a house they really wanted.
Bruce and I and virtually everyone I know wants foreclosures to be the answer to clear the market and move on. But have you noticed???? The powers that be don’t agree.
Let’s work with what we’ve got, and try to make the best of it.
I think we’re all pretty much in the camp that 3.5% is almost as ridiculous as 0%; the minimum should be 10% with the stiffest qualifications & PMI, 20% for standard.
Assumable with no qualifying? NWIH.
Otherwise the rest of his suggestions make sense.
Hey Jim, you beat me to it. I was going to say the same thing. The snarkers out there could really learn something by taking a course from Bruce Norris as he has a great deal of knowledge about real estate, listens and considers all points of view, and is always willing to share. I also agree with him that investors are a big part of the solution. One way or another, this market needs to transfer real estate from the weak hands to the strong hands. Once that happens, a true recovery will be at hand.
He will be speaking next week at the monthly SDCIA meeting, and that is one event I try to attend every year.
Zero-down financing isn’t much different than 3.5% down, and at least it’s truthful. With all the credits and gifts available, we’re just kidding ourselves to think there would be a difference. And don’t compare to last time, all buyers have to qualify for the loan now.
I disagree with this point. People need to have some skin in the game from day one.
I know that when I bought my first house FHA after years of being a grad student and postdoc on measly wages, that 5% (then) on a $152,000 purchase seemed like a very big chunk of change to me. For a $300K purchase, we’re talking about the difference between ten grand and nothing. That’s a lot for a household with an income of, say, $70K.
Another way to look at is that if you can’t save up 3.5% of your purchase price, then what the hell kind of risk are you, really? The qualifying doesn’t necessarily capture that.
I assume the idea behind the proposed actions is that the banks would let go if they saw higher prices. The proposed actions would create more demand, and that would lead to higher prices. Is that it?
I always look forward to learning. By gosh professional investors are critical to fixing the mess created by amateur investors. Their source of funding should be commercial though for their own long term interests, and those of consumers.
Jim, I humbly submit “gaming the government” is how we got into this housing debacle. It is inefficient for government to displace commercial enterprises in this area. I haven’t heard a realtor argue yet the government should sell properties on-line without involving for-profit realtors.
Further perverting the market has longer term consequences. The foreclosure clearing problem is the consequence of government intrusion into residential lending. Once the Feds had so much skin in the game, the opportunity, if not obligation, existed to dictate conditions according to politics instead of economics.
I would think realtors and investors would be unanimous in wanting a reduced government’s role akin to goverment’s traditional function of contract enforcement. That’s when the market can efficiently clear. Look not further than Wall St repaying TARP so quickly to reduce government involvement in their business.
So yes, I get snarfy about the Norris’s cognitive dissonance in wanting the foreclosure market to clear while advocating greater government involvement in an already perverted market.
Mike S.
3. Zero-down financing isn’t much different than 3.5% down, and at least it’s truthful. With all the credits and gifts available, we’re just kidding ourselves to think there would be a difference. And don’t compare to last time, all buyers have to qualify for the loan now.
I agree here, but that’s part of the problems. The HUD is also talking about increasing the skin in the game for FHA loans not decreasing it at this point. Hat Tip to CR. One of the problems with the FHA right now is that their reserves are below the minimum mandated amount. If this continues they will either need a huge infusion of cash from the taxpayers or change their loan origination methods.
http://www.calculatedriskblog.com/2009/12/huds-donovan-next-steps-for-fha.html
1. If there is more money available for people to buy fixers and rehab them, isn’t that good for the neighborhood and society? It is, and somebody has to step up and buy, unless you don’t mind fixers sitting around unsold in your area.
No. Fixers won’t sit around unsold if prices were allowed to correct to affordable levels. Besides, I’d rather see owner-occupied homes purchased for a much lower amount so that the owners could fix them up to their own liking. The FHA should provide rehab loans, but only on primary residences. Buying for $100K at the courthouse steps, putting in $20K of cosmetic “upgrades” then selling for $250K does not improve the neighborhood, nor does it put the ultimate owner in a better position.
2. The Fannie/Freddie loans for investors have always been around – they require more equity and a slightly higher rate. You must qualify to get one, 10, or unlimited. Investors who flip or hold for rentals are both helping clear the market, and helping society at large.
Not sure how specuvestors pumping up the market is helping society at large. We need to get away from the notion that high housing prices are a good thing. It would be far better for society if housing were viewed as shelter for families, and that low prices are better because this would give owners more income to allocate toward savings and other, more productive parts of the economy.
3. Zero-down financing isn’t much different than 3.5% down, and at least it’s truthful. With all the credits and gifts available, we’re just kidding ourselves to think there would be a difference. And don’t compare to last time, all buyers have to qualify for the loan now.
Whether it’s zero-down or 3.5% down, there is not enough of a buffer to protect the owner and lender. They are upside-down from day one, especially when you consider transaction costs.
4. Who does the 90-day flip rule help? We’ve already had a buyer who was told they were approved for 90% financing, then get turned down by PMI who now wants 85% LTV. But we couldn’t change to FHA because of the no-flip rule, and they lost out on a house they really wanted.
The 90-day flip rule helps borrowers and TAXPAYERS who will have to cover the losses created by all these speculative games.
Bruce and I and virtually everyone I know wants foreclosures to be the answer to clear the market and move on. But have you noticed???? The powers that be don’t agree.
Let’s work with what we’ve got, and try to make the best of it.
I’d rather we try to fix the system, and create a transparent market where families are given a priority over speculators. If specuvestors want to play, let them do so on their own dime. The FHA and Fannie/Freddie are supposed to exist for the benefit of real families who are trying to buy a home (and I would still prefer they didn’t exist at all). They are not there to provide taxpayer-backed loans for flippers.
Jim,
mine weren’t snark they were thoughtful critiques.
The FHA is going in the opposite direction on the 0% down aspect, and fully assumable loans went the way of the dinosaur in what 1988? So I don’t see them bringing that back either.
As far as instilling a higher appraisal standard for investor mortgages backed by Fannie and Freddie once they’ve exceeded the 10 house limit, I see nothing stopping them from implementing higher standards in exchange for easing the concentration of risk liability. That seems pretty reasonable to me.
The 90-day FHA rule probably isn’t helping anyone at the moment, but it’s not clear to me which direction easing it will take the market. I’m guessing down faster, so I guess that’s a good thing…. (more flippers = more transactions = faster price discovery)
I have to agree with CA Renter on this one. I don’t really see how Bruce’s suggestions get to weak hands to strong hands. All of his suggestions basically put the new buyers back into the same place as the buyers of the 2005-2006. 0 zero, no skin in the game and a willingness to walk away if they don’t get the appreciation they are looking for. We say, oh but they have to qualify, but the qualifications are barely over subprime, and just because these people have good credit doesn’t mean they won’t walk if their home falls 10%, especially if all they have to lose is their credit.
I would argue that selling to 0/3.5% down folks is actually *destabilizing*.
not only because, as livingincali says, they will walk when/if the market drops…
but if they can’t save a dp, and heloc money is gone, what are they going to do when they need a roof/furnace/etc?
0%down just encourages renter mentality house occupiers.
(not to diss renters, I actually take better care of my rented house than nearby “owners”)
Families should not be given priority over investors, investors should not be given priority over families–The property should be sold to whomever has the best offer-period–it should be an open marketplace
Families should not be given priority over investors, investors should not be given priority over families–The property should be sold to whomever has the best offer-period–it should be an open marketplace
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I’m referring to the govt-backed loans and programs. Even though I dislike govt-sponsored market interference; if we’re going to have the govt involved in housing finance/stimulus, it should only be available for owner-occupants.
Housing is a basic need. Let the specuvestors fend for themselves. Why is it that so many people fail to understand why we’ve had a “foreclosure crisis”?