Arizona Real Estate Notebook

I’ve railed against liar’s loans here.

Now a professional writer at Slate explains liar’s loans and the mortgage meltdown better than I ever could.

The term is mortgage-industry slang for what’s more formally called a “stated income” mortgage—a mortgage that a lender gives without checking tax returns, employment history, or pretty much anything else. Many of the loans that are in trouble now, or will be in trouble soon, fall into this category.

In 2006 in some parts of the country, these loans made up as much as half of new mortgages, for both subprime borrowers and for homebuyers with high credit scores.

The organization had compared a sample of 100 stated income mortgage applications to IRS records.

More than 90 of the applications overstated the borrower’s income at least a little. More strikingly, more than three out of five overstated it by at least 50 percent.

Wow!

Shedlock analyzed one particular bundle of loans from Washington Mutual consisting of 1,765 mortgages from around May 2007, a total of $519 million in loans.

These were not “subprime” loans. The borrowers’ average credit score was 705, well within prime territory. This is a fairly typical package of loans for a mortgage-backed security, but one thing that does make it stand out is the proportion of these loans that didn’t ask for income documents: 88 percent.

* Eighteen percent of the loans are already in foreclosure—or have already been seized by Washington Mutual.

* One in four of this bundle of liar loans is already 60 days past due.

Remember, these are folks with good credit histories—and one in four of them is well on his way to losing his home, or has already lost it.

None of this could have happened without everyone’s willing participation.

Keep in mind that in some places (for instance, San Diego), half the people in the market were taking out stated income loans and so bidding up prices to points where almost any house became impossible to finance for someone who did not lie.

All emphasis added was mine.

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From the Wall Street Journal;

“Yale University economist Robert Shiller, pioneer of Standard & Poor’s/Case-Shiller home-price index, said there’s a good chance housing prices will fall further than the 30% drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15% since their peak in 2006, he said.”

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From a nice little bit about doom sayers (and cars).

Stanford economist Paul Ehrlichs 1968 book “The Population Bomb,” which opined that, “The battle to feed humanity is over. In the 1970s…hundreds of millions of people including Americans are going to starve to death.”

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I was in HomeSmart’s office in Mesa last week with a couple of clients from Canada after a day of home shopping. We were back in the conference room looking at the MLS on the huge flat screen monitor on the wall, checking out the comps to their favorite homes.

Their favorite home had five excellent and recent comparable solds. Three were priced very closely together on a cost per square foot basis. One home, however, was low priced and another was very high priced.

My clients were very curious about the very high priced home so we started looking at the differences between the homes. Nothing jumped out at me. Then it hit me and I said, “I think I got it.”

I checked and sure enough it turned out the same real estate agent represented both the buyer and the seller. I find that explains a lot of over-priced sales.

I imagine the unrepresented buyer walked into an open house, loved the home and wanted to make an offer. The seller’s agent may have even offered the buyer some money from his commission if she used him as her agent too.

The seller’s agent - who was now also the buyer’s agent - could not tell the poor buyer that the place was way over-priced because that would have betrayed his responsibility to the seller.

If that buyer had her own agent, I’m sure her agent would have been able to advise her on pricing and she could have paid $10,000’s less.

To this day, the buyer may still think she made a few thousand dollars and was very clever to use the seller’s agent to represent her. In fact, I believe she lost tens of thousands of dollars by using an agent that could not advise her on pricing.

TIP: When you see an home where you can’t explain a high sales price, check and see if the same agent represented both the buyer and the seller.

TIP: Most buyers should use their own real estate agent and not the seller’s real estate agent.

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What surprised me most about this chart of home prices in several countries was that the United States experience was far from the worst.

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John Burns an economic consultant to home builders produced a neat little video on housing cycles. He is talking to home builders but much of what he says applies to resale homes.

His intro is pretty honest for a consultant to homebuilders.

Over the next few years record numbers of home builders, land developers and homeowners will file for bankruptcy or lose their assets to the bank.

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I did a CMA for a gentleman in Paradise Park Trails this morning and found the real estate market there strengthening.

Paradise Park Trails, McCormick Ranch, Scottsdale Arizona;

• Homes sold in the last 3 months = 2
• Homes currently under contract to buyers = 6
• Homes currently listed = 14

You can see a burst of recent sales (currently under contract) because we are in the high season for home sales.

If all of those 6 homes currently under contract sold, we would be looking at a normal supply, more of less, of homes for sale in Paradise Park Trails in McCormick Ranch.

Normal is good.

[Originally posted on McCormick Ranch Agent blog.]

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Phoenix homes have depreciated 21% from their peak value in June 2006 according to my analysis of the Case-Shiller data.

Since the August 2007 mortgage meltdown, prices have fallen about 15%.

The home price depreciation in Phoenix continues to accelerate according to the latest Case-Shiller numbers. From December to January the Phoenix Home Price Index fell 4.2%… that’s in 1 month!

It’s looking more and more likely to me that home prices in metro Phoenix as a whole will “bottom out” in 2008. Clearly, we’ll start to see the decline begin to decelerate in February or March.

Put together a down payment and keep your powder dry.

As always, the Case-Shiller index obscures the large differences within metro Phoenix sub-markets.

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Gilbert Realtor Jay Thompson has a post about some nifty little U.S. housing market graphics at the Wall Street Journal.

This is a don’t-miss for real estate geeks.

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What took so long?

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Home lenders are losing bazillions of dollars. I wonder how they can lose so much money and still stay in business. Apparently, the Fed is concerned too.

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Jon Lansner of the Orange County Register interviewed USC real estate finance professor Tracey Seslen on where we are in the housing cycle.

Us: So how does this up/down cycle compare, nationally and locally, to previous real estate cycles?

Tracey: In the past, housing downturns have often accompanied a more general recessionary environment. In this particular instance, the housing downturn can be pinned to very specific events, and may be a major cause of recession, rather than the other way around.

Thank goodness their wasn’t a recession in 2006! Can you imagine what would have happened to Arizona real estate prices if the economy tanked in 2006?

Us: Any guess to when we might hit a bottom, nationally or locally?

Tracey: My guess is similar to others’ — mid-2009, or possibly earlier.

Okay, I was guessing, as were many, that late 2008 or early 2009 would be the bottom for metro Phoenix as a whole. Maybe late 2008 to mid-2009 would be a better guess.

I think that the change in the conforming loan limits could be the most influential aspect of the Bush stimulus package on account of the fact that it actually provides real (as in non-illusory) liquidity to families in places that need it most — traditional high-home-price states of California, New York, and other parts of the east coast.

It’s nice to hear some positive news!

Us: How do real estate cycles compare to other assets? There’s been talk that home prices are often “sticky” on the way down, but you couldn’t tell that this time!

Tracey: … One of the reasons we’ve seen transaction volumes hit record lows isn’t just because people don’t want to buy or can’t get the loan they need – it’s because sellers aren’t willing to sell their properties for what buyers are willing or able to pay.

Interesting point.

I think sellers are usually wrong when they decide not to sell because they want to, “See if the market turns around next _____.”

Real estate price trends don’t usually change quickly. Home prices are a train that takes years to change direction. Think about the size of the run up in prices and then think about the number of years it may take to correct it.

If you are a home seller and you hear yourself saying, “I’m just going to wait out the market” then you will probably end up selling for less money later. You are betting against the current tide.

Us: How do “external” factors, like credit crunches or Fed cuts, factor within real estate cycles?

Tracey: … Fed rate cuts will eventually filter down to Treasury rates and other rates to which loans are indexed, and potentially provide cheaper safe (i.e. 30-year fixed) loans to those looking to buy now. The higher conforming loan limits will make for cheaper borrowing as well. If the cost of funds decreases, more people on the fence about purchasing will take the plunge and get into the market for a home sooner.

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I just finished updating the zip code notebooks with data for January 2008. January was generally weak as it is every year.

Select your zip code from the list in the right-hand column or click here to see the list of zip code real estate notebooks.

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Now isn’t this interesting.

The daughter of Vice Chairman and co-founder Bruce Toll informed the company last month that she and her husband “did not intend to make settlement” on a $2.47 million home they had previously agreed to purchase… Toll Brothers went on to say that it intends to pursue its rights

Blood is thicker than water… but not money.

Hat tip Seeking Alpha.

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When it rains it pours!

Too bad Phoenix isn’t one of the cities where Beazer will stop building.

Beazer said the company will exit home-building operations in Charlotte, N.C., Cincinnati/Dayton and Columbus, Ohio, Columbia, S.C., and Lexington, Ky.

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