Desirable Yes, Immune No

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Submitted by Rich Toscano on March 31, 2008 - 9:51pm

For years, people claimed that because San Diego was such a desirable place to live, local real estate was immune to price declines. We know how that turned out. Yet these days that same argument is often applied to San Diego's more upscale areas.

It seems, at first blush, to hold up. High-end San Diego homes have certainly weathered the housing bust far better than their lower-priced counterparts. This can be seen in last week's Case-Shiller home price graphs, which show that the high end of the housing market has fallen in price less than half as much as the low end. And the Case-Shiller high tier -- which aggregates price movements of the most expensive one-third of San Diego homes -- understates some notable resilience in swankier sub-markets such as Point Loma, Mission Hills, La Jolla, and much of the North County Coastal region.

The relative strength in these areas has led to the widespread conclusion that the high-end markets are desirable enough to be more or less invulnerable to the housing bust.

I am skeptical of this interpretation.


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Submitted by SD Realtor on April 4, 2008 - 10:32pm.

sdbanker I understand. While I am not on the inside of anything, I do spend ALOT of time reviewing what is publicly available and have not ever seen any of the sorts of transactions you speak of. While it doesn't mean it doesn't or hasn't happened I tend to think it is unlikely or possibly not possible for most people. I know that large portfolio purchases can and do realize severe discounts on bundles of foreclosures but we are talking 50 or more homes at once, not single buys.

Anyways, perhaps I am wrong but surely you can understand where I am coming from. People here tend to get all lathered up over certain types of posts. I can post about the actual real events of pricing in Carmel Valley and not many are happy about it. Yet if someone posts about a backdoor deal or something of that nature and the whole board goes crazy, you know what I am saying?

SD Realtor

Submitted by Mr. Drysdale on April 4, 2008 - 11:16pm.

I understand SD Realtor. Given the number of housing bubble blogs, someone will eventually find and disclose the sales I alluded to. I'm just not willing to be a party to, or assist in, that disclosure. There is so much more to all of this, but given some people's reactions to anything less that full disclosure, it's not worth saying anything at all.

It's ironic how some people will still insist on absolute proof of something, despite a mountain of circumstantial evidence to support it already.

Submitted by SD Realtor on April 5, 2008 - 9:35am.

Right, I guess I am one of those people who does demand absolute proof. As an engineer I tend to be that way. Also as you are being quite careful regarding disclosure so as not to open up yourself to legal liability, it is paradoxical to me that a builder would take such risk with both the underwriter of the project and the buyers lender by performing the manner of which you alluded to. Similarly they would be also defrauding any appraisers who perform appraisals by not disclosing these post transaction rebates. There is also the issue of the preferred lender they work with. Can you see my point of view? There are a hell of alot of irons in the fire.

As for the foreclosure sales at 50% the list price again, those transactions are of public record of which I look over alot. I generally find exceptionally low sales and look at the tax records and compare them to the list price. I simply haven't come across any 50% reductions from list price. I guess they have to be there per your post but yes it is all circumstantial to me unless I find hard evidence to support it.

SD Realtor

Submitted by NotCranky on April 5, 2008 - 6:32pm.

"It's ironic how some people will still insist on absolute proof of something, despite a mountain of circumstantial evidence to support it already."

Hi Sdbanker. Would you be so kind as to point out the mountain of circumstantial evidence that supports 50% off, arms length, REO sales. I think you were talking about decent detached homes? I agree some stuff(mostly condos) is selling at 50% off peak but that is different? I see the occasional dogs which will likely require a nearly 100% down financing, ripe for a 25% low ball and nothing better than that. So how are people slipping in 50% off deals?No names or addresses needed just a reasonable explanation to go with the mountain or circumstantial evidence.I think we can then find proof. If you don't come up with something better than you have, your point remains questionable,as does motive for saying it as far as I am concerned.Sorry if tone comes across wrong. It is hard to be skeptical and cheery at the same time.

Submitted by Mr. Drysdale on April 5, 2008 - 6:49pm.


Submitted by NotCranky on April 5, 2008 - 7:46pm.

No point in trying to discuss this.
Good luck

Submitted by Ex-SD on April 6, 2008 - 5:00pm.

I absolutely believe you. The homebuilding and real estate business' are both overrun with a lot of crooks and IMHO, there is no reason NOT to believe you since you have access to confidential information where some very good lawyers have probably hidden these transactions under layers of obfuscation.

Submitted by Ace23NY on April 7, 2008 - 3:28pm.

sdbanker1, interesting info. And in response to the question of why any builder would risk legal action to offer these "rebates," I think we should look at the motivation. Builders began out-of-control development during the bubble years with the promise of almost guaranteed seven figure profit. But when all of that came crashing to reality, every hope of that ridiculous payday evaporated. So is it truly difficult to imiagine why anyone would engage in any "questionable" practices to increase the amount of said payday? I don't think so. We've seen crooks go to jail before to save a few hundred thousand dollars (or millions, depending on the case....think Enron).

And great point Ex-SD. We've seen countless crooks and thieves come out of the woodwork over the past year or so. Shady lending practices, "liar loans," false information, etc. I don't think its hard to believe the rebate theory at all. As a matter of fact, I think it is something that is probably happening. We (the potential buying public) have been led astray by the realtors and speculators (not ALL realtors, of course). So I don't think we are in any position to trust the profession for the time being.

Now with that being said, I absolutely understand that the actions of some realtors does not and should not reflect the actions of the entire profession. But just like lawyers and accountants get a bad reputation after scnadals, so too do the realtors. I feel bad for the honest people out there that are clouded by the greed, scandal, and overall mess that has taken place.

Submitted by Mr. Drysdale on April 7, 2008 - 11:48pm.

Hi Ace23NY.

Here's why many of these new home builder's are offering "extreme" discounts.

New home builders generally have construction financing in place when they are selling units in their developments, and this type of financing has a very short fuse. Builders generally can't get permanent financing on what's referred to as "builder inventory". That's generally something only an individual home buyer can get. When markets go soft, the lenders on these kinds of loans (i.e., construction) either stop extending them or in lieu of foreclosing, start requiring accelerated pay downs of principal on the loan. Builders who offer the kind of extreme discounts I previously mentioned are generally those who are already on the verge of default/foreclosure anyway, so offering an under the table discount is nothing compared to losing an entire project to foreclosure. Moreover, this allows them to create the perception of activity, move some units, and lessen their liability on the construction loan.

People who think they understand what is happening in the mortgage banking industry have no idea what is actually happening, or will happen, including many in the industry whose positions are too specialized for them to see the big picture.

For example, we've all seen the large profits banks and mortgage companies have posted in recent years prior to the last two years, right? Well guess what, most of it was never actually received and here's why. It's because of something called accrual accounting. Accrual accounting allows banks and mortgage companies to immediately recognize as income, the interest on neg-am and option ARMS that was being deferred till a future date. With the market now in freefall, not only will much of that interest income never be received by lenders, neither will a good chunk of the principal (if the property ultimately becomes a short sale or foreclosure). Furthermore, if it becomes REO, the lender will have the additional cost burden of having to set aside loan loss reserves as well.

That's why you are going to see restated financial statements every quarter for possibly another two years from banks and mortgage companies with loan portfolios disproportionately weighted with neg-am and option ARM loans. This will have an enormous impact on bank solvency, market psychology, and consumer sentiment.

Submitted by FormerSanDiegan on April 8, 2008 - 11:47am.

Yes, I confess I do not understand legal matters that well. I have perhaps been overeducated in laws of physics and electricity and magnetism so much so that it skews my ability to make logical sense out of our legal system. As an uneducated (well, maybe not completely) idiot jackass I am often confused by the law. I need someone to explain to me the following: (please use drawings or pictographs in crayon)

1. Is it legal to rebate 25% of a purchase back to a buyer outside of escrow ?

If this is legal ...
Is the information available to appraisers from public records or title companies in making comps ?

If this is not legal ...
If I sign a confidentiality agreement that requires me to keep the transaction information secret and that information indicates that fraud or another crime has been committed am I obligated to report or not report those facts to law enforcement ?

Submitted by JWM in SD on April 8, 2008 - 1:19pm.


Do you think the deferred amortization and credit loss write downs are why the FDIC is expecting 150 bank failures in the next year or two? They are hiring a lot peoople to deal with according to a recent announcement.

Personally, I think that announcement was huge but largely ignored by the MSM. It is about as close to admission of a major credit contraction that J6P can actually relate as we can get. Yet no one paid attention to including here when it was a brief thread.

I just don't some people get it.

Submitted by Mr. Drysdale on April 8, 2008 - 2:00pm.

Hi FormerSanDiegan. There is nothing illegal that I'm aware of in requiring that someone sign a confidentiality agreement associated with the sale of real estate or giving them a huge discount, but here's the part that is very illegal that I may not have made clear, which is the impetus for structuring these sales this way.

The following is an example:

A builder who has 1 million dollar homes for sale (based on the going market price from two years ago) has a dozen or so left to sell in this dead market and because of the construction loan(s) looming over them, they need to move inventory quick. The builder offers a buyer a $1 million dollar home with $250,000 back post closing subject to the previously mentioned confidentiality agreement because the builder (1) doesn't want to invite lawsuits from earlier buyers in the project who might learn of it, and (2) because they still need to sell other homes in the project at the inflated price, at what they hope will be without discount. The buyer with purchase contract in hand for $1 million goes to a bank and gets a 90% LTV loan for $900,000. The deal closes and the buyer gets $250,000 back from the builder. He/She only put up $100,000 for the down payment with the bank and now gets $250,000 back, not bad. The lender is now on the hook for $900,000 on a home that is actually worth $150,000 less than the outstanding loan. This is absolute fraud and has happened! I would never be a party to this kind of lending, but there are some bankers/mortgage lenders who have been.

If/When the builder goes bankrupt, the buyer can risk violating the confidentiality agreement and also risk the consequences of full disclosure about the rebate when they attempt to have their real estate taxes lowered based on the "real" transfer value on that home. However, I'm not sure the tax assessor will buy it, and may even report it.

To JMW, my answer to your question is a resounding YES

Submitted by LarryTheRenter on April 9, 2008 - 1:15pm.

Please name the builder in CV who has rebated 25% of the sales price....That would interest me, but I doubt that that happened and think it is very shaddy...It certainly isnt Pardee at Derby Hill...

Submitted by NotCranky on April 9, 2008 - 3:44pm.

Submitted by sandiegobanker1 on March 10, 2008 - 5:26am.
Actually, the buying opportunities are here. I've seen buyers offer Countrywide and others with huge REO portfolios 25% of the REO asking price and getting countered at 40% to 50%. The REO asking price is well below the prior market price. The counters were $200,000 even on 3-BR, 2-BA SFRs with yards. These are not townhomes. You have to bid 20% to 30% of the asking price and no more. The opportunities are with those with large REO portfolios. Ignore homeseller listings. If they have to sell, they will eventually they will become REO because the current REO comps will not support the prices they need just to cover their mortgage.

This is the claim I was referring to/asking about. I don't know anything about the other controversial claim. This one seems very easy to discuss in light of circumstantial evidence and how easy it would be to verify. Forget the rebate this is a better deal.

Submitted by SD Realtor on April 9, 2008 - 11:24pm.

I have already asked about this claim but sandiegobanker already said he could not comment on these transactions due to confidentiality.

SD Realtor

Submitted by NotCranky on April 9, 2008 - 11:51pm.

I had asked about it before too and asked again up a few posts . I thought a re-posting might help people understand where we are coming from with this skepticism is coming from(in case they didn't).

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