UT: Foreclosure trend rising as hopes fall

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Submitted by Drew on August 5, 2007 - 10:03am

"San Diego County's highflying housing boom is over..."

Pretty strong opening statement for UT.

My favorite comment from the article from a guy that purchased a forclosure property for $470k in Fallbrook:

"Foreclosures are great,” he added. “For people willing to put in sweat equity, this is a good deal. So far I've spent $30,000, I'll spend another $50,000, and it will be worth $850,000 when I'm done."

I think someone has been watching too many re-runs of Flip This House...

Rest of the article:

http://www.signonsandiego.com/news/metro...

Submitted by Bugs on August 5, 2007 - 11:22am.

The Fallbrook property is in the MLS. According to the listing it was listed in 12/2006 at $654,900 and later reduced to $474,900. It took 134 days exposure before it did sell. I'd call the final sales price well tested in the market. It's not like there was a line of buyers for it at $475k.

The photos in the MLS listing and the description from the article depict a home of very average quality and below average condition. On the plat map the lot looks almost square and it may have a little topography, but it possibly 100% usable (if so, that's good). I've seen tons of properties like this throughout Fallbrook over the years - I don't see anything noteworthy about it.

I ran an MLS search for homes in a comparable age range (1960 - 1986) based on it's design, comparable size (1,700 - 2,600), and lot area 0.80 - 2.00 acres), in a 2-mile radius and came up with a total of 12 sales (including the subject) since 01/2007; Of these, 6 went down in 06/2007 or 07/2007.

Of the 12, our property was the lowest sale. The next one up was also a foreclosure sale, at $480k - larger house but the usable lot area may be less.

The next 6 sales include the properties that on paper would appear to reflect generally similar design and features; they range from $525k - $585k, and include at least two homes with refurbish/remodel at that upper end. The last 4 sales range from $640k - $725k and include remodeled homes and MUCH nicer homes that most people would probably consider as being superior to our property. I don't see where an $800k value could come from in this area for a 1974 property of this type design on a 1 acre lot.

I'd question how "conservative" the $580,000 appraisal is and/or whether that appraisal may have been based on the "as repaired" condition. The property that looks most indicative of our property after a minor remodel/refurbish on that list is the following property:

25** Havencrest Dr
2,000 SqFt 3/2 on 1.12 acres;

Very similar construction with workshop and room for a horse (stalls and corrals do not convey). Remodeled kitchen and Travertine floors, dual pane windows, spa tubs, etc. This is the property I think might be most similar to our property after he gets done spending $80k on it. It sold for $585,000 in 06/2007.

There is another property I like quite a bit:

*** Park Ridge

2258 SqFt 4/2 on 1.07 acres "relaxing pool", but nothing special beyond that. It sold in 06/2007 for $580,000 and is the closest sale to out property, being just north off of Live Oak. I'd rate this as a little inferior to the Havencrest property overall because of condition but it is larger and it does have the pool, so that pretty much demonstrates how the market reacts to the different features between these two properties. I'd rate it a lot superior to the what is being described for our property's "as is" condition.

The break even point for this flip would probably be somewhere around $585k ($470,000 purchase + $80k refurbish + 5% cost of sales). That would net zero profits for the seller and indeed it would represent a net loss when considering the labor. He might end up with a house that's a bit better than Havencrest by virtue of it being a little newer, but I can see no way how it would be better than the fully remodeled home on Morro Hills Rd (1977yb 2157 SqFt on 1.17 ac) that sold in 07/2007 for $640,000.

Of course, a lot would depend on what he's doing with that $80k. The article includes a photo of him digging for a pad for a propane tank - that's not the type of improvement that buyers would normally pay for. Ditto for the yard cleanup. I doubt that flooring, paint, baseboards and door casings would make this house competitive with either of the properties I listed above. I assume he's going to include a reasonable kitchen/bath remodel, but I wouldn't assume that dual paned windows, A/C or other upgrades would be included. Maybe so, though - you never know.

I hope this seller has a day job.

Submitted by LookoutBelow on August 5, 2007 - 11:25am.

These clowns that are trying to "convince" themselves that they bought a house at a good deal are in fact trying to catch falling knives......The are foolish enough to believe that the market bottomed out....were a looong way from that happening...

todays buyers, will be tomorrows foreclosure victims..... as the prices continue to fall....one of the problems of shooting your wad too soon

Submitted by BuyerWillEPB on August 5, 2007 - 11:53am.

Hey Drew,

I just read that UT article and I also zeroed in on that same statement you mention:

"So far I've spent $30,000, I'll spend another $50,000, and it will be worth $850,000 when I'm done."

I was thinking to myself as I read it, "So you add $80,000 of retail improvements (means $30,000 of REAL value) and you do all the work yourself (not very much, I'm sure) and then you think your house is now suddenly worth $300,000 more? In THIS market? Riiiight!"

This is precisely why I will ONLY be shopping for homes with NO "improvements" or "remodels." When I see a listing that says "Totally remodeled" I tend to just throw it away because I know they will be ripping me off.

On a positive note, I was very happy to see the housing bust story grace the front page of our UT today. This is a very good sign. Although they are still trying to emphasize how there are no significant price declines, and "There are no firesales out there." This mentality will also change very, very soon.

Submitted by Allan from Fallbrook on August 5, 2007 - 12:00pm.

I live in Fallbrook. We have a 3,250sf custom on 1.19ac that we purchased in 2003 for $425k. During the height of the boom, it went as high as $810k (I had it appraised just for the heck of it), before settling back down into the low $600s recently.

If this guy thinks he is going to get $850k for a 1,900sf house in this market, he is clearly out of his tree.

BTW, Bugs, Morro Hills is a very tony neighborhood (it abuts Bonsall and Rolling Hills Estates), so you should factor that in when comparing homes in the Fallbrook area. "In town" carries less cachet than the outlying areas (like Morro Hills), or Bonsall. Just my $.02.

Submitted by NotCranky on August 5, 2007 - 12:16pm.

Buyer,
This is a very good sign. Although they are still trying to emphasize how there are no significant price declines, and "There are no firesales out there."

I saw that differently. I thought the "foreclosure specialist" was being honest and saying,look these foreclosure deals are nothing to get excited about if you want to get in on the action. If she did mean that it would be true, as you well know.

Submitted by Bugs on August 5, 2007 - 12:34pm.

AfF,

re: Morro Hills, I completely agree. I think that area's better proximity to 76 makes a lot of difference. I didn't mention it before 'cause - sight unseen - I didn't want to come across as dogpiling on to what appears to be a marginal situation. Everything else I mentioned is bad enough.

BTW, if your house was at $810k before you're probably a fair bit better off now than the low $600s. It's tough out in 92028, but 3,250/1.19 is still pretty marketable.

Submitted by Allan from Fallbrook on August 5, 2007 - 12:50pm.

Bugs: I don't know how to put this, since it amounts to pure speculation on my part, but I have the sense that things here (Fallbrook, Bonsall, etc) are more desperate than the numbers would indicate.

I coach football here, and I think that kids are always a good barometer of what is going on at home. More and more, I have been hearing about vacations put off, purchases not made and "toys" (RVs, boats, etc) for sale. In the grocery store, I watch more and more people buying groceries with credit cards. Like I said, this is probably nothing more than idle speculation, but I get the definite sense that the buoyant mood of a few years past is gone.

You see a lot more short sales, a lot more "Reduced Price" sign toppers and a lot more "For Sale" signs sitting on the market for a lot longer.

While things are definitely worse in Temecula/Murrieta/Menifee, it looks like the pain is spreading here too. I don't think the problem is "contained" solely to sub-prime or even Alt-A borrowers. I think it is pointing to an appetite for debt across all income classes and I think the party is about to come to an end.

Submitted by dm investor on August 5, 2007 - 1:47pm.

AfF,
Don't be so quick to shortsell your observations as idle speculation. What you are reporting on is anecdotal evidence of the next wave of the meltdown, which we are actually a couple of months into. As I said yesterday, the elephant in the corner that the mainstream media is either intentionally ignoring or doesn't understand the significance of is the shutdown of the retail economy. Take a look at the monthly same store sales reports of the major drivers of the US retail economy - Walmart, Target, Home Depot, Lowe's, GM, Ford, Chrysler, Best Buy. Just in the past few weeks retailers themselves have been pulling the plug on new store development projects because they sense they can no longer ignore the slowed pace of spending. Sales have been slowing down at a not insignificant pace since last year. Retail spending has stopped because the home equity spigot has been completely tapped in the bubble markets of the country. Elsewhere, spending is down because the middle class just doesn't have the money to buy things. People who can buy houses aren't because they are scared of where values are going. On the other hand, people who would buy HDTVs, boats, new cars, and vacations aren't because they can't. The home equity that fueled those purchases since 2000 has evaporated. And when this great consumer economy that has driven things for so long totally hits the skids, that's the time 'look out below' mentality takes hold.

Submitted by Allan from Fallbrook on August 5, 2007 - 2:07pm.

dm investor: I agree completely. If I remember correctly, I read an article that says that consumer spending accounts for nearly 70% of the economy. Wow. If so, and since housing and consumer spending are inextricably linked by the availability of easy cash and credit, then the resultant "turning off of the spigot" is going to create one helluva hole.

A friend of mine went furniture shopping in this mall off of the 215 in Murrieta. He said that virtually all of the stores were deserted and he nearly got assaulted by an eager salesperson in the Wickes store. Every one of the stores was in "Let's Make A Deal" mode and he claims he cut a deal on a living room set that was about 40% off list. Again, anecdotal, but, if true, it is telling.

I have another friend in banking who is getting inundated on a daily basis with email notifications from his bank and other banks about repo vehicles up for sale.

Submitted by NotCranky on August 5, 2007 - 3:00pm.

Hi Allan,

I enjoy reading your bearish statements and those that others bring as well.JWM has been saying for as long as I can recall "why don't people get this?" I think I was using the term "chicken little" for the really "negative" types at that point even though I was one of the most bearish ,especially for of the RE licensees. My apologies JWM(if you are reading).

My guess, many people still think it is about "me". My house value, my chance to time the market ect. ect. Something about forests and trees. I don't understand the level of intellectual investment in the thought that this is going to be a rational correction and will go according to some schedule. I am not talking about people in the street either. Some decent percentage of people on the bearish blogs seem to think this way too. That seems to be changing to though,. Maybe we are just tracking the normal change in pyschology through a cycle? IMHO it is way too early to take it for granted that anything close to normal is going to mark the course of things to come. I definitely don't think we will have an instant replay of the last bust. That would be nice though.

I wonder if there is still a lot of custom building going on around your area. It appears the pace is pretty good here in Jamul. If you recall I told you once that Fallbrook and Jamul have similiarites. My wife asks me to explain all the building in light of the doom and gloom. I told her that I think it is a mixture of the last credit bingers and folks that do things the "sustainable" way, on land they have owned for a long while. Not sure though.
Good job on the football coaching.
Best wishes

Submitted by Allan from Fallbrook on August 5, 2007 - 3:03pm.

Rustico: Thanks for the compliments. On the topic of building, we have a new custom built home going up right down the road from where I am and I keep musing about who would build in this market.

There are a trio of custom built homes on Mission Road (the main drag in Fallbrook) that have been sitting unsold for the better part of a year and a half. As I stated in an earlier post, there are literally thickets of "For Sale" signs in and around certain developments and neighborhoods in Fallbrook and Bonsall.

A friend of mine that works for Lockton (another big insurance broker) in LA said that the big builders (Pulte, Lennar, KB, etc) will continue to build houses on those pieces of land that they couldn't unload or walk away from their option on. Developed land is apparently a better bet for them than empty lots.

I used to live in East County, by the way. When I had my motorcycle, I used to ride through Jamul all the time. There was this great little dive called The Green Tomato in Boulevard that made the best guacamole I think I have ever had. The Harley crowd loved that place, and I don't think I was very welcome there with my BMW K100.

Submitted by JWM in SD on August 5, 2007 - 3:06pm.

"JWM has been saying for as long as I can recall "why don't people get this?" I think I was using the term "chicken little" for the really "negative" types at that point even though I was one of the most bearish ,especially for of the RE licensees. My apologies JWM(if you are reading). "

When am I not reading (much to the chagrin of my wife).

"My guess, many people still think it is about "me". My house value, my chance to time the market ect. ect. Something about forests and trees."

You are probably right and deep down I know that is true as well because that is how I started out with my research into this when the Piggington site was really obscure and I had just moved to SD from Chicago in the Fall of 04. I started looking into the market when because I didn't understand how the income levels could support prices of RE here. That was when I had discovered the exotic financing link. It took at least a year before I connected all of the dots into the mortgage lending industry and the excess liquidity spigot. At that point it became obvious that something nasty was brewing all across the country with some of the worst examples being here in SD.

The decision to not buy a house in 2005 was the smartest thing I have ever done in my entire life. Period. And that decision was hard fought because my wife was furious about it and I had her whole family railing on me over it. Now they don't talk about it anymore.

Submitted by Allan from Fallbrook on August 5, 2007 - 3:20pm.

JWM: We bought our house here in Fallbrook for $425k. That represented the single largest purchase I had ever made in my life. I literally lost sleep thinking about possible market reverses, whatever. Then as things really started to jump (the run-up in housing), I went from thinking that I must have been some kind of genius to really sensing that something was waaaaaaay outta whack.

I had arguments with people during '03, '04 and into '05 about the SD market and why it was not only different this time (all the usual RE propaganda), but that the SD market somehow had the ability to defy gravity apparently in perpetuity. Having grown up in the SF/Bay Area, I know that certain markets (like San Francisco city) have remained resilient regardless of external factors.

After a while, you start thinking that maybe YOU are the idiot and everyone else is right. But, I remember having had the same feelings during the NASDAQ/dot.com run-up as well. Listening to some twenty-something CEO of kozmo.com, or webvan, or eToys going on and on about the "New Economy" and realizing that the emperor really wasn't wearing any clothes.

The NASDAQ implosion erased $4Tn. How big a bust is this one?

Submitted by davidt1 on August 5, 2007 - 5:30pm.

Quote "The NASDAQ implosion erased $4Tn."

I am new to all this financial stuff. I always thought that when the market goes down it is because the people who got in early sell their stocks while there are less buyers stepping in to buy the stocks. In other words, if more money moves out of the market than there is money coming in, then the market goes down. The money doesn't disappear. It is just being transfered from the people who got in late to the people who got in early.

Am I even close in my assessment? Thanks.

Submitted by SD Realtor on August 5, 2007 - 5:50pm.

Not true... Money does indeed disappear...

SD Realtor

Submitted by JWM in SD on August 5, 2007 - 5:59pm.

Yeah, it's called credit contraction (M3). Some might argue that it didn't really exist in the first place.

Submitted by HLS on August 5, 2007 - 6:01pm.

Hi David,,
A simple answer: Money doesn't disappear, perceived value disappears...

A stock cannot be sold without somebody wanting to buy it. You cannot sell a share into thin air or into "the system"
Based on supply and demand there are always shares changing hands, so someone must buy for someone else to sell. The seller gets MONEY. The buyer gets shares of stock. So far you theory is sorta right.

Imagine that there are 1 million shares outstanding that people paid various prices for. If the stock is $20 a share on Monday, it's $20 million in "market cap" for that company, (regardless of what people paid per share).

On Friday, if ths stock drops to $5 a share, the market cap drops to $5 million.... $15 million just disappeared from perceived value.

Often times it is in the hundreds of millions or even billions that disappears. It was only worth that on paper.
Everybody couldn't cash out at the same time, because you wouldn't find the buyers. You couldn't sell 10% of homes for what people think they are worth either.

Home equity and stocks are paper "value" until actually sold. If your house was worth $500K 2 years ago and $400K today, did $100K of money disappear ? NO, but $100K of VALUE did. It STILL isn't money until you sell it (AND get paid) Selling something on credit isn't money either.
Real money is CASH, and that's why cash is king.
Make sense ?

Submitted by Allan from Fallbrook on August 5, 2007 - 6:07pm.

JWM: You're a finance guy, right? Do you find it interesting that they no longer report M3? M1 and M2 are still there, but good 'ol M3 isn't. Not trying to put on my paranoid conspiracist hat or anything, but...

I'm also curious as to what you think of FASB's role in all of this, specifically SFAS 140/QSPE accounting rules. QSPE (Qualifying Special Purpose Entities) accounting was behind the Enron nonsense and has now reared it's ugly head again in the derivatives market. While I think that the ratings agencies bear a lot of responsibility for this mess by handing out AAA ratings willy-nilly, I also think FASB played a large part as well.

Lastly, I have been watching the monoline insurance market for the last couple of months. I am waiting for one of the big monoline players to bite the dust. If that happens (and I am not saying it will), things will get really interesting.

Just curious as to your thoughts.

Submitted by SD Realtor on August 5, 2007 - 6:10pm.

Allan I am not a finance guy but I think the fact that M3 is not reported is quite incredible. It makes one think that the printing presses have been operating for quite a long time. I am not talking conspiracy... it is just kind of... well unsettling (to say the least)... I am surprised more people never seem to talk about that.

SD Realtor

Submitted by Allan from Fallbrook on August 5, 2007 - 6:12pm.

HLS: Excellent synopsis. We should also take that one step further and discuss leverage as well.

The real downside risk here is the amount of leverage (generally 10x to 20x) that is at play in the markets right now, and the role that CDS instruments play in backing up (the now nearly worthless) CDO market.

Leverage played a huge role in inflating this massive trio of bubbles (Housing, Credit and Stocks) and the resultant deflation (leverage in reverse) is going to amplify the bust by at least a few orders of magnitude.

Submitted by JWM in SD on August 5, 2007 - 6:32pm.

"JWM: You're a finance guy, right? Do you find it interesting that they no longer report M3? M1 and M2 are still there, but good 'ol M3 isn't. Not trying to put on my paranoid conspiracist hat or anything, but..."

Technically, I'm not Finance but rather accounting (CPA), but you learn most of the same fundamentals in TVM. I did handle corporate finance stuff like NPV and ROI for an automotive component supplier (Borg Warner) at one of their plants in Illinois for a couple of years though. a lot of the investment principles are the same such as hurdle rates and payback. Instead of houses it was two ton presses and tooling and die equipment.

Yes, it's not surprising that the Fed decided not to report that anymore. However, there are still plenty of graphs depricting what happened relative to M0, M1, M2. Mish Shedlock was where I first read about that. What's interesting is when you correlate housing prices in SoCal to the growth in M3...take a wild guess at how well they correlate.

I dont know enough about SFAS 140 yet. There is an article by Tanta at CR that about that I will read later on.

Submitted by HLS on August 5, 2007 - 6:51pm.

What NOBODY talks about is who/what is at risk, as far as average Joe & Jane investor.

There are multi millions of people "investing" in the stock market via 401K, IRA's etc for their retirement, without having a CLUE what they are doing, just blindly buying stocks via mutual funds or whatever. It's what they are told to do, so they have money taken out of every single paycheck.

It's akin to people who bought homes at inflated prices, without having a clue what they were doing. The end result (again) is that some people will get lucky, others will get burned badly.

It isn't a myth that only a small % of mutual funds beat the indexes, yet fund mangers collect mgmt fees based on the amounts of the funds.

The pitch of the investment industry is that over time, the market returns 11% on average. Please try explaining that simple sentence to someone who had a million dollar portfolio in tech stocks prior to the dot.com bust. I know of accounts that went from $1 mil to $50k pretty fast.

They had been investing for years, hoping to retire around 2002. Plans change.

The innocence of so many people that have a fair amount of money in stocks for retirement is staggering. No idea of p/e, p/s, market cap, enterprise value, growth stocks, value stocks, etc. just assuming that it will grow to an expected amount due to compounding growth (Because we all know that it's TIME in the market, not timing)

Hopefully for all, people will not want to cash out en masse, but what some people don't realize is it also isn't possible. There won't be enough buyers. (Sounds like homes today) When/if sentiment changes, there goes the market.
Most will ask the same questions as they do about houses, "how come I can't sell"

Although the major housing losses will be regional, a real downturn in stocks will be national, affecting every single square inch of the country.

Some of the hedge fund money and similar risky investments came from pension funds and average investors Joe & Jane without them even knowing. The total leveraged losses will be covered up by shenanigan accounting for as long as possible.

I read a about a recent pension fund that EXPECTS 8% return year over year. To me it says we NEED 8% or we're in trouble.

Some of the perps will hope to die before the coverups come to light.

I hope it doesn't happen. It's gonna make people wish that it was only as bad as Enron or Worldcom.

Submitted by JWM in SD on August 5, 2007 - 7:19pm.

"I hope it doesn't happen. It's gonna make people wish that it was only as bad as Enron or Worldcom."

Yes, and look what happened in response to those two issues:Sarbanes Oxley. The effing bane of my existence or any other publicly held or considering going public company in the US right now. The pendulum swung too far in that one and the credit crisis makes those two look like small change. How far will the pendulum swing in the lending market after the scope of this problem becomes more obvious??

Anyone who thinks that SD home prices can't decline as much 50% doesn't know WTF they are talking about because they do not understand far reaching impacts of the credit markets and how they will react. This is why I take issue with those giving advise to would be buyers posting here that it is only an emotional issue and if you can afford to buy and you have a long term view it wil be okay. That is utter bullshit because this is unprecedented and nobody knows how bad it is going to get...only that it has the potential to get really ugly.

Ayone looking to buy a home right now in SD might as well have been standing at the shoreline in Phuket when the tsunami rolled in. You Just Don't Get It.

Submitted by HLS on August 5, 2007 - 7:44pm.

Never forget about Banda Aceh http://news.nationalgeographic.com/news/...

"Many eyewitnesses have compared the post-tsunami scene in Banda Aceh to that of Hiroshima, Japan, after it was hit by an atomic bomb during World War II "
*****************************************
JWM, You are right..
Anybody who wants to compare this debacle to 1995'ish just doesn't get it.
The fall in the 90's was with people who ALL had something invested..... 100% loans, Stated Loans DIDN'T EXIST and people still were upside down and walked....

If I said that 25 times the number of people bought homes with no $ mo' down, in this last run it might be an understatement, but even if only 10x is closer, do the math.

I can guarantee you that the number of people who bought homes in the recent 4-5 year run with no or little "skin in the game" is many mutiples of those that did come up with a down in the early 90's, who still lost it all.

To those that say prices come back, this chart is my answer to that statement. http://bigcharts.marketwatch.com/quickch...

Submitted by no_such_reality on August 5, 2007 - 7:55pm.

I like this one better HLS. QQQ

It's been seven years and it's rebounded with prices doubling in the last four and half years; It is still only worth a smidgeon over 1/3 of what it was at peak.

Submitted by JWM in SD on August 5, 2007 - 7:56pm.

My wife was in Banda Aceh this time last year with the USNS Mercy on a humanitarian mission. I referred to Phuket because it's better known than Banda Aceh.

Submitted by HLS on August 5, 2007 - 8:18pm.

NSR,
How can you like QQQ better ????

PALM was $1,100.00 down to $14.00
please look at chart again!http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=palm&sid=0&o_symb=palm&freq=2&time=13&x=48&y=14

Loss of 98.75%

Submitted by HLS on August 5, 2007 - 8:15pm.

oops

Submitted by no_such_reality on August 5, 2007 - 8:22pm.

How can you like QQQ better ????

Palm is an individual stock, kind of like buying a home from a flip this house episode that used bleach water to clean mold covered walls and later discovered that there's still mold and the foundation is cracked. Perhaps that would be Enron...

QQQ on the other hand, is the cream of the NASDAQ crop, like the best neighborhoods of San Diego. It's still completely toasted. They aren't companies that failed, they're still the best, they're just worth 1/3rd of what they were in the dot com bubble.

Submitted by PerryChase on August 5, 2007 - 11:20pm.

Another excellent post, bugs.

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