Thursday, September 11, 2008 at 05:54AM
Speaker Panel
Last night I was a panelist at the 2nd annual real estate conference for the San Diego chapter of FENG (Financial Executives Networking Group). There were about 80 people in attendance at the same venue as last year's, the UCSD Faculty Club.
The other panelists were Bruce Norris, Alan Nevin, and Gary London - unfortunately Rich Toscano couldn't make it this year.
Here are my notes:
Bruce Norris:
Bruce brought data with him highlighting the fact that we have had more foreclosures this year than sales. His numbers showed 9,275 foreclosures in the first half of 2008, compared to 7,260 sales.
He also mention First Federal, a lender who did neg-am loans but were fairly conservative, requiring 20% down payments. Their first big group of resetting mortgages hit in the first quarter, and when it did, 40% of the borrowers defaulted. He also had the standard ARM reset charts in his package.
He thought we will have to see higher mortgage rates in 3+ years, perhaps as high as 8-9%, and that if you bought a house today you're payment could actually end up being less than if you waited for lower prices (The higher rates keeping the payments the same or higher, though you paid less). He also thought that we've seen the biggest hit already, price-wise, but that the higher-end was going to get impacted by resetting option-arms.
He thought a serious recession was inevitable, and that oil would be back under $100 per barrel by the end of the year.
Bruce buys homes for a living, fixes them up and re-sells them. He has purchased 20 homes in the last 75 days, and said he can take a total dump and completely rehab it in three weeks, but can't sell it until he's owned for 90 days.
He paid $2.1 million for the 20 homes he bought, and the previous loans owed totaled approximately $6.6 million.
Alan Nevin:
Alan mentioned that there are 91 areas in San Diego County that are tracked by Dataquick, and that 70% of the foreclosures this year are located in just 10 of the areas - including Oceanside, Escondido, Chula Vista/Otay, and Spring Valley. Twenty of the areas had fewer than five foreclosures each.
He said that in 2008 there will only be 3,000 single-family residences built in San Diego County, with 500 of those being ones that burned down in last year's RB fire. New-home building has virtually stopped, after completing at least 10,000 SFRs per year in recent history.
He and Gary agreed that there is, in effect, a 'moratorium' on downtown condo building, and that it was likely that another new downtown condo project wouldn't be started until 2012 (Alan) or 2015 (Gary).
Alan also mentioned that there really aren't many high-end downtown condos, he thought most were rather ordinary - he and Gary could only list 4-6 buildings that they considered high-end.
Gary London:
Gary said that there won't be any more new SFR developments in the county, except around Otay Ranch, because we're built out. The remaining parcels are mapped and waiting for the market to return. The future of San Diego County is building up, not out, and that buyers will be buying smaller homes at lower prices as a result.
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Zach Fox and the North County Times is working on sponsoring a public forum in a couple of weeks - stay tuned.
Jim the Realtor
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Reader Comments (22)
Sounds reasonable. At least they try to backup up their predictions with logic. It's so annoying listening to realtors that think prices will go up because the skys more blue today then yesterday.
It's interesting that Bruce has purchased 20 homes in the last 75 days. This is exactly what I'm seeing. Banks have no idea how to sell a property. When they initially get a property they either try to auction it for too high of a price or way too low of a price. If guys like Bruce don't pick it up at auction for the low price banks take the property back and listen to a realtor that seems to almost always overprice the listing. The result is a property that stays on the market too long and is not liquidated.
Had the Bank just skipped the auction and listed very aggressively from the start they would get multiple offers and could liquidate the property quickly.
I don't know if the MLS will allow it or not but if the bank put in the property listing that they would be dropping the price 5k every week until it's sold. This would be like a reverse auction.
I agree with everything except one and thank you for the excellent reportage. That one thing is Gary London's tired old new urbanist spiel. "Build up, not out." It just has never shown up in peoples' reveal preferences. The only time townhomes/condos do well is at the end of bubbles when buyers are constrained as to choice. Well news flash, there's gonna be lots of choice for lots of years and that means people buying what they want rather than settling for what's available.
I take most of these predictions with a grain of salt. I don't think any of these guys can reasonably predict the future given how quickly things are changing. I favor market fundemantals (GRM, DTI, etc) for making predictions not someone's gut feeling about interest rates, oil prices, and housing bottom.
Did Bruce say what area the 20 homes he bought were in?
Good report, thanks Jim!
BAM,
No, but I just added the last line to his comments, that he paid $2.1 million for the 20 houses. He must be in Riverside County if he is averaging around $100,000 per house.
I objected to the moderator's using the county's median income as a reliable data point about the market. Not everyone in the county is looking to buy a home.
Points we didn't get to:
1. When Alan and Gary were talking about how limited the supply is, and will be in the future, I didn't hit them over the head with the fact that 6,792 of the 17,619 detached and attached listings (38.5%) are marked vacant. There are plenty of houses to go around.
2. I didn't comment on Bruce's prediction that we'll see 6,800 foreclosures per quarter for 3Q08 and 4Q08. I think it will be higher.
3. I didn't interrupt Bruce's prediction that the resetting neg-ams are going to cause big trouble. With all the government intervention we've had already, I think they'll find a way to conspire with banks to waive the reset caps.
Bruce Norris is based in the Inland Empire. His purchases and sales are in his farm area which is Riverside County so he is coming from the perspective of seeing some of the most extreme situations.
I respect Bruce Norris a lot. He is very data driven, an experienced rehabber, and called both the coming boom in 1997 and the California crash in 2006 when the mainstream economists such as Nevin were saying the opposite.
Hey, we are running out of land! They don't make any more of that. Prices can only go up!
Bruce Norris has also purchases several homes in Moreno Valley. That area has been very hard hit. Most for 60-70% off last purchase price.
Angela
". I didn't interrupt Bruce's prediction that the resetting neg-ams are going to cause big trouble. With all the government intervention we've had already, I think they'll find a way to conspire with banks to waive the reset caps."
I think Bruce would have cited you the law of unintended consequences on this one. The person living next door without the neg-am who has still taken a massive equity hit is more likely to walk when they find out their next door neighbor gets a bail out that they don't qualify for.
He cited that very law, regarding the last bailout plan to reduce loan amounts to 90% of the value and do an FHA refi on 90% of the balance.
Certainly the waiving of neg-am resets will set off a firestorm of complaints, but I don't think it will stop them from doing it. I don't agree with the idea, I'm as sick of these stupid bailout plans as anyone. I want to get this over with!
The further step of the unintended consequences is that Mr. Do-Good will be less likely to resist the cheating shortcuts next time. When he sees his neighbor do it and get away with it....many will ponder crossing the line. What the heck, if the government bails you out every time, why not?
"[...] why not?"
It's pretty obvious that not everyone got bailed out. That's a pretty good "why not" to me.
2.1M for 20 homes= $105K ea, are the numbers correct. Angela above said Moreno Valley, CA. What gives?
$2.1m for 20 homes is not believable given the other claims of location and time frame. Any kind of normal mathematical distribution around $105k requires more purchases below $90k than the sales data records for the same time period.
I believe him. I think he may have even broken down each purchase he made and calculated it out to something like 31% of the original loan amounts in the August 23 "I survived" program he has posted the video of on his web site.
Norris is know as the go to guy in the inland empire who actually closes deals all cash when he makes an offer. He is on the front lines of this market and an excellent source of information. The courses he offers are very good also.
The money shot qoute didn't even get a mention so far. He also mention First Federal, a lender who did neg-am loans but were fairly conservative, requiring 20% down payments. Their first big group of resetting mortgages hit in the first quarter, and when it did, 40% of the borrowers defaulted. He also had the standard ARM reset charts in his package.</I>
First of all there is no such thing as a conservative neg-am loan. Any loan that lets people pay less than the full interest is toxic. The mere fact that someone would say they did these loans, but were conservative and still 40% default is crazy. 40% default is all the proof you need that they weren't conservative loans. What kind of apologist would even try this?
Though I'm not currently short FED, I have been, and they are toast.
You left your i dangling. there, I closed it for ya.
Some thoughts:
wrt Alan Nevin - his arguments don't add up.
If interest rates go up, house prices will go down because the constant is the monthly payment. The result is constant monthly payment either way with the unintended consequence that a down payment has greater value. With a serious recession, available income for mortgages is less.. and thereby demand for houses drops and houses cost less.
wrt Gary London
The properties may be mapped, but the option to purchase may have been returned to the state. Homebuilders are having to deal with the drop in demand by getting rid of the land they hold title or option to.
I'm with Barnaby on this one.
Neg-ams have no place in the housing market with VERY few exceptions -- the VERY wealthy person who could pay all cash (or who could pay 20-40% down and make fully-amortizing 15/30-yr FRM payments without any stretching), but is an abnormally successful investor who can earn enough through his/her other investments to offset the accruing interest and principal payments on the mortgage. I'm guessing the vast majority (80%+) of neg-am borrowers since 2001 do not truly qualify for a neg-am loan. They ought to be effectively banned, except for private/hard money lenders.
Postponing the day of reckoning is not going to help anyone. It will only prolong the period of lost jobs, misallocated resources and growing deficits. Best to just get on with it and let things fall to the bottom so we can start from scratch. This thing's been too patched up to allow for any real improvement in our economy without bottoming first, IMHO.
Great read.
Jim, you mentioned in your comment above you think the foreclosure rate will be higher:
"2. I didn't comment on Bruce's prediction that we'll see 6,800 foreclosures per quarter for 3Q08 and 4Q08. I think it will be higher."
Do you think this will be at the higher end? The entry level neighborhood seem to be clearing up. Where will these 7k foreclosures occur?
I'm curious of how many of the 6,792 vacant homes are complete crapboxes that hobos wouldn't even desire to live in...
Maybe 6,000?