CW REO's

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Janet,





The answers to all your questions are sprinkled throughout my analysis posts. The most direct answer is here: <a title="Permanent Link to Houses Should Not Be a Commodity" rel="bookmark" linkindex="18" set="yes" href="http://www.irvinehousingblog.com/2007/06/25/houses-should-not-be-a-commodity/">Houses Should Not Be a Commodity</a>





People have commented on the confidence I have in my analysis of the market. To be very honest, most of the analysis came later. Early in this bubble I witnessed inflated prices begin to rise. My years of experience trading the markets told me it was a beginning of a financial bubble. I didn’t know exactly what was causing it, I didn’t know how high it would go or how long it would last; I just knew it would prove to be a bad time to buy. Even after watching prices go up significantly from there, I knew it wasn’t going to last. I had seen the cycle too many times before. I was witness to the insanity as it unfolded, but it has only been in the last year that I became more interested and really researched the details of causes of this bubble. I have greatly increased my depth of understanding of this phenomenon, but I have never doubted my initial instinct; I still don’t.
 
<p>I agree with IR on his out look.</p>

<p>I personally have one reason and one reason only. Affordability of housing.</p>

<p>$900,000 home costs about $5300 per month. 800k is $4700 per month, 700k = $4,100 , 600k = $3,500, 500k = $2,900, 400k = $2,300, 300k = $1750.</p>

<p>This is based off of 30 year fixed at 5.75%</p>

<p>Now this does not include HOA or MR's, which in two of the tracts I looked in were just about 700 a month. That is like carrying a second of about $125k. </p>

<p>So if the median housing price is 600k the Mortgage will be about $3,500 per month. That is 42k a year. Then add on the additional 700 per month of the HOA and MR you have $8,400 and 42k or over 50k a year for your home.</p>

<p>So assuming 29% of your income should go for your home you would have to make what 150k a year to buy the average Irvine home.</p>

<p>Now I personally know quite a few people in Tustin/Irvine and they don't make that. </p>

<p>If you are lucky you can go to the 92780 zip or Santa Ana to pay about 3k a month and avoid the HOA and MR's.</p>

<p>I have driven down the Streets in Santa Ana where the half million dollar homes are. I would rather live in my apartment then spend 3k a month to live there.</p>

<p>Don't forget upkeep. Got to have the money to make repairs. </p>

<p>So until I can Afford a house I will not buy a house. If the banks and lending institutions start lending money to people that can afford to pay them back then housing prices will have to adjust down.</p>

<p>If the guy making 50k walks into CW tomorrow and wants to take out a mortgage they will say sure. WE can loan you about 250k not 700k like they did last year.</p>

<p> </p>

<p> </p>
 
IR -- With all due respect even confidence that prices are too high doesn't justify a statement like <em>"I would not buy in the next year and a half no matter how good the price because I know it will still get lower."</em> Even assuming all of your arguments are sound, all of the data you point to show that houses are priced too high now. And really that's the best any of us can do. But to say that you know prices will be too high a year and a half from now, that seems to require an ability to traverse the space-time continuum.
 
<p>Thanks too ELS.</p>

<p>I am very familiar with all aspects of mortgage finance - all the way through MBS's.</p>

<p>I think I have as good a handle on this as anyone (with a few exceptions) here.</p>

<p>I would not have been really fearful of any of this had the secondary market not been abandoned. Those players could have (and still might) price for risk. Instead, they ran for the hills. That is what will cause the greatest damage.</p>

<p>I know option ARM and I/O loans, as well as other short-, and mid-term ARMS, were widely used. But I disagree that 100% of them were used for the sole purpose of qualifying/affording. Lots of people simply wanted to reduce their interest cost because they thought they could, not because they had to. Didn't Greenspan make the argument that ARMs can be a great product? It disappoints me that people blame anyone who merely took his advice. When you look at it, didn't this guy - our preeminent economist - know that rates would be racheted-up shortly thereafter? Between that, and no one keeping lenders in check, it is our very own government that brought this on us all.</p>
 
marty mcfly,





I believe pricing will be lower than whatever prices are available 18 months from now because the mortgage reset timebombs will not have all detonated by then. Until the ARMs issued over the last several years have all reset and the resulting foreclosure absorbed by the market, there is little or no chance of price appreciation and a very good chance of continuing price decline.





Realistically, if I found the house I wanted at a price I could afford, I would buy it. The valuation doesn't matter much to me when I am saving money on my rent and living in a nice place. I would be more concerned if I was buying a place I planned to live in for less than 5 years due to the likelihood of being underwater.





Implicit in Janet's comment about buying a REO sometime in the next 18 months is the idea that the market will be at the bottom. My comment was more a reflection of the fact I do not believe we will be at or near the bottom for some time after that.
 
<p>IR,</p>

<p>It doesn't take a wider market bottom to ensure that any particular REO couldn't be at a bottom.</p>

<p>I think REO's seem to trade differently. And the courthouse-steps thing is even more unpredictable. </p>

<p>Who knows what could happen there - you might find 80% off on a good day!</p>

<p>Or do you think the relationship between market & REO moves, undeniably, in tandem?</p>
 
<em>"When you look at it - didn't this guy - our preeminent economist - know that rates would be racheted-up shortly thereafter?"</em>





Of course he did. Remember, this guy is our central banker, not our central financial adviser. His comments were looking out for the best interest of banks (or so he thought) by telling people to take out ARMs.





If everyone had wisely refinanced into fixed rate debt, banks would be left holding mortgages of declining value once interest rates began to rise. In order to prevent banks from becoming locked into low interest rates on 30 year mortgages, he told the public to take our ARMs. IMO, it was one of the most callously self-interested statements ever made by our quasi-governmental FED chief. It sickens me that he did that.





The comeupance in all this is the banks are going to be ruined. Not by the holding of mortgage debt as he feared, but by the holding of worthless collateral which was inflated in price because people actually took his advice. Sadly ironic if you ask me.
 
<p>IR,</p>

<p>I'm also not so certain of calling the refinance market 18 months out.</p>

<p>People with high LTVs will still be SOL then, but plenty of others might be able to get the act together by then.</p>

<p>It will depend on where rates are as well. </p>

<p>I won't venture a guess.</p>
 
<em>"Or do you think the relationship between market & REO moves, undeniably, in tandem?"</em>





You will rarely if ever get more than 20% off the original purchase price because the bank will bid the price up at auction to cover the note on the first mortgage which is generally 80% of the purchase price.





There will always be possibilities for a good deal in REOs, but you really need to know what you are doing, and you need to have cash.





IMO, if you really want a good deal on an REO wait and buy one in 2010.
 
"I won't venture a guess."





I will. Mortgage interest rates will be higher because the defaults will continue to raise the risk premium.





The flood of foreclosures will continue to cause tightening until the ARM timebombs have all detonated and the REOs have worked there way through the system. Think 2012-2014.





<img alt="" src="http://www.irvinehousingblog.com/wp-content/uploads/2007/04/adjustable-rate-mortgage-reset-schedule.jpg" />
 
I have a stupid question. I was looking at some of the REOs in other states (OH, PA, MI, IN) and there are quite a few under $5,000. Why are they so cheap?
 
<p>IR,</p>

<p>Interesting observation about the fed.</p>

<p>I always thought they were supposed to be stewards of the economy, not just the banks. </p>

<p>I wonder if there will be a huge fall from grace for it when we look back in 20 years.</p>

<p>How could they get it so wrong?</p>
 
<p>Maybe we need a new cabinet position?</p>

<p>Then again, Washington gets everything wrong anyway.</p>
 
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