November 30, 2006

Zillow is Off by a Small Amount. Try $250,000 off with Proof!

I have found how Zillow prices their homes. Please, this is definitely confidential information so I hope that we can keep this between us bloggers. I have found their head algorithm engineers and took a snap shot of their insanely accurate “Zestimate” figures. Here is the clandestine photo that I took of their uncanny picking abilities:

In all seriousness, let me show you an example of how off they really are. Below is a Zestimate of a home in San Diego county:

Zestimate: $848,926

Sale History

06/07/2006: $670,520
10/03/2005: $790,000
10/25/2004: $725,000

Currently this home is REO and is listed at $614,000. So Zillow is off by exactly $234,926! Are you kidding me? I wish I would have gotten away in graduate school with approximation like this. Can you imagine if you worked as a teller at a bank and you told your manager “yeah, I’m only off today by $15,992.32.” Your manager would smile and probably report you to the authorities once you stepped out of the building. This is only one case example of how distorted the current housing market is. When banks start getting more and more properties as REOs such as this one we will begin to see how shady the mortgage lending and housing construct has become. There needs to be some purging that happens in the next few years.

This home on the Dr. HousingBubble scale rates as:

What overpriced homes have you come across?

November 28, 2006

Even the Harlem Globe Trotters Couldn’t Spin Today’s Housing News!

Where do I start today? Negative news regarding housing is hitting the presswires fast and furious. First, CNN published a headline story describing that Nationally, housing has faced a record year-over-year decline in October. Biggest Recorded Drop Ever In addition, I was able to catch a glimpse this morning on CBS MarketWatch a headline story posting “Housing Sligthly Rebounds.” This story was pulled because opening the article I found that sales increased by a meager .5 percent, stopping (pausing?) a slide since February. In addition, the major factor that should have headlined was the record year-over-year price drop (kudos to CNN). My only conclusion to this journalistic faux pas was someone trying to spin the data; after all this is data from the National Association of Realtors, otherwise known as Bozo the circus clown of housing.

Next, the Wall Street Journal published an article showing areas that are overvalued. Take a look below for a snapshot of the article:

The article can be found here but take a look at this brilliant quote from the Jack in the Box talking head, David Lereah:

“David Lereah, chief economist of the National Association of Realtors, expects that nationwide prices will bounce back in 2007.

He adds that one-third of the country is primed for growth -- a claim that Mr. Winzer's research supports. And if you don't have to sell your home, the short-term turmoil underscores the point that it seldom makes sense to obsess over your home's value the way you'd obsess over, say, your Google shares. Better to sit back, enjoy your mortgage-interest tax deduction, and wait for better days.”

I’m hoping that you haven’t choked on your tongue after reading the above paragraph. This idiot is such a maestro when it comes to spinning bad news, maybe he should apply for the position of Ambassador to Iraq. One-third of the country is primed for growth? You mean like Texas, Montana, North Dakota, and so on and so on. How in the world he sees real estate bouncing back in 2007 is beyond my knowledge but it certainly won’t be the case for the coastal areas including, guess what, California! Oh my, more and more the media is finding it more difficult to spin the absurdity of what these morons are spewing.

Take a look at the chart again. San Diego is overvalued by 60 percent meaning prices should be around $210,000. Does it look like we will reach those prices anytime soon with all these delusional home owners thinking their 1,000 square foot box is worth half a million? I do agree with Lereah that prices will bounce; bounce off a cliff that is in 2007. As the housing lemming mafia marches to their doom, the drum beat of massive mortgage resets, recession, declining dollar, and housing related job losses is getting louder each day. My guess is that September of 2007 we will finally get the full effect of what is occurring and sellers will understand what it means to be underwater. You think someone that just lost $100,000 of equity is not going to feel the psychological effect? At this moment the Doctor recommends do not buy ANYWHERE in California until this mess clears up.

What is your guess for the turning point in housing psychology?

November 27, 2006

Current Status of Real Estate Market: Boring!

A front page story on the Sunday L.A. Times talked about a few areas where real estate still remains persistent and commands high prices regardless of the overall market climate. These areas, mostly in the East Bay in Northern California are still bringing bids over asking price. My response? Who cares!!! The overall real estate market is trending down and trending down fast. What happened to year-on-year double-digit appreciation this year? We are on track for zero percent appreciation this year and definitely negative territory in 2007; the only question that remains is how low will we go? But the next few months will be absolutely and fabulously boring. Here’s why…

If you track inventory numbers, take a look at the MLS data or Ziprealty inventory numbers. Reduced price listings are growing and hovering around 35 to 45 percent depending on which county you are looking at. These sellers we will call:

Desperados def.- Selling because they have absolute no choice.

Then we have a large contingency of sellers that have let listings expire or have withdrawn their home from the market. We will call these sellers:

Baghdad Bobs of Housingdef.- They feel they can relist in spring/summer 2007 and get their asking price. Why you may ask? Because this is housing playa! Housing always goes up.

So until we reach spring of 2007, the market will continue on its molasses downward trend and inventory will continue to build up on the backend only to be unleashed in Q1 and Q2 of 2007. These Bagdad Bobs of Housing (BBHs) will be coming to a gunfight with water pistols. Think of these factors that we KNOW will happen:

1. Major number of adjustable mortgages will reset. To the tune of $1 trillion dollars in 2007.
2. Housing appreciation stalled to negative. By definition of reason #1, we know many will be unable to refinance due to prepayment penalties and low or negative equity.
3. Massive inventory increases. See Baghdad Bob's of Housing for more info above.
4. Economy already laying off many in construction and industries associated with real estate.
5. War in Iraq draining our funds and the dollar at all time lows against the Euro and other currencies. Strikes at argument that Fed will lower rates to keep housing stable. Do you think housing is the most important issue in the U.S.?

You think the Fed can lower rates and inflate this bubble again? Doubt it. If anything, the Fed will need to adjust rates upward to compete for capital on the global markets. They will sacrifice housing for a stable dollar; it just has to be that way.

So for the next few months the housing market will be rather dull to watch. The party will begin in spring of 2007 and after that it is anyone’s guess what will happen. But we can easily predict that prices will not go up and that is almost the only thing we can say isn’t boring.

November 20, 2006

Think Housing Can't Go Down Significantly in Southern California?

I find it hilarious when I hear David Lereah, the N.A.R. housing shill, talking about how great it is to buy (or sell) a house today. These morons forget even what happened only a decade ago. Housing declines last many years (take a look at one of my links to housing cycles dating back to the 1800s). The above chart shows some massive changes in particular areas.

And another lame argument I keep hearing is all these buyers that are on the sidelines will jump in this upcoming spring and summer. You think buyers are going to jump in when they hear these headlines:

1. Housing prices declining at record pace.
2. Mortgage resets totaling in the trillions.
3. Foreclosures at all time highs.
4. Zero to negative appreciation.

Yeah, that is the rallying cry for housing. Actually sounds more like the siren call…

November 19, 2006

Flipper Nation! Some Weekend Housing Humor!

For those of you who haven't seen this funny clip. The funny thing about this clip is that I am sure many of you know people like this in real life!

Filed in:

November 17, 2006

Mortgage Payment as % of Median Four-Person Family Income

Big Nose Blog

Follow up: Mortgage Fraud Arrest of Mortgage Scammer!

Jail Time for Mortgage Scammer!

This is a follow up to a post I talked about last week in The Bonnie and Clyde of Real Estate . Well it looks like Clyde will now join Bonnie in prison. Matthew Cox was caught in his home in Tennessee. Get ready for a lot of these cases.

Mortgage Scammer Matthew Cox Captured

November 16, 2006

Are you a Debt Slave?

This month, California has voted and approved $37 billion in bond packages that will improve the infrastructure of the state. The mantra goes, we will not raise taxes and be able to improve the state. Yet we will (and our children) will be paying for these bonds with interest for decades to come. Now how is this not a tax? Welcome to 2006 – where debt is credit and up is down and monkeys fly out of rear ends. Simply by changing the title of something people are mystified of the actual core of what is being pushed. The logic goes as follows: I want a plasma TV but it will cost me $3,000, money I do not have. But wait! I can have it for $100 a month over a five-year period. What has occurred with housing today is this “monthly nut” phenomena. People are happy that they can swing a payment no matter what the economic value of the item is. Financing has become the drug of choice for many recent home buyers and they are realizing that they need more drugs simply to maintain their previous high. This will be the undoing of the market.

As many recent articles have demonstrated, Americans are horrible savers. For the last year, Americans have gone into negative savings rates. Take a look at the chart below:

Not that Americans were ever good savers, unlike our Japanese brothers and sisters who save nearly 30 percent of their income, but we are now running a personal deficit each month. Anyone that has read any history book or economic book realizes that any country that runs trade deficits for a prolonged time is doomed to failure. This is tantamount to spending more than you make. What this does is that it creates a society where each month many Americans are simply paying debt service (ala the bonds) to fund their current spending habits. Take a look at the below data:

As you can see from the above chart, debt service has steadily increased for the past decade while housing affordability has fallen to a 20 year low. No surprise here. The financing machine that we are operating in will only stop when the mentality of those benefiting from it realize that they are slaves to their own personal consumption. People are literally mortgaging their lives away to debt. In no other time in history are middle-income folks able to purchase a large home, top of the line automobiles, furnish their homes with all the modern gadgets, and pay for it later in the future. The problem with this model as is being demonstrated by strains in our economy is that debt takes away from productive assets in an economy. So what is the median income in the top metropolitan areas in the country? Take a look at the chart below:

As you can see from the above, the median salary for someone in Los Angeles County is $60,000 per year. But this is based on gross numbers. What is the actual take home number for these people? Let us run the numbers:

Gross: $60,000
Monthly Gross: $5,000

FICA Medicare - $72.50
Federal Tax - $717.58
State & local Tax - $252.00
Salary deferral (401k/403b) - $250

Monthly Net Paycheck = $3,397.92

Now looking at the above, how much home could this person afford? If we follow the typical old school bankers rule of using 1/3 of your gross income for housing, we see that this person can afford a monthly payment of $1,666; aside from the fact that it is odd that the number of the beast appears in this formula (hmmm) it is absolutely impossible to find a home in Los Angeles County with a monthly payment of $1,666. The median home in Los Angeles County is $514,000 (DQ News). Let us run the numbers if this person were to buy a starter home:

Median LA County home: $514,000
Down payment 10% - $51,400
Mortgage - $472,857
Rate Set at 6.25% fixed for 30 years
Property Tax - $5,140
Loan Origination - $4,728
Misc. Closing Cost - $800
Home Insurance = $2,500
Points Paid = $4,728

Total Monthly Payment - $3,750

In all fairness, this house will provide monthly tax savings of $716 a month. So the total real monthly payment rounds out to $3,035. Again, going back to the median HOUSEHOLD INCOME, meaning 50 percent of all families fall below this point (and conversely 50 percent above) we see that our median family by no means can afford this home. They take home $3,397 and their payment (conservatively) is $3,035 leaving them with $362 of disposable income. Again, is there any doubt why ARMS, interest only loans, negative amortization loans, and any bogus debt slave™ product has grown through the roof? Keep in mind that this does not include the average American household having $10,000 in credit card debt, car payments, food, utilities, and all the other necessities of being human in an urban area.

The question I leave you is, are you a debt slave™?

November 08, 2006

When The FBI Gets Involved, You Know We Are in a Bubble!

Marcia Vickers has an amazing story about mortgage fraud, in particular of a supposed realtor/financer Matthew Cox and his female associates, on Yahoo! Finance. You can read the article in its entirety at:

Bonnie and Clyde of the Mortgage Industry

The entire story is chalk full of wonderful morsels regarding the evolution of what has got to be the most corrupt sector of our economy since Enron. Take a look at the below:

“The real estate market has never offered such opportunity for graft. Since the housing market started to soar in 2001, mortgage fraud has become the fastest-growing white-collar crime, according to the FBI. Last year crooks skimmed at least $1 billion from the $3 trillion U.S. mortgage market.

Now that the market is slowing, fraud is only rising. As business dries up, there's increasing pressure on lenders, brokers, title companies and appraisers to be profitable. That means loan and title documents aren't scrutinized as carefully as they might be, and courts - many of them so low-tech they resemble Mayberry - can't keep up with the volume of paper.

Then there's the mad rush to sell, particularly by people who paid high prices for homes and suddenly can't afford the mortgages.”

Well what do we have here? Can we all collectively say “NO S*@T! SHERLOCK!” I mean this story only touches the tip of this monolithic iceberg of what we will be seeing in the next few years. 1 billion dollars in fraud and this is only reported cases because we all know that those complicit to the housing bubble have kept their mouths shut; but now that the cash-flow has turned into a flow of something else people are trying to hang whoever they can get a hand on. One would think that lenders, bankers, and brokers would be the most ethical people right especially when standards are tightening? Continue reading on:

“For the better part of the past decade Cox has stalked his prey through MLS (multiple listing service) real estate ads. He has studied county courts, looking for ones he could easily dupe with falsified documents.

Schooled as an artist, he is an expert at forging signatures. He knows how to obtain corporate seals of actual banks. He launders money in complex webs of cashier's checks made out to counterfeit names. Authorities suspect he has stolen at least $15 million through fraudulent mortgages, although the figure could be much higher.

Cox's victims have been forced to pay tens of thousands of dollars to lawyers to save their property from foreclosure on unpaid fraudulent loans. They have had to clean up ruined credit. "It's been so stressful, both financially and psychologically," says Bridget Brown.

Schlesinger says classic con men, besides being psychopathic and greedy, are driven by a need to show the world how clever they are. "Their thinking is, 'Look at all these schmucks who actually go to work and earn so much less than I do. I get up at 11, work four hours a day, and make millions.' "

Their crimes are meticulously planned, and not just to elude law enforcement. "They have an overwhelming need to let others know how smart they are," says Schlesinger. "That's why they often leave notes and various clues behind.""

Schooled as an artist? Did I tell you ANYONE can jump into the real estate frenzy? Not only that, but when you are operating in a system that is conducive to passing the buck, no one cares as long as they are getting their cut. The fact of the matter in this case, Matthew essentially played upon the greed and insecurity of all those involved. This guy was sophisticated and studied each facet of the real estate complex; lenders, insurance, sellers, buyers, and most of all how to close a fraudulent deal. The following describes how Matthew researched “experts” in his industry to gain fodder for his activities:

“Like, for instance, a 317-page hard-boiled crime novel about a serial con artist who becomes a mortgage fraud ace. Federal authorities believe an unpublished book by Cox, called "The Associates," is a blueprint for his crimes.

They say he started writing it while running a mortgage company in Tampa. To research it, he interviewed top real estate lawyers, mortgage brokers, title agency owners and others - telling them he was working on a novel and quizzing them about the ins and outs of real estate cons.

The main character in the book, Christian Locke, is a hard-working Tampa mortgage broker who ends up running his own company. He gets more crooked as the pages turn.”

Running a mortgage company in Tampa? I hate to tell you this but this kind of fraud is common essentially in many high priced areas. Don’t think so? I point you to another wonderful site called Mortgage Fraud Blog and you will see that this is far from being uncommon. You think people who’s livelihood depends on selling a home are going to argue about a few dollars or missed signatures? Why not ask the fox to guard the hen house eh? This article goes on to discuss how Matthew convinced female associates to join his scam:

“Like all great con men, Cox recognized early on he needed a moll, a charming frontperson who exudes innocence and engenders trust. Rebecca Marie Hauck, a perky, petite blond in her mid-30s, fit the bill perfectly.

Cox and Hauck, starting in December 2003, embarked on a crime spree crisscrossing six states, engaging in identity theft, money laundering and bank fraud, according to an indictment filed in U.S. District Court in Atlanta.

While on the run with Cox, Hauck assumed at least five identities and forged numerous documents, obtained fake driver's licenses, leased mail drops, rented apartments and opened bank accounts.”

But of course Hauck must have had some previous education and knowledge of real estate to help Matthew right? I mean who would sign a deal potentially being the largest in their personal life to quick talking folks only because they can close quickly, want to offer you above asking in a slow market, and are as fake as a Hollywood chest. Unfortunately many people fell for this including a medical doctor, not exactly the poster boy of stupidity.

“When her attorney, Paula Hutchinson, arrives, Hauck is thrilled that she's brought makeup for a Fortune photo session. Hauck, who is called "Becky" by almost everyone, has no more than a high school education, yet she's quite articulate. She says, "People naturally like me 'cause they say I have the gift of gab. I can talk to anyone about anything."

So again the mortgage industry is corrupt because there is zero accountability. When mortgage holders have a secondary market and hedged risked, a Fed that has flooded the system with easy financing, and essentially underwriting standards made by two-year olds we can see why these things occur. We have people making the largest monetary transaction and it is handled by high school graduates? Art school majors? Are you kidding me? No offense but if someone were to operate on my stomach, I sure hope that they have been trained in that area of expertise. If someone is working on my teeth, I sure hope they have proper dental training. And if I’m making the largest financial decision in my life, I damn well will make sure the person is credible, understands finance, has a grasp of real estate, and understands the legal and ethical issues of a binding contract. Is that too much to ask? Well when a sample of 100 no-doc loans results in 60 overstating income by 50 percent need I say more?

Any reader on the housing blog circuit needs to print this article out and store it in a drawer. Pull it out at the end of 2007 when these stories will be much more common to prove to you (and your sanity) that yes, we did and are living in a thing called the housing bubble.

November 06, 2006

Do the Herd Dance: I’ll Sell if you Sell! Woo Woo!

The L.A. Times had a headline article in the Sunday Real Estate section called “Meet the Flockers.” The article implies that the current market is a combination of behavioral economics, speculation, and mass psychology. All of a sudden those loony-fringe housing blogs seem to have some credence in the mainstream media. The article simply goes on to state the obvious; sellers are holding to their guns while more and more buyers sit on the fence. Yet the main point is that it was a cover story with a picture of sheep! Did I say sheep? Yup, no where in the article do they talk about sheep being led to the slaughter but the implication was clearer than a sunny Southern California day. The article doesn’t highlight any Earth shattering stats or figures that we have not already heard but it does show a change in mainstream media sentiment. Since the year-on-year median home price have fallen 9.6 percent nationwide many are raising an eyebrow and finally taking notice; think of being at a party and seeing uncle Jim hitting the Vodka one too many times and falling over destroying the porcelain vase.

In the same real estate section yesterday, there was an ad from Quicken Loans with a headline stating “Refinance before your rate adjusts!” Too bad the ad was for an option ARM with negative amortization. But this again hits at the core of those clueless of things in finance. In the fine print they give the hypothetical scenario of a $300,000 loan:

Starting rate: $875
After 53 months: $1600
After 5 years: $2,400

Besides the fact that the rate doubles in less than five years and that the rate automatically fully amortizes after the loan grows 10 percent this is a great loan! I’m only giving quick numbers to demonstrate how ridiculous this has gotten. This ad is like me saying “hey, I’m sorry that they screwed you with that used car of yours, but I have a great Ford Pinto I would like to sell you.” It is the equivalent of you taking ten dollars from your left pocket and shifting it to your right pocket and feeling richer for it.

Many folks think that everyone is jumping in buy using exotic financing. To be honest, the only way to make the monthly payments manageable is exotic financing but this hasn’t always been the trend. Let us take a look at one zip code in Irvine, 92602. You can just as easily choose any zip code in Southern California since the same data will show up.

Assets & Debt/Household
Median Net Worth: $65,251
Average Net Worth: $210,958
Median Home Equity: $139,645
Median Mortgage Debt: $62,293

As you can see from the above data, the average household only has a median mortgage debt of $62,293. Keep in mind this is an area that is well beyond the average median of homes in most of Southern California. Any person that has purchased a home in the last three years is clearly beyond this median. The point being, many sheep have been led to the slaughter. The reset time bomb is set to go off in 2007. 2006 lemmings still had a chance to refinance because we were still riding the last wave of the housing binge party (as highlighted by that Quicken Loan offer/guillotine). But looking at the above stats provided by ZipRealty, we can clearly see that the last few years are atypical behavior. The above stats tell us that net worth and equity were built by having little debt and building up home equity. These sound like foreign recommendations in the current market but little by little sanity is shining through.

November 01, 2006

Doing The Housing Bubble Math Dance for California.

How much more expensive is it living in California than say in 1970? We can speculate, guess, do the housing bubble cha-cha or we can use hard data and numbers to see the actual cost of living in California in 2006. This post was inspired by the lack of actual data contrasting inflation, rates, current prices, and rents and putting the numbers together in some tangible form. In addition, this data was inspired by a Northern California realtor who decided to actually crunch the numbers. So are you ready for the housing bubble math dance? Let us proceed:

1. First, we need to agree that rates are at all time lows. Our assumption is that these are artificially low in terms of historical data. According to Freddie Mac, since 1971 rates seem to average about 7.5% so we will use that as our mortgage rate. We will use this rate since one of the primary arguments is housing always goes up so we can also state that rates on average have hovered around 7.5%.

Assumption #1 - Mortgage Rate of 7.5%

Data Source:

2. Looking at Census data, we see that in 1970 rent was $484 a month in 2000 dollars. By using an inflation calculator to adjust we get a monthly rent figure of about $107. You can use the below inflation calculator to derive this number.

Assumption #2 - Rent in 1970 adjusted for inflation was $107

Data Source:

3. The C.A.R. (yes, not the most trustworthy source for data) put out a study regarding the median price of family homes. It shows the median California home in 1970 priced at $24,640.

Assumption #3 - 1970 Median California home is $24,640

Data Source:

4. You can then go to Bankrate and calculate that with 20% down, which again was typical at the time, would leave you with a loan of $20,000, and the mortgage payment would be approximately $140. With taxes and insurance, about $30 more, you would have a total of $170 PITI.

Assumption #4: $20,000 Mortgage with 20% down

Data Source:

Again, assuming tax breaks that housing offers, this would yield about a $30-50 monthly savings, meaning that it would cost $32 more per month to own.

After these numbers are calculated you can use Tom's inflation calculator again and find that the difference in today's dollars between renting and owning should be about $170.

Here is a rough breakdown of the above for those who visually do better:

Now tell me where in California will you find a place that has a rent/own difference of $170 per month?