Part II: 2008 Economic & Housing Report Presented by Gary Watts, Real Estate Economist

THE SUB-PRIME AND PRIME LOAN MARKET

Today’s various media outlets play up bad economic news more than ever, which leads to misconceptions about economic reality. In dealing with the news about sub-prime loans, they have greatly over-exaggerated the true situation. David Wyss, chief economist at Standard & Poor’s in New York said on January 4, 2008: “You look at the magnitude of the sub-prime problem, and it’s just not that big relative to the size of the economy or the financial market.”

It may surprise you to know that including Alt-A loans (less than prime but better than sub-prime) with sub-prime loans only makes up 13.1% of mortgage market.

Market Share of Loans: Sub-Prime Prime Loans FHA/VA
Fixed ARMs Fixed ARMs

U.S. 6.3% 6.8% 63.1% 14.5% 9.3%
California 15% 83% 2.0%


Delinquencies – 3rd Quarter Findings:

A delinquency in a mortgage payment occurs when just one monthly payment has been missed. In California, 21% of the loans that are delinquent are non-owner occupied home loans. The U.S. average is 13%.

Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined

U.S. 16.31% 3.12% 12.92% 6.58% 5.59%
California 12.6% 14.20% 1.00% 3.25%(2Q)

Notice that the combine d rate of delinquencies for all loans in the U.S. is 5.59%. The media never asks, “What was the all-time low delinquency rate?” The answer is 4.0%, which occurred in the 4th quarter of 2005! Also notice that 84% of sub-prime buyers have never missed a payment!

Notices of Default – 3rd Quarter Findings:

Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. This begins the foreclosure process. Most of the rise in this process is due to Florida, Ohio, Michigan, and California loans.

Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined

U.S. 1.38% 4.72% 0.22% 1.02% 2.22% 1.03% 1.69%
California Figures for California could not be found

Although the four states of California, Florida, Nevada, and Arizona currently have the largest amount of loans in foreclosure, in the 1st quarter, 24 states saw a decline in foreclosure starts. By the 2nd quarter, 36 states saw a decline. California and Florida hold 28.1% of all sub-prime ARMs, yet 33.7% are in the foreclosure process.

The media will report that 72,571 notices of default were filed in the 3rd quarter – a new record for California, surpassing the 1st quarter of 1996 with 61,541 filings. Nowhere do they say that since that time, California has built 2 million more homes and condos. By the way, those filings were on 68,746 properties.

Foreclosures – 3rd Quarter Findings:

Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property.

Sub-prime Prime: Combined vs. 2006

U.S. 3.12% 0.79% 1.45% 1.09%
California n/a n/a 2.08% 1.17% (2Q)

Sub-prime adjustable loans represent only 6.8% of the market, yet they create 43% of all foreclosures. Over the past 20 years, the average foreclosure rate in the U.S. has been 1.09%. The lowest foreclosure rate ever was 0.86%. In California, 54.6% of homeowners emerge from the foreclosure process by bringing their payments current, refinancing, restructuring their loan or successfully selling their home and paying off what they owe.

Last year, 43 states had fewer foreclosures in 2007 than in 2006. Only 7 states have a foreclosure problem. One third of all foreclosures come from just two states – California and Florida. The other two thirds come from Nevada, Arizona, Indiana, Michigan, and Ohio.

Reasons for Foreclosure:

The #1 reason: Fraud and/or Speculation! As of 12/1/07, the FBI reported 46,717 cases of mortgage fraud. As of 8/30/07, California investors (those not living in the home) represented 21% of the loans in default. In Nevada, the number is 33%, Arizona is showing 26%, and Florida has 25%.

The #2 reason: Unethical Lending! The government has enacted new standards for lenders including more education and licensing. New Truth in Lending guidelines are being put in place and so far 21 states have enacted new rules and regulations, including California.

The #3 reason: Loss of a Job, Medical Problems or a Change in Marital Status

Financial Support for Housing:

Since housing is so important to the overall economy, it will always receive help when things go wrong. Today, lenders are modifying existing loans to prevent foreclosure. Other lenders are not adjusting the interest rates upwards when the rollover period comes due. Congress has passed legislation allowing Freddie Mac and Fannie Mae to buy more sub-prime loans. FHA may raise their loan limits and cut in half, the down payment. The Federal Reserve has reduced the discount rate, and is pumping money into the credit markets. The European banks put $400 billion dollars into the credit markets in December. Investment firms, private equity companies, giant bond companies, and hedge funds are all planning on buying up delinquent mortgages. The big money houses have pretty much written off their bad loans’, getting ready to institute new underwriting standards, and will once again enter the home lending business.

(Source: Mortgage Bankers Association, Federal Reserve, FBI, Inside Mortgage Finance, U.S. Congress, and DataQuick Information Systems)

2008 Economic & Housing Report Presented by Gary Watts, Real Estate Economist

The following are the notes provided by Gary Watts to attendees to share with their clients. He feels that only as buyers and sellers are knowledgable about the market will the market start to improve. His first comments included "If you don't have to sell, then get off the market!"

FACTORS EFFECTING AND AFFECTING HOUSING

The Economy:

Over the past 12 months, our economy grew at a very healthy rate of 2.8% and creted a $11.52 trillor dollar economy. Since 2003, the U.S. has created over 5 million new businesses and almost 8.3 million new salaried jobs - employing 1.3 million more people over the past year. Add the 16 million self-employed and the 25 million part-time workers, and you can see why the government has received a lot of extra tax revenue this last year. Last year our government projected a deficit of $177 billion dollars. that would have been a 28.7% reduction from the previous year's budget. As the government's fiscal year came to an end, the deficit was only $162.7 billion dollars.

Since 1980, the Gross Domestic Product has risen 70% and helped to shrink our federal deficit. Today, our national debt is less than 1.2% of the GDP, compared with 6.0% in the 1980s and 4.7% in the 1990s. this current percentage level of 1.2% is below the 40 year average.

Corporate Profits:

The 3rd quarter numbers showed that U.S. corporations are still doing very well. They now have 21 straight quarters of double digit earnings, and corporate profits are running at an annual rate of $1.62 trillion dollars. These profits have almost doubled during the past 5 years.

Financial Corporations:

The media only talks about their huge write-downs due to the sub-prime crisis, and fails to mention that the majority of these financial companies still have surprisingly strong cash flows, and continue to pay big dividends. Since the market has already driven down their share prices, they have very little to lose by writing off any potentially bad loan. These write-offs include bad: business loans, credit cards, leasing contracts, currency fluctuations, bond devaluations, collateralized debt obligations, structured investment vehicles, mortgages, and failed mergers. If they hold these securities to maturity, they will likely get 98 cents on the dollar.

During the 3rd quarter of 2007, banks took write-downs of $43 billion dollars, yet they still made a net profit of $28.7 billion dollars - even after putting aside reserves (a 20 year high) for more potential loan losses. Here is a look ats some of the larger banks' profit positions (in billions) from the 3rd quarter; Citigroup: $2.38; Bank of America: $3.7; JP MOrgan Chase: $3.4; Wells Fargo: $2.8; Morgan Stanley: $1.54; and Goldman Saks: $2.85

(Source: Bureau of Labor Statistics, Bloomberg, Bureau of Economic Analysis, Federal Reserve)

Income Growth:

In 2006, the IRS reported that wage earners in the U.S. had their highest income growth in 5 years, and that personal income grew more rapidly than spending in 2007. Since the housing slowdown began two years ago, personal income has risen 7% leading to a $1.35 trillion dollar rise in the nation's income.

Employment:

December marked the 52nd consecutive month of job growth - this is the longest period of uninterrupted job growth on record. Over the past year, 1.3 million new jobs were created and the current unemployment rate is at 5.0%. Since 3% of the population won't work, even if you give them a job, we are near full employment. for 2007, the unemployment rate averaged 4.6%, the same as 2006.

Interest Rates:

Current conforming rates for mortgages are within 3/4 of a percent of historical lows. Last summer, rates rose to 6.75%, but by the end of the year they had fallen into a range of 5.75% to 6.12%.

With the benchmark 10-Year Treasury trading around the 4% range, interest rates for home mortgages should be around 5.5%. The reason they are higher is the lenders are still adding extra basis points for the fear premium.

Lending:

The financial markets have been in turmoil since summer. This was largely due to an over reaction in the subprime market, whereby financial institituions had bundled all types of loans into mortgage-backed securities. With investors not knowing exactly how much of their portfolio was sub-prime, they panicked and pulled the plug on additional funds being available for mortgages. As the investors either put on hold or adjusted their lending criteria, the whole landscape of lending changed.

(Source: Federal Reserve, U.s. Treasury, U.S. Bureau of Labor, IRS, Mortgage Bankers Association)

South Orange County Real Estate Blog

It is February and properties are coming on the market when our old inventory is still sitting. This is going to make a really tough Spring unless the economoy bounces back with a flourish. Homeowners please note, the old rules don't apply right now. Putting your home on the market now for it to sell by May is not the way this market is moving - unless of course you have priced your house based on 2004 comps. Sellers do not want to hear this news, but please wake up and take note. If you don't have to sell, DON'T! Get your property off the market. There are way too many real estate agents out there that are not being honest with you. They want the listing and will tell you whatever you need to hear. Agents are even letting sellers set the sales price. Why bother with an agent if you are not going to take their advice?

Our preview sheet this week there were 48 listings; 20 in Dana Point, 2 in Laguna Niguel, 19 in San Clemente, and 7 in San Juan Capistrano. If you are looking for a large flat lot with a quaint New England feel and beautiful gardens, there is just the property for you in San Juan Capistrano, 4 bedrooms, 3 baths with about 3,000 square feet on the market at $1,345,000.

In San Clemente's newer community of Talega there is a bank owned property with a huge backyard that has a canyon/hills view in the neighborhood of Farralon Ridge. The home has 3 bedrooms, 2.5 baths with approximately 2,000 square feet - it is listed at $761,000!

There are a number of new listings or re-listed listings in Southwest San Clemente. Unfortunately, many of these remain over-priced for today's market. One listing has been on the market for over 8 months and the price has still not been adjusted.

L.A. Times Article On Real Estate Agent Blogging

In today's L.A. Times, author Ann Brenoff, Times Staff Writer talks about agents blogging. The article goes onto say that working with an agent that doesn't blog is a disadvantage, since you can get to know an agent and their personality by the flavor of the blog. Many agents are blogging, but it is really difficult to keep up. Life has so many ups and downs and dedicating to writing about property when the market is slow takes alot of creativity.

A great super new construction property is just about ready for sale listed at $4.4 million in San Clemente. The homes boasts 6 bedrooms and 6.5 baths in about 5,800 square feet. What is so amazing about this property is the attention to detail as well as the spectular views that the home has been built around. It is currently bank owned and as they say today "make us an offer".

There is a nice roomy family home on the market in Capistrano Beach with 4 bedrooms, 4 baths at a little over 2900 square feet for $1.15 million. Recent remodel and the owners are relocating out-of-state. The home has a room addition over the garage built out for a mother-in-law with kitchenette and ocean view balcony. Well done and maintained off of Camino Capistrano.

Great listing up in Richmond Pointe with sitdown ocean views. This is a 3 bedroom, 2.5 bath with approximately 1800 square feet on the market for $875,000. This is a wonderful kid-friendly neighborhood.

The deals are out there we just need buyers to realize this is a fabulous time to buy!

Tax Break for Mortgage Debt Forgiveness

Just a reminder that President Bush signed into law the end of last year, a new measure that gives tax breaks to homeowners who have a mortgage debt forgiven. Prior to this new measure, if your lender forgave part of your debt under a short sale or refinance, you were responsible to pay income tax on that debt. Under the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does NOT have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

This tax break applies to debts discharged from January 1, 2007 until December 31, 2009. This applied to principal residences up to $2 million for refinances. To read the full text of this Act, go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648