I’m not quite ready to say that the "sub-prime crisis" is over, but the majority of these loans were 2/28s and most have been flushed out of the system. The early resetting sub-prime loans recast at death interest rates due LIBOR abnomally high rates, which have since subsided. Late sub-primes (and early 5/25 Prime and Alt A) loans are resetting at rates pretty near their initial rates. Most of these loans were for purchases for what were then sub-median price homes- how times have changed!
As huge as sub-prime was, the big brains are saying that the exposure to Option ARM defaults is about double the dollar value of the sub-prime defaults. And this second wave is starting to lap on our shores.
Option ARM loans provided buyers with the option of paying off their loan based on an initial discounted interest rate, interest only, 15 year payoff, or traditional 30 year amortization. There are a gazillion variations on this loan type, but in general, the initial payment is about half of the 30 year amortization payment, and the deficit goes to negative amortization. Depending on the lender, maximum neg-am is capped at 110%, 115% if you put 10% down, or 125% if you put 20% down (Home Savings) of the initial loan amount. Roughly speaking, if you are paying the minimum payment on your Option ARM loan, you will hit the neg-am limits two and a half to three years into your loan. When that happens, you are instantly jacked-up to full amortization payments based on you now reduced loan term and increased principal balance. Groady. Your required payment more than double overnight. Ouch.
Option ARM loans hadn’t really been showing up too much on the new listing or NOD markets that I follow. That is starting to change big time:
2340 Trail Ridge. Purchased 11/21/05 for $1,085,674. 1st loan was a $813,750 Option ARM with a 115% cap, second loan of $162,750. At minimum payments, this property has been going negative at about $3000 per month and now is hitting the cap. Listed at $699,000. I am pretty sure this is a re-listing and a short sale, so I don’t totally trust the asking price. But wow. Try selling in Somersett with this one as your potential comp.
949 Apollo, Incline Village. Purchase for $925,000 on 5/7/2003. After various refinances, refied for $1,406,250 on 12/19/2005, Option Arm with a 115% cap. At minimum payment, this one has been going at about $5000 neg-am a month. The NOD has been served.
I’ve got lots of others – these aren’t isolated examples, just what hit the market in the last few days. The Option ARM loans that helped facilitate the run up in prices in the mid-to-upper end market are coming due and payable. The Emperor has no clothes. Get hunkered down for the next wave.
smarten
WOW! Great data Mike.
Although you might hear a hypothetical theory similar to this on one of the business talk shows, where would you learn of data like this in the real world? This is why I love this blog.
Now Mike, looking ahead, what’s the third wave? And if you don’t mind highlighting similar data for Incline Village, I for one would appreciate it!
BanteringBear
Mike:
I think you should have included the mortgage reset chart in your post. It would allow readers to see for themselves, the carnage on the way. Here it is. For those here who have been yammering about prices bottoming out soon, well, keep dreaming.
http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html
BanteringBear
Second try, first post was eaten. Here’s the mortgage reset chart so readers can see the carnage in the pipeline. I see absolutely no indication of a bottom anytime soon, and wonder how anyone could disagree.
http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html
BanteringBear
Hmmm. It seems as if the spam filter is eating my links to the mortgage reset chart. I’ve posted links many times to this blog so I’m not sure what’s happening. Diane?
Reno Ignoramus
Ahh yes….the option ARM. The slickest fix in the Voodoo witchdoctor’s bag. The most marvelous device ever created to enable the unqualified to purchase a house. The greatest friend to the Greater Fool. And the biggest commissioned “product” for the Voodoo witchdoctors. Want to know how to make four hundred grand a year selling mortgages? Easy. Simply round up all the $12 an hour workers you can find, wink and nod when they hand in their no doc loan applications stating $120K annual income, and then qualify them at the lowest possible option payment. Presto! The truck driver can buy a $600,000 palace! The magic of “creative financing”.
I am amused at yet another Somersett listing 35% below the bubbled-up Voodoo money-fueled 2005 price. Ahh….. the magic of creative financing.
I can only wonder what this house will be worth in 2012.
Robert
The next wave? Well it really does not matter Mike. Smarten has assured us all that the bottom is now only a tad more than 6 months away, on January 11, 2009.
So, it is irrelevant that there are yet thousands of REO properties that will enter the market in the next year. Looming foreclosures in option ARMS and Alt-A, no matter. All irrelevant. Smarten assures us that in a short 6 months from now, the bottom will be reached and prices will fall no more. So who cares what the next wave is?
Joe Six Pack
I love the wave analogy. I wish more industry perma-bulls would explain why the Option ARM thing isn’t going to be a problem. Everyone wants to call a bottom in 2008, 2009 or 2010 but they don’t cite hard facts to explain why they are just speculating.
Reno Ignoramus
In June of 2005, the Economist magazine published what history will no doubt regard as one of the seminal stories on the global housing bubble. The story was two years before its time and remains one of the finest pieces yet written on the inevitable result of the easy money policies by the US Fed and other central banks after the dot com bust and 9/11. The title of the article was “In Come the Waves.”
Diane Cohn
BB, found your link in the spam filter. Thanks for the heads up.
So… this means bottom feeding really begins in 2013? Time to lower the price on my house again (may be here for a while longer, after all).
RI, is there a link to that article in the Economist online?
Paul
Diane: Did you sell the Rock House in Diamond J yet? I love it, it looks like the Nat’l Wildlife Art Museum in Jackson Hole.
Faust
If I understand the timing of NOD’s (etc) correctly, we have yet to see all the bodies wash up on the beach from the 1st wave.
What still boggles me is what is going to happen to all the >$700k houses in my area when their owners begin to NEED to sell them. I doubt anyone with a De Longchamps original is able to just do a ‘BK and Walk Away’ as they probably have a fairly loaded portfolio. But when that entire portfolio is scraping bottom they will eventually need to start selling the bigger assets to cover cash flow issues.
On the low end, I still see a lot of houses priced way above their current appraisal levels. Delusional sellers who think their “gem in the Old Southwest” will be bought for cash in a competitive bidding war. Though many of these owners are just fishing, they don’t seem to realize that no matter what the offering price is, the house will not sell without measuring up to an appraisal first. Many of these have had pending offers fall though repeatedly but maintain unreasonable asking prices.
On the high end, we see $750+ deluxe houses languishing with a sign in the front yard. They compete with delux houses all over the county. Several have left the MLS but the signs remain. Do to economic challenges driven by their other investments, these owners will eventually get to a point where they need to sell and the only way to do it will be to drop the price to something the market will support.
When that happens the middle ground ($550 area) homes will really start looking over priced and they will have to cut their prices to be competitive. and etc…
So, I think we’ve got a couple more months before the first wave recedes and shows us the wreckage it has dealt.
Reno Ignoramus
Diane, that article is available in the archives at the Economist magazine website. However, that is a pay site.
Reno Ignoramus
Diane, did you already lower the asking price on your house? I see it is at $725K. I thought it originally came on at $750K, but I may be mistaken.
Is this your marketing strategy? Are you going to drop the price $25K every 10 days? Don’t laugh. Iv’e seen this “auction in reverse” strategy work very well. Unlike typical realtor hype, this approach can indeed create a real sense of urgency. As in: we better buy now before the price drops another $25K and somebody sneaks in and snags it away from us. It will get you what a willing buyer is willing to pay very fast.
Just wondering.
Doug B. Cooper
Good stuff Mike, I agree with you and got my surfboard ready.
NAS
http://online.wsj.com/article/SB121431191157999655.html?mod=hps_us_whats_news
I’m beginning to think Reno IS living in a bubble. News like this not being reported. RGJ blathering on about last years fire, Rodeo, and getting rid of tent city. Local news is important, but come on !!!
SkrapGuy
NAS, you are NOW beginning to believe that Reno is a (popping) bubble? Now? BB and RI and Lindie(wherever she went)and Mike Z and I and others here for at least 2 years have making the obvious case that the Reno housing market became a speculative bubble from 2001-2005. And it’s been a bursting bubble, still coming undone, since then. Welcome aboard.
And to those who complain that the RRB is “just a bubble blog”, well, that’s because that’s what the Reno market became…..a speculative bubble propped up by phony money handed out to the blatantly unqualified to enable them to buy what they never could afford. We are indeed back to 2004 price levels, and working our way back to (inflation adjusted) 2000 prices. This bubble will, eventually, be wrung out of the market, foreclosure by foreclosure, short sale by short sale.
Don Cooper
Here’s Harvard’s Joint Center for Housing Report for 2008. It’s a long read but interesting. One point it makes is that a place like Reno, while suffering from a burst speculative bubble, are better off than places like Detroit where foreclosures are the result of dying industries.
http://www.jchs.harvard.edu/publications/markets/son2008/index.htm
smarten
According to SkrapGuy, “we are indeed back to 2004 price levels.”
With this in mind today Guy posted his newest listing on craigslist – 5715 Dijon Circle in Montreux. 3BD/3.5BA, 4,166 square feet on 1/2 acre. The listing price is $1.749M and according to zillow, the last sale took place in March of 2004 at $1.5M [also the Zestimate is $1.4315M].
So why has Guy listed this McMansion for $250K more? It can’t be based upon comparable sales since there have been few in this price range in Montreux in some period of time.
Don Cooper
Here is the 2008 Harvard Joint Center for Housing State of the Nation’s Housing 2008 report. It’s a long but interesting read. One point that can sometimes be overlooked is the difference in areas where housing is suffering from a financing bubble and those, like Detroit, where the you have a bubble and disappearing industries. Now that’s tough.
http://www.jchs.harvard.edu/publications/markets/son2008/index.htm
Sando
Yes we are back to 2004 prices. You can buy many many houses today for what you could have bought for in 2004. And that’s in nominal dollars. If we factor in cumulative inflation at a total of 15%-20% over the past 4 years, we are farther back than 2004. If we adjust for “real” inflation, we are back to 2003 pricing in many instances.
I can’t speak for Guy. Looks like that perhaps the Zestimate may be right for this one. Maybe he can explain the pricing?
Diane Cohn
Paul, yes, JoAnn and I sold the Rock House together. It truly is an amazing property.
RI, now the price is down to $700K. Yes, the reverse auction method works, but I’m not sure how low we can go before renting it looks attractive again. At least we’re under Zillow. Ugh.
NAS
Hi ScrapGuy-
Easy big fella
Make no mistake as to what my opinion is about the R.E. market at present & future, in particular to Reno. Re-read my comment and anything else I’ve stated on this site.
doofus
Check out the owner’s name on Guy’s listing at 5715 Dijon. Suffice it to say that Guy may have dug up a “nugget”! If I had the chance to get my foot in the door on this sort of franchise listing, I’d let the owner set any price he wanted. Though I’m sure Guy came to listing interview with a full set of gloomy charts and graphs.
Check out JoAnn’s new listing at 2105 Parkridge at $1,900,000. Zestimate $1,006,500. Sure there has been some major remodeling that Zillow hasn’t picked up, but jeez! This is almost double the Zestimates of all the neighboring houses that have not been decked out. And the 2142 square foot finished basement (and then some) has been included in the square footage on the listing. Talk about an iceberg’s chance in hell of being sold. What was she thinkin’ taking this one?
Allen Murray
Skrap, as you point out, this bubble began inflating in 2001. It began losing air in late 2005, and there is still air to be released. This is very old news. There is not much more to say about this, but I guess some of you like to repeat yourself over and over and over and over. Besides being a bubble blog, it would be nice if we talked about what cap rates are doing, how attractive land prices are now, and how cost of construction is falling. How about all of the opportunities that are out there for investors and future homeowners. I just met with some clients today that recently purchased a foreclosure in Fieldcreek that we are looking to do a major remodel on. They bought it for about $200k below last sales price and will probably put over $100K into it. I just put an offer in on a piece of property (I didn’t get it), by the University to build a 4 plex on. With every down market comes opportunity, and it takes a lot more intelligence to figure that out than constantly pointing out the obvious.
NVMojo
I couldn’t believe my ears this week. A woman at my office is closing on 1,250 sf 3 bdrm crackerbox on a postage stamp sized lot for about $235,000 off South Meadows. The bank tried to get her to close with an ARM!!!
I didn’t know those were still be offered these days!
BanteringBear
Allen Murrary posted:
“It would be nice if we talked about…how attractive land prices are now.”
Bwahahahahahaha! Thanks for the hearty laugh. Land prices are still absurdly high, better than yesteryear yes, but outrageous nonetheless. We won’t see land bottoming until those $450k fantasy prices have left the sidebar of this blog. Yawn.
Allen Murray
BB, that’s why you are a joker and not a speculator….
konvpalto
This bill has the potential of slowing down the foreclosure tides:
Approval Is Near for Bill to Help U.S. Homeowners
http://www.nytimes.com/2008/06/25/washington/25housing.html?_r=1&hp&oref=slogin
If we are to return back to historical trends,
the bill delays getting to the bottom of the market.
Inclinejj
Check the sheet on 949 Apollo Way IV..Its up for sale October 3rd
smarten
Okay Mike –
According to Realtytrac, the estimated opening bid on the 949 Apollo Way trustee’s sale is going to be $1.5667M [and BTW, it discloses the sales date as October 8th (rather than the 5th)]! So based upon your more recent commentary, are you stating you expect the trustee for countrywide mortgage to submit an opening bid in the $700K range [rather than for the full amount it asserts is owed]?
GreenNV
I don’t know the Incline market in general or this property in particular. Do you have any information on the MLS history of the property?
The majority of TDs are now recording with a bid below the outstanding loan balance. If I had to throw a guess out, I’d say Countrywide /BofA will start the bidding at $1.1M – 20% below the original loan vale of $1.4M.
You going to bidding, smarten?
smarten
No GreenNV, not bidding for two reasons.
First, for me it’s in a geographically undesirable location [up in nosebleed territory].
Second, YTD there have been only 5 sales in this neighborhood. Four of those sales were under $820K, and the fifth was at $1.2M [1049 Apollo (half a block from the subject property), 4BD/3BA, 3,484 square feet and extensively remodeled with Lake views]. At $1.5M, the subject property is way, way, overpriced. At $1.1M for a net distress sale, it’s still overpriced.
Finally, when one bids at foreclosure sale one must demonstrate [prior to bidding] that he/she has the full winning bid in cash [or cashier’s check]. Even at your below what is owed winning bid guesstimate of $1.1M, I don’t have that kind of cash.
But if you’d like to give me a non-recourse loan secured by the property…
Let’s just watch what happens to this sale.
Inclinejj
Plus this property is way way up at the very top of Incline Village..It is over 7000 feet..Not a strong market for property way up on the hill
billddrummer
To NV Mojo,
ARMs are still available, and quotes abound everywhere. The biggest difference, in my view, is that the deals getting signed now are full-doc. Stated Option ARMs have gone the way of the dodo bird.
And dodos were the ones who signed them in the first place.
Reno Realty Blog: Reno Real Estate, Market & Trends, Nevada » Option ARM Recasts are Here, Honey
[…] Where these properties are and the amount of the defaults are bearing out the predictions from The Next Wave. Look at the amounts due at the sale vs, the Option ARM loan […]