2010 Market Summary

April 8, 2010

Presented by Joycelyn Valentine

Gary Watts Market Summary

Waiting for 2010 &

Have We Reached The Bottom?

Some sectors of the economy have reached their bottom. Others have reached a bottom . . . for now… but may not have reached the bottom. Here is a look at some current issues:

The Economy

First, false signs of a recovery are common in recessions, like the 3.5% increase in the Gross Domestic Product (GDP) for the 3rd quarter of 2009. Since WWII, our economy has experienced 11 recessions and, during 8 of those, real GDP rose well before the recession ended. This means that some sectors will get worse before they get better.

1. Consumers are treating payments on mortgages, equity lines, credit cards, auto,

and student loans all as discretionary! If it is a choice between buying food and gas

or making a payment, financial responsibility seems to have disappeared.

2. Rents are plunging as vacancies mount in all rental properties: office buildings; hotels;

shopping centers; commercial developments. Next year, $600 billion in commercial

mortgage securities (issued between 2005 and 2007) are likely to begin defaulting.

3. The Fed is in a tough spot. They control monetary policy, but Congress and Obama

control fiscal policy. Congress believes in spending programs, higher taxes and more

regulation, which causes businesses and consumers to cut their spending, forcing the Fed

to create more liquidity in the financial markets. The Treasury’s daily average of issuing

notes is now $4 billion. Their share of the gross debt issuance has doubled in two years.

4. The Fed has been purchasing mortgage-backed securities ($1.25 trillion this year), which

has helped to keep a lid on rising interest rates. However, at the October Fed Meeting,

the Fed signaled that it would begin decreasing its purchases. This could cause

interest rates to rise.

5. Industrial output is at 70% of capacity, the lowest level in two decades, and 10% below

its 36-year average. Consumers are reducing debt by not spending. We are now in the

longest contraction period since the early 1990s.

6. The U.S. unemployment rate in October was 10.2%, a 27-year high after job losses

of 275,000 for the month. Since the recession began, 7.2 million people have lost their

jobs. If you count the under-employed and those that have quit looking for work, the

real unemployment rate rises to 17.2%.

All these factors, as well as others, will have an effect on our economy and its ability to grow out of the recession next year. If the economy does not, we may face a dreaded double-dip recession.

Source: Fed Minutes, Forbes, Bureau of Labor, White House Report, Bankers Association

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The Present State of Real Estate

Housing has been a major drag on the U.S. economy. The pundits first told us that we should begin to pull out of the downward spiral by the 1st quarter of 2009. Later, they said it would be late 2009. Now it is to be in early 2010. The Mortgage Bankers Association just informed the financial community that they see housing foreclosures continuing through 2010 before they level off. Here is what is actually happening:

The U.S.

♦ Since the first of the year, delinquent payments have risen from 2.5% to 4.5% on

all Fannie Mae loans – up from 1% in 2008 (Fannie Mae).

♦ All loans delinquent (90 days +) have risen to 7.10%. This is up 70% in the past

year! (First American Corelogic).

♦ Today, 10% of all mortgages are in arrears. (Mortgage Bankers Association).

♦ Last year, 44% of all prime borrowers fell behind in their payments. (Freddie Mac).

♦ As of June, 15.2% of all Option-ARMs were seriously delinquent (up from 6% last year)

and those in foreclosure have risen from 4.5% to 10% in the past year.

♦ 27% of all 1st T.D.s are at least 30 days late and if it is an Option ARM, 46%!.

♦ In the 3rd Qtr. of 2009, lenders filed 938,000 NODs (Realty Trac).

“Loan Modifications to Stop Foreclosures” . . . Not!

The truth is that banks really do not want to modify loans. This is why Hope for Homeowners and Making Homes Affordable did not prevent massive foreclosures. The Homeowners Affordability and Stability Plan, aided by the Homeowners Stability Initiative, have also proved to be ineffective. These programs were designed to stop 4.5 million foreclosures.

♦ 50% of loans modified have gone into default within 6 months of modification.

♦ 33% of borrowers who had their payments reduced by 20% or more have fallen behind.

♦ 60% of borrowers who had no payment adjustments are again delinquent.

♦ 12% of all qualified borrowers have received a loan modification.

Banking regulators are now pressuring banks to make payment reductions, in a 3 month trial program. The goal is to have 500,000 borrowers in the system by years end. As of October 1st, 375,000 were in the pipeline. The Making Homes Affordable Program and the Home Affordable Refinancing Program, by the Obama administration, have allocated $75 billion towards this goal.

Qualifications for the Making Home Affordable Program:

♦ The borrower must have obtained the loan before 1/1/2009.

♦ The loan amount can not exceed $729,750.

♦ The total mortgage payment (PITI+A) must exceed 31% of borrower’s gross income.

♦ Borrower’s income must have declined, or mortgage payments have increased or

medical bills have been incurred, or some other valid reason has resulted hardship.

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Loan Mods Continued:

Qualifications for Home Affordable Refinancing Program:

♦ Only Fannie Mae and Freddie Mac loans are eligible.

♦ Property must be one to four units.

♦ Borrower must be current on mortgage payment (only one 30-day late in past 12 months).

♦ Loan(s) on borrower’s home can not exceed 125% of current value.

The Reality:

♦ Only 40% of the nation’s 1.2 million borrowers are eligible for the Making Home

Affordable Program.

♦ Only 16% are eligible for the Home Affordable Refinancing Program, due to delinquent

mortgage payments by the borrowers.

The only good news is that in the last quarter, of the loan modifications that have been successful, 78% involved payment declines.

Government’s Financing of Homes

Today, approximately 93% of all funded loans have come from government sponsored entities (GSEs) such as Fannie Mae, Freddie Mac and FHA.

FHA

♦ These organizations’ long term average funding was 6% of all loans.

♦ Through September of 2009, they had funded 21.5% of all loans.

♦ At the end of September 2007, FHA had a reserve fund of 6.4%. By September of this

year, it had dropped to 2%.

♦ FHA has no chief credit risk office or officer!

♦ At the end of October, 17.8% of FHA loans were in some form of delinquency .

Fannie Mae and Freddie Mac

♦ Both entities are now completely controlled by the government and funded by the Fed,

since they have exhausted their reserves due to foreclosures.

♦ The government is now talking about merging the two agencies together into a single unit.

♦ Fannie Mae single family delinquency rates now exceed 4.3%. In 2008, the rate was 1%.

♦ Freddie Mac’s delinquency rate on all loans is now 2.75%. Last year it was 0.75%.

The government will once again have to “bring money to the table” to keep these GSEs functioning, as they deplete their existing reserves in dealing with the high rate of foreclosures and short sale losses. The Mortgage Bankers Association estimates that there will be another 15.2 million foreclosures in the coming years.

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The State of the State

And

Southern California

California

The state lost 39,300 jobs in September and 741,000 workers over the past 12 months. The current unemployment rate is 12.2%, with 1/3 being unemployed for longer than 27 weeks. A total of 2.2 million workers are now out of work. If one counts the under-employed and those who have quit looking for a job, the rate jumps to 22%! This loss of jobs has hurt every aspect of real estate. These job losses and the decline in home prices have led to:

♦ 7.3% decline in single family home prices in the past year.

♦ 42% of all properties in the state are upside-down but if it has an Option ARM, it is 73%.

♦ 42% of all sales in September were foreclosed properties.

♦ Defaults are up 19% over last year (111,689 in 3rd qrtr) and up 67% over the past 3 years.

♦ 10.81% of all loans in the state are 90 (+) days late – up 70% from a year ago!

♦ Banks are holding 90,000 foreclosures.

♦ 140,000 other properties are scheduled for auctions.

♦ In the past 3 months, 125,000 homes were sold in California – 40% were foreclosures!

♦ Of all Option ARMs ever issued, California holds 58%.

Source: ForeclosureRadar, Mortgage Bankers Association, EDD of California, T2Partners, LLC.

Southern California

Southern California’s median home price has declined 46% from its peak in 2007. The unemployment rate for our 6 southern California counties is at 12.06%. These job losses have caused commercial vacancy rates in Southern California to soar to 18.5%. There is 51 million square feet of commercial space sitting vacant! Here is a current look at Southern California home prices for the month of September. Prices declined an average of 10.9% over the past year.

County Median Price__% Change 3rd Quarter Mortgage Defaults

Los Angeles $ 330,000 -08.3% 17,073

Riverside 185,000 -22.1% 11,714

San Diego 325,000 -00.9% 7,062

San Bernardino 150,000 -26.8% 9,833

Orange 429,000 +0.9% 7,436

Ventura 371,750 -03.4% 2,146

Source: DataQuick, ForeclosureRadar

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Orange County

In September, Orange County’s unemployment rate was 9.4% and, in the two past years, “The OC” has lost 89,200 jobs, along with 15,000 jobs among the self-employed. UCLA is forecasting another loss for 2010 of 9,900 jobs. In the past year, Orange County business and personal bankruptcies have risen 67%! Commercial loan defaults are becoming a bigger problem in Orange County with the higher vacancy rates. In OC, 16 hotels are in default, while 47 have gone to foreclosure. In the past year, the default rate on residential mortgages has risen 155.1%! Although measures have been introduced to stall foreclosures, this year, OC still is averaging 699 properties monthly.

The median sales price rose in September 0.9% for the first time in two years, but even with the sales volume up 16.9% and historically low interest rates, prices are not really rising. This is largely due to the distressed property on the market, which represents 30.3% of our active listing inventory.

♦ 78.1% of homeowners have a mortgage.

♦ 35.0% have negative equity.

♦ 38.7% are within 5% of having negative equity

Source: U.S. Census Bureau and First American Corelogic, UCLA Anderson School of Economics

September’s Numbers:

♦ 65% of sales were resale single family, totaling 1,862 with a median price of $500,000.

♦ 29% of sales were resale condos, totaling 839 with a median price of $300,000.

♦ 58% of sales were under $500,000.

♦ 77% of sales were under $700,000.

♦ 2,222 monthly defaults were filed.

♦ 709 foreclosures occurred and there were 806 foreclosure filings.

♦ 38.8% of all sales are foreclosures.

♦ 6.85% of all OC loans are in default – up for the 7th straight month (was 0.7% in 2007)

Source: DataQuick

As of October 29th:

♦ Listing inventory is 7,749 properties, with a marketing time of 2.45 months.

♦ 4% of our inventory is foreclosures with a market time of 0.69 months.

♦ 27% of our listing inventory is short sales, with a market time of 1.85 months.

♦ 52.7% of our distressed inventory is priced under $500,000.

♦ 27.2% of our listing inventory is sitting vacant.

Source: Altera’s Orange County Housing Report

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Potential Headwinds

In 2010, there will be more financial issues facing potential homebuyers, as well as the economy in general. How we move through the known issues, as well as those as yet unseen, will determine which direction our real estate values will move.

Bank Failures

Although there have been 125 banks through October, the FDIC says there are another 200 banks in the system that may fail in the near future. When this banking crisis cycle has ended, it is estimated that as many as 2,000 banks will be closed. Let us hope they are not any of the big ones!

Tighter Qualifying Guidelines

Beginning January 1st, Fannie Mae will begin tightening the qualifying requirements for their loans. The debt ratios will be reduced in an effort to prevent or reduce future loan losses.

Treasury Purchases and Mortgage –Backed Securities

The Treasury has been purchasing government notes, bills and bonds, while the Federal Reserve has been very active in purchasing mortgage-backed securities. These two actions have kept the interest rates for home mortgages at historical lows. The bad news is that Thursday, October 29th was the last day that the Treasury will be purchasing notes, bills and bonds.

At the October Fed Meeting, it was announced that it would begin to phase out the purchasing of mortgage-backed securities. These two actions could put pressure on these sensitive interest rate securities, with the resulting effect of interest rates moving upwards.

Strategic Defaults

A strategic default is when a borrower purposely stops paying, even when they have the money. These are becoming more common on both residential and commercial properties. It comes down to a business decision. Why keep paying out of pocket to cover the difference between rental income and payments to the lender, when the property is so far under water? In Orange County 73.7% of homes either have no equity or are within 5% of having no equity. This is a potential future problem that could add up to more foreclosures.

Foreclosures and Short Sales

The sheer size of foreclosures that have already occurred, 6.3 million since the beginning of the recession, and are being held by the lenders is enormous. How many are released by the lenders, and over what period of time they are released into the market will have a direct effect on home prices. It’s clear that short sales will continue to dominate the lower end of the market as well.

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My Forecast

In mid-2008, I was asked to write an article about Orange County real estate prices and what I saw for their future. In that article, I stated that we would have to re-build the entire price structure, similar to building a home. Beginning with a new foundation (entry level), I forecast that by the early spring of 2009, largely due to all the stimulus programs, we would have developed a solid base below $250,000. By early summer, I hoped we could add another support level at $350,000 and, by the end of the year, my wish was to see most properties under $500,000 reaching a solid base.

As of today, the under $500,000 market has firmed up and one could expect minor price increases as long as the multiple offers continue.

My forecast stopped there, as it made sense that properties above $500,000 were going to experience softness. This would be due to the basic fact that almost all sellers under $500,000 had lost their entire equity. These buyers used to move up into the next real estate tier of $550,000 to $750,000 priced homes. Without these buyers, there would not be the usual move-ups, leaving this next level in a void and thus creating an additional void of move up buyers for the properties priced from $750,000 up to $1,500,000. When prices rise above $2 million, potential buyers are usually less affected by economic downturns.

Unfortunately, for properties over $550,000, the sales will continue to be slow. Limited financing programs, potentially increasing interest rates, foreclosures and short sales will continue to put pressure on real estate values. Do not expect 2010 to be a rebound year. If you survived 2009, you should experience pretty much the same for 2010. It took 10 years of government intervention and creative loans to get into this mess. It can not be solved in three short years!

We will continue to grind our way through a troubled market for quite some time, especially here in California. The Alt-A and Option ARM loans will be a huge problem in the coming years for California. Last year Option ARM recasts totaled $7.2 billion. Next year (2010) the number grows to $11.8 billion, $11.4 billion in 2011 and $18.2 billion from 2012 forward. What is sad is this “grinding” appears to be the better scenario. There are so many issues, on so many levels, that still remain unresolved. Because of this, we are all left with an unclear picture of our economy over the next few years. However, next year is fairly clear. There will be more real estate related problems and that will continue to keep a fairly tight lid on any significant price appreciation.

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Tax Credit Update!! (Hurry!!)

April 7, 2010
 

Homebuyer Tax Credit Chart 2010 

find the article at: 

http://www.car.org/legal/legal-questions-answers/2010-qa/homebuyer-tax-credit-2010/” 

  

March 30, 2010 (revised) 

To help stimulate home sales, both the federal and state governments are offering tax credits for 

Californians purchasing their piece of the American dream. Federal law offers up to $8,000 for firsttime 

homebuyers and $6,500 for long-time residents. California law offers up to $10,000 for firsttime 

homebuyers or buyers of properties that have never been occupied. Here’s a handy summary 

of the two tax credit laws: 

HOMEBUYER 

TAX CREDIT FEDERAL CALIFORNIA 

Amount of Tax 

Credit 10% of purchase price not to exceed 

$8,000 for First-Time Homebuyers or 

$6,500 for Long-Term Residents. 

5% of purchase price, not to exceed 

$10,000 for first-time homebuyers or 

buyers of properties that have never 

been occupied. (See also Maximum 

Credit for All Taxpayers.) 

Date of 

Purchase 

By June 30, 2010, but taxpayer must 

enter into a written binding contract by 

April 30, 2010. 

From May 1, 2010 to July 31, 2011, 

but an enforceable contract must be 

executed by December 31, 2010. 

Principal 

Residence Yes. Property purchased must be the 

taxpayer’s principal residence which is 

generally the home the taxpayer lives in 

most of the time (26 U.S.C. § 121). 

Yes. Property purchased must be a 

qualified principal residence and 

eligible for the homeowner’s 

exemption from property taxes (Cal. 

Tax & Rev. Code § 218). 

Type of Property House, condominium, townhome, 

manufactured home, apartment 

cooperative, houseboat, housetrailer, or 

other type of property located in the U.S. 

Single-family residence, whether 

detached or attached. 

Home Page > Legal > All Legal Q&As > 2010 Q&As > Homebuyer Tax Credit Chart 2010 

Eligibility 

1. First-Time Homebuyer: Up to $8,000 if 

buyer (and buyer’s spouse if any) has not 

owned a principal residence during the 

three-year period before date of 

purchase; OR 

2. Long-Time Resident: Up to $6,500 if 

buyer (and buyer’s spouse if any) has 

owned and used existing home as a 

principal residence for 5 of the last 8 

years. 

1. First-Time Homebuyer: Up to 

$10,000 if the buyer (or buyer’s 

spouse if any) has not owned a 

principal residence during the threeyear 

period before date of purchase; 

OR 

2. Never-Occupied Property: Up to 

$10,000 for a principal residence if 

the property has never been 

previously occupied as certified by the 

seller. 

Income 

Restriction 

Yes. Tax credit begins to phase out for 

modified adjusted gross income (MAGI) 

over $125,000 (or $225,000 for joint 

filers). No tax credit at all for MAGI over 

$145,000 (or $245,000 for joint filers). 

No 

Maximum 

Purchase Price $800,000. N/A 

Refundable Yes. Any amount of the tax credit not 

used to reduce the tax owed may be 

added to the taxpayer’s tax refund check. 

No 

Repayment No repayment required if the buyer owns 

and occupies the property for at least 36 

months after purchase. 

No repayment required if the buyer 

owns and occupies the property for at 

least two years immediately following 

the purchase. 

Multiple Buyers 

(not married to 

each other) 

Tax credit may be allocated between 

eligible taxpayers in any reasonable 

manner. 

Tax credit must be allocated between 

eligible taxpayers based on their 

percentage of ownership. 

Maximum Credit 

for All Taxpayers N/A 

$100 million for first-time homebuyers 

and $100 million for never-occupied 

properties, both on a first-come-firstserved 

basis. 

Reservations of 

Credit 

N/A 

Yes. Buyer may reserve credit before 

close of escrow for a property that 

has never been occupied by 

submitting a certification signed by 

buyer and seller stating they have 

entered into an enforceable contract 

between May 1, 2010 and December 

31, 2010, inclusive. 

When to Claim 

Full tax credit may be claimed on 2009 or 

2010 tax returns. 

1/3 of total tax credit may be claimed 

each year for 3 successive years (e.g. 

$3,333 for 2010, $3,333 for 2011, and 

$3,333 for 2012). 

Tax Agency Internal Revenue Service (IRS). Franchise Tax Board (FTB). 

How to File First-Time Homebuyer Credit and 

Repayment of the Credit (IRS Form 

5405) to be filed with tax returns 

Submit application to the FTB to 

obtain Certificate of Allocation. The 

FTB may prescribe additional rules 

and procedures to carry out this law. 

Other 

Restrictions 

Cannot be an acquisition from related 

persons as defined; cannot be an 

acquisition by gift or inheritance; and 

buyer cannot be a non resident alien. 

Cannot be an acquisition from related 

persons as defined; buyer or spouse 

must be 18 years old; buyer cannot 

be another taxpayer’s dependent; 

credit is allowed for only one qualified 

principal residence; and credit 

allowed cannot be a business credit 

under Cal. Tax & Rev. Code § 

17039.2. 

Legal Authority 

26 U.S.C. section 36. 

Cal. Rev. & Tax Code section 

17059.1 (as added by Assembly Bill 

183). 

Date of 

Enactment November 6, 2009 (as revised). March 25, 2010More Information IRS Web site