What a winter!

I've been really really busy this winter. Holy cow. Two posts since December.

As my readers already know, I am not a real estate professional. I'm not a Realtor. I'm not a lawyer involved in closing. I'm not an appraiser. So when my real job makes demands, there's not always time to research properties. IrvineRenter, on the other hand, is researching properties as part of his job. (Of course, his blog is in absolutely every way superior to my blog, so the comparison is gratuitous.)

So this winter has been interesting. Since the summer, Case-Schiller went flat and even increased in several cities. In the winter, there hasn't been as much of a seasonal downturn as there is in most winters. We just learned that, seasonally adjusted, Case-Schiller increased in December, Of course, that means it fell, but less than in most Decembers. But remember, Case-Schiller is pretty far behind. In late February, we're getting data from December. What will January Case-Schiller look like?

Early indicators are bearish. 1) New home sales have fallen to a record low; they had bounced back ~30% off their bottom that they hit last January, but are now back into their lowest levels since the Census Bureau started collecting data in the 60s. 2) Existing home sales fall sharply in January to right about their volume in September before the New Homebuyer's Tax Credit program threatened to end. October and November sales were up dramatically. People exclaimed "Real estate is alive again. We've hit bottom. Buy now or be priced out forever." Ahem...

Since the stimulus didn't end, people took their time finishing up closing properties in November and closed them in December. Then January rolls around and volume plummets.

This surge in volume will happen again in April. And the drop off in volume will happen again in May. That's what stimulus programs accomplish.

As I've pointed out before, this spring is panic time for today's sellers. If they want to sell their house, they'd better do it before April.

1) In March, the Fed's program to buy $1.3 Trillion in residential mortgage backed securities (RMBS) will conclude. The Fed has already purchased $1.2 Trillion. It's almost done. This will cause interest rates to rise ~0.5%. This will decrease borrower's bidding power, meaning that housing prices will have to drop to meet the prices buyers can bid.

2) The tax credit for new home buyers -- and for existing home buyers, too! -- will disappear. This tax credit increases the price of houses by $8K. Now, it doesn't hurt the buyer to pay an extra $8K for their house -- the government will pay them back that $8K. But it does mean that when the program disappears, all unsold houses will loose $8K overnight.

3) We are not nearing the end of the housing crisis. We haven't even hit the worst of it yet. Fredie Mac reported its delinquency rate for January; a new record high. The flow of distressed properties is not tapering off, it's picking up steam. The more distressed properties, the lower housing prices go. (You have to see the chart.)

So sellers: You better hurry up and get your house sold before April.

How do you do that? By making sure you don't price your house too high.



Today's sellers are listing their house for too much. They live in Southern Village where houses sold last summer at ~$200/sqft. That's more than I would pay, but that's another topic. Today's sellers think that they can get another $33/sqft. They are asking $398K for 1708 square feet of house -- on 4326 square feet of land!. That comes out to $233/sqft. They will not get this price. Their house will not sell before April. Their buyers will not get a 5% interest rate. Their buyers will not be given $8K from Uncle Sam to complete the transaction.

They will chase the market down.

How did they spend their years in their house? By financing greater and greater amounts of debt as often as they could.

05/26/2000 -- DEED OF TRUST --$214,500 First mortgage, an ARM, from Wachovia. Original purchase price: $218K. Downpayment: $2,500. 1% Down.

05/09/2001 -- DEED OF TRUST -- $215,000 Refinanced ( only $500?) Wachovia.

10/21/2002 --DEED OF TRUST -- $25K 2nd Mortgage from Bank of America (BoA)

10/21/2002 -- DEED OF TRUST -- Refinanced to $225,000 with BoA

10/07/2003 -- DEED OF TRUST -- Refinanced to $251,178.88 with BoA

08/25/2004 -- DEED OF TRUST -- $25,000 2nd Mortgage with BoA

11/28/2005 -- DEED OF TRUST -- HELOC $25K with BoA

08/30/2007 -- MODIFICATION AGREEMENT -- Their $25K HELOC becomes a $125K HELOC.

$125K HELOC! What was BoA thinking? The bubble was bursting, why open up another $100K worth of debt to these junkies? They owe $401,178.88 on their house if they fully tapped out their HELOC. No wonder they are asking $398K. In the last 9 years, these owners invested $2,500 and saw a payout of $150K. Unfortunately, they have trapped themselves under a mountain of debt. These owners are headed for foreclosure.

Analogy

From Dinosaur Comics

Foreclosure news

N.C. Foreclosure filings up 17% in 2009

HT: www.patric.net

Chase the market down

XXX Sylvan Way $139/sqft. Asking $359,000.

Sellers: don't miss out on the fantastic interest rates before the Fed stops its $1.3 Trillion MBS purchase program. CalculatedRisk says the program is 85% complete and is on track to finish by April 2010 as scheduled. At that point, expect mortgage interest rates to jump 0.35 to 0.5% over night. (The Fed seems to think rates will jump by 1% overnight, but I trust CR's analysis more). Higher interest rates mean buyers will be bidding less. That's less money for you.

Remember: you're holding on to a depreciating asset at a time when the government is bending over backwards to make sure you'll receive as much as possible for that asset.

My tax dollars are going into your pocket. Rob me while you still have the chance.

...or chase the market all the way to the bottom.

Today's property was listed on December 16th for $385K. I mean, it was listed December 16th, 2008. In the past year, the owners lowered their asking price to $380K, then to $368K. They took their house off the market for a short period and then relisted in September (giving it that "fresh" look) for $365K. Each time they lowered their price only enough to make sure it didn't sell.

Imagine if in December they had priced it for $370 instead of $385. They would be done with the arduous task of selling a house, and they would have gotten more for it than they will now. They are chasing the market downward with delusions that their house is worth more than what the market will bear.

April's going to be an interesting month. The home buyer's tax credit will end AND the Fed's MBS purchase program will end. There will be a rush of volume in April. May, not so much.

If you haven't sold by April, god help you.

Three years old.

This is as good a market as any seller will find for the next decade. The fed has lowered interest rates to 4.5%. The fed is even giving buyers an extra $8K (which means only that buyers can bid an extra $8K for the same house).

If you're trying to sell your house now, and you haven't sold yet, you need to lower your sales price as quickly as possible to unload your property now while the unloading is still good. The longer you wait, the higher your buyer's interest rate is going to be, and the less aggressively they can bid.

Ordinarily advice on my blog is of the form "if you're thinking about buying a house now, don't" -- so this is a little out of character that I would have something even remotely encouraging to say to current home owners. I'm not a current home owner, so I don't put much (any) time thinking about what it is to be in their position. But honestly, with interest rates this low, there's never been a better time to sell.

There has never been a better time to sell.

The bubble has peaked in the rest of the country, the fed has stepped in to keep interest rates low nationwide. The Fed stepped in to help the hardest-hit areas; by forcing down interest rates, the fed is supporting higher housing prices. Chapel Hill home owners benefit from these low interest rates -- but only if they sell now. If you haven't sold your house yet, and you intend to sell, you need to sell as quickly as possible. The market will only continue to loose ground from here.

Today's featured properties are the some of the ones that have been on the market the longest. (I am now keeping a database of all the houses for sale as listed on Realtor.com. When I figure out how to post files, I'll upload it for everyone else.)

XXX Tadley Drive Listed 2/13/2008. 669 Days ago.
XXX Rose Walk LaneListed 7/7/2007. 890 Days ago.
XXX Oval Park Place Listed 3/16/2007. 1004 Days ago.

Imagine having your house for sale for over 1K days. This last property has been on the market the very longest. It is coming up soon on its three year anniversary. If a child had been born the day this property had been listed, then that child would be walking, talking, and dressing up like Buzz Lightyear.

Now and Then

Chapel Hill houses increased in price dramatically in the last decade. These price increases coincided with a housing bubble in the rest of the country.

So the question that potential buyers have to ask themselves is this: were Chapel Hill's price increases due to the bubble or due to a change in the desirability of Chapel Hill?

Houses were affordable in Chapel Hill ten years ago.

One house near campus, on Roosevelt Drive sold for $234K in 2000. It's an 1800 sqft house with a very nice location. A modest house, not very large. That the house is currently asking $450K.

What does $234K get you in that neighborhood today? This 900 sqft condo.

How about this house on the eastern edge of Chapel Hill? New, it sold for $369K in 2003. This is an upper end house, with more than 3400 square feet. Today, it's asking $459K.

What does $359K get you in that neighborhood today? This house at half the size.

Houses used to be affordable. They stopped being affordable. If no one can afford to buy the houses, then no one will -- and houses will languish unsold on the market. A drop in sales volume, then, is indicative that prices are too high. Prices will only rise to what the market can bare. The market has not changed enough to bear the current prices. This year's low sales volume is evidence that sellers are asking too much.

If I were a buyer right now: I would wait to buy since I could buy more house for the same amount of money later. Prices will drop in Chapel Hill.

If I were a seller right now: I would make sure to undercut the price of my neighbors to sell my house as soon as possible. The longer you wait to sell your house, the lower it will sell for in the future. You're holding a declining asset. The longer you hold, the more damage it does to you financially.

Negative Equity

I haven't come across very many houses in Chapel Hill where the owners owe more than the asking. Generally, this is a good thing for the owners and for the town, but the bear in me who wants to see a return to normal home pricing would prefer to see foreclosures and strategic-defaults which would flush out all the bad debt in the system quickly. Instead, it looks like housing will be a drain on the economy for the next several years.

This was a big day for mortgage data. First: a link to CR, who today posted a graph of the negative equity populations for all 50 states; NC ranked 38th (lower rank meaning higher %age of negative equity). Overall, 23% of mortgage holders are underwater.

Case-Shiller was up again for October, as it was for September. This is both a shock given the last year and a half of consistent declines, and given the a-seasonality of the uptick. September and October are usually cooling periods where volume drops considerably from the summer month highs.

Most believe that the boost in price and volume for the past two months was due to first-time homebuyers rushing to beat the Nov 30th deadline for the homebuyer's tax credit (which was extended). This borrowing forward of future demand should depress volume until we near the April deadline. I am expecting November volume to come in very low. We'll see.

Not really a short sale

XXX Cheswick Ct $187 /sqft. Asking $239,900.

Today's property has a pink kitchen. Maybe that's why they feel it is worth so much.

It's also a "short sale," according to the listing.

It's asking $239,000 after having been purchased in 2007 for $250K.

Today's seller does not understand the term "short sale." A short sale is when the BANK looses money. If the seller looses some or all of their down payment, that is not a short sale. It's a bummer.

When the seller is trying to sell their house for less than what they owe on it, that is a short sale. In that case, the bank has to approve the sale and usually drags their feet for a long time. Short sales take twice as long to close as do conventional sales.

Fortunately for the knife-catcher who ends up buying this place, the bank is not losing money and will not drag their feet on closing this sale. The bank doesn't care at all if the seller looses their down payment.

Todays owner put 10% down on a $250K purchase price. The took out $200K from "Florida Corporation" and another $25K HELOC from National City Bank. The owner stands to loose $10K of their $25K down payment. This house is only selling at a 4% discount from its 2007 price. The $10K loss, however, is assuming they get their asking price. That's also ignoring the 6% cut that the realtors will take -- 6% of 240K is 14.4K. Holy cow. 4% depreciation + 6% realtors fee. That's 10% of the price of the house. If the sellers get their asking price, they will lose 100% of their down payment.

100% loss. That's a staggering figure.

Fortunately for the bank, they at least had 10% down. 20% down is the norm, but 2007 was a different era.

6% goes to Realtors. Gee. That's 60% of the down payment for these sellers. 60% seems awfully high. Are Realtors really worth that much money?

CR links for the day

I love CalculatedRisk. If you're reading my blog, and you're not reading CR, I'd recommend doing so. Because CR posts so much content so frequently, keeping up with his blog is a full time job. So the service I'll offer is to link to relevant CR stories.

It's only 8 am on the west coast, but already CR has had two terrific posts.

1) North Carolina unemployment is now at 11%. It is very near it's all time high. CR has a graph comparing the unemployment figures for all 50 states. NC ranks 11th for unemployment.

2) Forecasters are calling for housing price decreases through 2010. These forecasts are based on the observation that foreclosures are still climbing and are seemingly not based on the "interest rates have to return to historical levels sometime" argument that I've been making.

Meadowmont

I haven't picked on Meadowmont for a long time, but only because it seems too easy.

There is one realtor in Chapel Hill whom I like. I won't link to his blog, because I don't want him to know I read it -- and judging by my recent harsh words for realtors in the area, I don't want to stigmatize him*. What he does is post regular updates for recent transactions, broken down by neighborhood, and which houses are for sale in that neighborhood. This includes their asking price and the square footage of the house. It's really useful for watching transactions over time. I've been keeping a record of everything he's posted since June or so. You can find his blog pretty quickly on google if you search for chapel hill real estate blog neighborhood update.

(*I used to have a realtor follower, and she left a message once saying she enjoyed my blog. But she's deleted that message, either to distance herself from my bearish attitudes, or because she doesn't like my opinion of her national organization.)

From this Realtor's blog, I was able to watch something astonishing:

The only houses to sell in Meadowmont this summer sold for ~$200/sqft. They have a dozen houses in the $300 to $400 per square foot range. Ok -- some of those links were for houses in the $200 /sqft range -- but those were 6K sqft houses. Each one that I linked to cost more than $1M. Or I should say, each one is asking over $1M.

Today's property is a foreclosure. It's not yet on the market. SunTrust foreclosed in July. They haven't gotten their act together yet to put this property -- originally purchased for $1,048,000 -- onto the market. Instead, it stays on their books as a non-performing asset. If I held shares in SunTrust, damn right I'd sell.

The history for the property doesn't look good.



XXX Circle Park Place

(As identified by realtytrac.com)

12/15/2006 DEED OF TRUST -- $750K Adjustable Rate Mortgage from SunTrust

2/15/2006 DEED OF TRUST -- $270K Second Mortgage from MERS.

03/19/2008 DEED OF TRUST -- $230K Third Mortgage from the owner's family trust.

07/28/2009 FORECLOSURE -- Sold back to SunTrust for $858K.


Todays owners placed a $28K down payment on a $1M house. 2.6% of the purchase price.

How long do you think SunTrust will keep this off the market? What happens to the other Meadowmont sellers when they see that the only house to sell since MARCH 2009 is a foreclosure property?

Chapel Hill Realtors love the housing credit

Marie Scheuring wants you to know that this is great news:

Congress has passed a bill to extend the original Dec 1, 2009 deadline to include buyers who are under contract by April 30th and closed no later than end of June 2010. This is great news for first time buyers who just couldn't get it together or find the right home by now.

Jody Bakst is really excited about the extension:

The significant changes are that the tax credit has been extended, the income limits have been raised to cover more buyers AND now there is a credit available to move up buyers that have lived in their houses at least 5 of the last 8 years. The time is still right to buy. There is great inventory and interest rates are at all time lows.

Chapel Hill realtors are not alone in loving this credit.

Of course Realtors are excited about the credit. They skim an extra $195 per sale off the top because of this credit. They expose either their stupidity or their dishonesty by pretending that the credit is a good thing for buyers. If they don't see the tax credit as making housing more expensive, then they are stupid. If they do see it as making houses more expensive, but want you to ignore that fact and purchase a house anyways because the credit earns them more money, then they are being dishonest.

If Realtor's excitement over the credit were genuinely their excitement for you the buyer, then here's what they should offer. They should acknowledge that the tax credit only means that buyers have to bid more money on houses they would otherwise be able to purchase for less. They should acknowledge that this higher bidding price means a higher commission for them, since they take 3% of the purchase price. Finally, they should voluntarily reduce their fees by $195 so that they don't directly benefit from the tax credit.

Hey, if the tax credit was actually causing people to buy who otherwise wouldn't, then Realtors would still be benefiting indirectly from the credit due to increased sales volume.

I'll bet you $100 that no realtor would ever suggest this plan.

Everybody gets $6.5K to buy a house

Who benefits from the extension of the homebuyers tax credit?

1) Current home owners
2) Realtors
3) Banks


Why?

1) Current home owners: The new extension to this tax credit allows anyone*, not just first time home buyers, to receive a tax credit. That means that people who are currently selling can expect their buyers to bid $6,500 more than they would otherwise be able to. The market will rest on an artificial support.

It's certainly not the home buyer who would benefit. If the tax credit allows them to bid $106,500 on a house that they otherwise would only be able to bid $100K on, that doesn't make it any more likely they would win the auction. Anyone else who could have bid $100K on the house can ALSO get the tax credit and also bid $106,500 on the house. If everyone can bid X more for an item, the price of that item goes up by X. Handing out $X to everyone doesn't make anything more affordable.

No, the people who benefit are current home owners who are able to sell their house at a higher price than they would otherwise be offered. If they were shrewd, they would pocket the extra money and wait until house prices declined (renting in the mean time) before buying another house.

*Minor disqualification for current homeowners that have lived in their current house for less than 5 years.

2) Realtors. Realtors get 3% commision on a transaction. Since all the tax credit does is make houses $6500 more expensive, realtors who close a particular transaction can expect to make more money on that transaction. Their 3% commission for the extra $6500 is an unearned bonus of $195. American tax payers are giving realtors $200 bonuses.

3) Banks. The artificial floor in housing causes fewer people to think that they are under water. These people are less likely to walk away from their mortgages. The banks are scared to death that consumers will wisen up to their bullshit story of homeownership as the keystone to the american dream. Maybe they'll realize you can be happy without an obscene mountain of debt hanging over you. If everyone were to walk away from their overpriced shelters, then the banks would be left holding the bag. The foreclosure of all the properties that are currently underwater would reset housing prices downwards -- banks would be able to recoup less than 60% of the value of the loans they had made.

I'm not happy to see my tax dollars benefiting any one of these groups.

Residual Delusion

There are some attractive properties below $150/sqft within the Chapel Hill school district. Today's property is not one of them.

XXX Oxford Road $225/sqft. Asking $289K.

Purchased new in 1992 for $139K.

03/16/1992 DEED OF TRUST [No image found]

11/23/1993 DEED OF TRUST North american mortgage company -- $127,500

03/10/1998 DEED OF TRUST Capital savings company -- refinanced for $132,000

06/03/1999 DEED OF TRUST BB&T -- HELOC $25K

03/06/2001 DEED OF TRUST Transland financial services -- Refinance $153K

02/19/2003 DEED OF TRUST State Employees Credit Union -- HELOC $25K.

Total debt, $178K.

$300 Billion

The Federal Reserve's summerlong initiative to keep mortgage interest rates low was a stunning success. By buying mortgage backed securities at incredibly high volumes, it simulated high demand. High demand kept the interest rates on those securities low. That meant people buying this summer were able to finance at historically unprecidented interest rates in the range of 4.5 to 5.0%.

Low interest rates meant that home buyers could place bids with a higher principle. This helped keep housing prices inflated. A key part of keeping housing inflated is making sure there are buyers who can bid inflated prices. If the Fed hadn't stepped in, interest rates would have risen and prices would have crashed harder.

Well, $300 Billion have been spent. The program is over. Mortgage rates should start rising.

I was surprised this past summer to not see as much price depreciation as I had anticipated. I didn't quite realize what was going on.

Irvine housing blog spent the week discussing various aspects of what to consider in a house purchase. Tuesday's post showed a table of interest rates vs principle that can be bid on a house given a fixed monthly payment. Going from a 5% interest rate to an 8% interest rate causes a 26% drop in the price of the house.

Can you imagine that? Save up for years until you have $100K to make a down payment on a $500K house, and after 2 years you're 6% under water? Consider that if you'd had all your money in the S&P at the height of the stock market in 2008, you would only be out 30%. That's still 70% remaining. 70% sucks, sure, but it's way better than -6%. SeattleBubbleBlog does a much better job making this point. Except the point The Tim made is to compare buying in 2007 vs investing in 2007. The point I want to make -- or rather to summarize from others -- is that there's still that much loss waiting! Buying a house now means you will be under water on that house in 2 years.

$300 Billion. Was that a good use of taxpayer money?

Charlotte: 12% Unemployment

Interesting article on the Post about the effect Wachovia's demise has had on Charlotte.

I'm also enjoying the Vanity Fair article on the Wall Street meltdown back in September 2008. On Wachovia:

Meanwhile, Jon Pruzan, the Morgan Stanley banker who had been assigned to review Wachovia’s $122 billion mortgage portfolio—to crack the tape—finally had some answers. A team of Morgan bankers in New York, London, and Hong Kong had worked overnight to sift through as many mortgages as they humanly could.

“Now I know why they didn’t want to give us the tape!” Pruzan announced dourly at a meeting before they headed over to Sullivan & Cromwell to begin due diligence on Wachovia. “It shows they’re expecting a 19 percent cumulative loss.”

“You’ve got to be fucking kidding me,” Robert Scully exclaimed. “We obviously can’t do this deal.”

To make it work, Morgan Stanley would have to raise some $20 to $24 billion of equity to capitalize the combined firms, a virtual impossibility under the current market conditions. Scully described Wachovia’s mortgage book as “a $40 to $50 billion problem. It’s huge. The junior Wachovia team is not disputing our analysis.”

Kelleher, who had been keeping a careful watch over the firm’s dwindling cash pile, had just taken a look at Wachovia’s numbers for himself and observed, “That’s a shit sandwich even I can’t get my big mouth around.”

Walk to Foster's

XXX E Columbia Place $215/sqft, Asking $409,000

One of my favorite restaurants in Chapel Hill is Foster's Market. Today's property is only a short walk from there. That's fortunate for today's owners because they'll be able to continue walking to Foster's for a long time. This house will not sell at this price.

I suppose it's fortunate for them that they didn't completely tap the housing ATM.

Feb 2004: Purchased for $270K. $54K (20%) down, $216K loan from Bank of America

Nov 2005: HELOC of $39,100 from Charter One Bank

Sep 2006: HELOC of $100K from RBC Centura (paying off the $39K HELOC)

Total debt: $316K.

The prior owners bought the place for $238K in 2002. The owners before them bought the place for $225 in 2000 when it was new.

What a run up!

Interest rates

Having looked at the property records for several dozen houses now, I've gotten a general sense (not data) for average financing in Chapel Hill. The most common feature is 10% down. This is usually accomplished by a 80% first mortgage and a 10% second mortgage. Fairly often, I'll see an additional HELOC on top.

When you require 10% down, there are more people who can bid price X than if you require 20% down. Fewer people have twice as much in savings. This means that requiring 10% down inflated demand and prices rose. Now that banks are back to requiring a 20% down payment, prices will have to fall.

That's said and done. I think the price drop associated with the 10->20% DP increase will have been factored into the market by the end of next summer.

The other shoe to drop will be the increase in interest rates. If you buy at a 4.5% interest rate, and two years down the road, someone else is only able to get a 6.5% interest rate, then you loose some serious cash. (I'll get to that math below.) The fed succeeded this summer in keeping interest rates at historic lows. They gingerly placed delicious cheese wedges on the door steps of houses all across america to lure unsuspecting consumers into the debt trap that the previous owners had set for them. Todays borrowers were betrayed by their government. I feel sorry for them, and five years down the road, when they start going into default in record numbers or just start mailing their keys to the banks, I'll understand their protest.

On the other hand, they're idiots for buying now, and I have trouble feeling bad for idiots for very long.

Here's the deal with interest rates. There are X houses and X buyers. The houses are of varying qualities and the buyers have varying levels of income. If you were to sort all the buyers and houses by income and quality, then you would be able to assign each buyer to a house. This is more or less what the market does. Buyers with higher incomes are able to bid more agressively in order to obtain houses of higher quality. Everyone bids as much as they're willing and able.

A buyer's income dictates the monthly payment they're willing to shoulder. Monthly payment and interest rate together dictate the principle that the buyer is willing to bid. Assuming incomes don't change (they haven't for the past decade!) and that everyone gets the same interest rate, the principle is irrelevant. The real bid is the monthly payment burden. "My income is Y so I'll shoulder Z per month."

When a person with income Y willing to make a monthly payment Z takes out a loan at a 4.5% interest rate, the principle of the loan they're taking out is greater than if they are offered a 6.5% interest rate, but still constrained to a monthly payment Z.

Some real numbers. Plug them into this calculator if you'd like:
$500K house
4.5% interest rate, 30 yr
20% down.
400K loan

= $2,026 Month.

They have 100K "invested" in the house.

Now

Someone is going to purchase their house two years from now at a 6.5% interest rate. They also can afford a $2,026 monthly payment. What can they bid?

$2,026 Month
6.5%
$320,000
+20% downpayment
= $400K bid.

In two years, the $100K down payment evaporates. 20% loss on the property because the interest rates rose 2 points. This is why everyone is wondering worriedly about just how long the Fed can keep interest rates this low.

This is the worst possible time you could buy. Don't let a realtor tell you otherwise.

900% Return on Investment

XXX Brookgreen Drive $199/sqft. Asking $513,000

Invest $25K in a 10% downpayment on a $250K house. Wait 10 years. Sell that house for $500K. You make $225K off $25K

But before you say "that sounds too good to be true," just wait until I tell you that you don't even have to sell the house to start seeing a return on your investment!

Here's the timeline for todays home-debtors:

01/29/1999 Purchased for $251K, $225K mortgage. $26K down. Spruillco Ltd and Norwest Mortgage made that happen.

10/16/2000 Took out a stand alone 2nd mortgage of $25K from Bank of America.

01/05/2004 Refinanced their 1st mortgage with a $218 Mortgage from Wells Fargo.

03/10/2006 Refinanced both mortgages together into a single $356K mortgage with the Carolina Home Mortgage Company.

Today's home-debtors stand to make a handsome profit if they're able to get their asking price. Hell, they've already spent an extra $106K from their original $26K investment. They've already made a handsome profit. Too bad for today's debtors their next buyers will have to put twice down what they had to. Instead of $25K, the next sucker in this ponzi scheme will have to put down $100K.

Pipeline

The foreclosure process is going to help purge our system of excess debt. It will be very expensive for banks, and traumatic for home-debtors. But it will return housing costs to those which can be sustained.

Home buyers between 2001 and 2007 started extending themselves more and more so that they could purchase a home. Real estate appreciates endlessly, of course, and so you make money by owning real estate. The more expensive a house you buy, the more money you make. Over extending yourself to afford a home is in fact a sound financial decision. The more people that over extend themselves, the more housing prices increase, the more attractive over-extension becomes. It was a positive feedback cycle: all that needed to happen was for lenders to keep pumping debt into the system. Thus the exotic loans: 10% down, 0% down, subprime, liar loans, interest-only loans, negatively-amortizing loans.

Unfortunately for the people that bought between 2001 and 2007, housing couldn't appreciate forever. Now the buyers that could barely afford a house in 2007 cannot sell their house in 2009 because they owe more than the house is worth. They are trapped. It sucks.

Chapel Hill saw a lot of 10% down mortgages. I haven't found any 0% down. I have seen a lot of ARM mortgages, but not any interest-only or negatively-amortizing loans. Most people took out conventional mortgages. Lots of them took out 80/10/10 mortgages (80% first mortgage, 10% second mortgage, 10% down). Chapel Hill won't be seeing tons of foreclosures due to the grossly exotic loans. What about foreclosures from conventional mortgages where the buyer simply overextended themself?

So far, foreclosures have been very light in Chapel Hill. I keep looking at the Google foreclosure map, and there are ever only about 17 properties in the foreclosure process (delinquent, foreclosed, reo) -- some foreclosures come and go, but several have been showing up consistently for a very long time. The one on North Hill Road, for instance, was foreclosed upon back in August 2008.

So are we ever going to see a foreclosure wave hit Chapel Hill? If we don't, prices will deflate more slowly.

CalculatedRisk has a post showing a graph with the "seriously delinquent" rate for all conventional mortgages it backs. It's a hockey stick graph: flat until mid 2007 when it shoots straight up. It's still going up.

Foreclosures are coming.

Harrington Bank

Calculated risk just posted a link to a website that has calculated the troubled-asset ratio for all banks in the US.

I've seen a couple familiar banks show up again and again in the HELOC records for Chapel Hill properties. Harrington Bank, which is headquartered in Chapel Hill, is one of those banks.

What's Harrington Bank's troubled-asset ratio? 24. That means the value of its assets tied up in non-performing assets (foreclosures) and 90-day delinquencies are 24% of its capital + reserves.

That's well above the national median of 13. It's also way up from this time last year when its troubled-asset ratio was 1.3.

To avoid blowing this out of proportion, I should point out that when the FDIC closed the Georgian Bank in Atlanta on Friday, the bank had a troubled asset ratio of 198.

A couple other ratios for banks based in North Carolina:
New Dominion 56.
RBC Bank 38
Mechanics and Farmers Bank 35
Wachovia 34 (I thought they were gone?)
Bank of America32

Dark days for bankers ahead. They have a lot of writing down to do.