Driving around this weekend, I was listening to a local real estate radio show that I’m sure many of you have heard. One of the calls again demonstrates that we are nowhere near the bottom of this housing bonanza. The call went as follows and I do paraphrase:

Host: “How can we help you?”

Caller: “My boyfriend had an offer recently. He has good credit. He has a 778 score. Someone told him he can make $30,000 in one month. All he needs to do is let them use his score.”

Host: “This doesn’t sound right. I’m starting to think there is something else here.”

Caller: “They also said if he used it on 3 homes he would get $90,000. What do you think?”

Host: “Let me ask you. Do you think this deal is okay?”

Caller: “I don’t know [hesitant voice]”

Host: “Don’t do it. This smells of fraud.”

You may know this scheme since it’s played out countless times. We’ve touched upon it a few times here on various articles. What occurs here is the person with good credit is used as a front for the offer to go through. Normally the persons putting this together are committing outright fraud and does this by offering a very lucrative sum, secures financing and the home usually sells because of the price offered to the seller. In a market that is tanking like now, buyers are hard to come by so some sellers are willing to look the other way to unload the home even if they smell an aroma of suspicion. Of course the persons putting this together are in bed with a shady agent, appraiser, and broker (they normally work in teams) and split the proceeds. The intention is never to live in the house. They put it back on the market and of course at the inflated price it never sells which they already expect. The home forecloses. Rinse and repeat. Some people with good credit like the caller’s boyfriend actually think this is an excellent way to get easy money until they realize a few months later that they now have a foreclosure on their record. There is no free lunch. But don’t take my word for it, take a look at these Real Housing Professionals of Genius over in San Diego:

“This scam stretched from December 2003 to June 2005, according to the government’s documents. As part of their guilty plea filed Nov. 13, the defendants admitted they frequented swap meets to find potential clients. They advertised on Spanish-language radio stations and in Spanish-language publications. They billed themselves as problem-solvers for the region’s Latinos. Experts say Latinos, especially immigrants, face unique challenges in obtaining financing because they often have thinner credit histories than do other segments of the population.”

These entrepreneurs went to swap meets to find additional pray. Talk about mass marketing. I’m not sure how many people are looking for $500,000 homes at swap meets. Normally these people are bargain hunting and trying to save a few bucks here and there so taking on a half million dollar mortgage probably doesn’t make sense for them but that’s just me. Now tell me, do you think the intention of these criminal agents and brokers were to help their fellow brothers and sisters to own a home? Of course not. Now they are looking at jail time courtesy of the FBI. Feliz Navidad!

NINJA Loans and Chuck Norris

It must be an odd week. Chuck Norris is now backing a Republican candidate, promoting his book, a line of vitamins, and his show Walker Texas Ranger is syndicated on cable television. I wonder what he would have to say about the housing industry? It looks like Mr. Norris has future political aspirations. He is a very likable guy and who can argue with a person that will roundhouse you to the head if you disrespect him? If Chuck Norris was enforcing the industry, he would certainly terminate all NINJA loans. If you haven’t heard of this, it is basically no income, no job, no assets. In other words, the large portion of loans given out to California buyers. Thankfully NINJA loans are now going the way of the shogun.

Lakewood Revisited

It is always nice to go back in time and see how Real Homes of Genius are doing. You’ll be surprised at what is going on out there. We initially listed this fabulous 816 square foot home in July at a “great” price of $400,000. Here is the link to the home. Looking at the sales history we see the following:

Sale History

08/31/2006: $500,000

03/17/2006: $489,000

Okay, so first we realize at the current short sale price, the seller is facing a $100,000 downgrade. I actually don’t think using a hyper inflated bubble price is a good reference point but there it is. After all, we can say, “wow, you can buy Pets.com for $3” after being massively overpriced and it still would not be a good deal. So 5 months later what is the status of this home? Take a look at this:

Price Reduced: 04/24/07 — $499,900 to $485,000
Price Reduced: 05/27/07 — $485,000 to $470,000
Price Reduced: 07/11/07 — $470,000 to $450,000
Price Reduced: 07/18/07 — $450,000 to $400,000

But wait, you’ll love this:

Price Increased: 08/09/07 — $400,000 to $430,000

Bwahaha! This home has been on the market since April and instead of lowering the price they increase it? No wonder why no one is biting since August. Just a word of advice, increasing the price to create an artificial perception of “desire” is not going to sell a home. These guru techniques only worked during stage 1, 2 and 3 of the housing bubble. The issue at hand is we are now living in a housing market where all the professionals are accustomed to easy money and having loans and buyers come to them. There are ethical and good professionals that realize housing markets ebb and flow. They also realize that it takes work and professionalism to survive in the industry. Sustainability is always the key in many things in life. Any truthful housing professional would tell you that this was a once in a lifetime housing market. Hope everyone has fond memories of what just occurred over the past seven years because you will never see it again.

There is some irony to the current situation. Lenders are trying to sell properties that they now have through REOs yet they are unable to lend money to prospective buyers without going back to NINJA loans, the same loans that caused the foreclosure in the first place. Instead of calling this “housing woes” or “mortgage crisis” why doesn’t the media talk about “returning to normalcy” or “bubble correction?” Have you noticed how little people address the main issue? The main problem is housing is incredibly overpriced and has created enormous dependency for jobs, spending, and other industries that directly depend on a perpetually booming housing market. Just take a look at the number of license growth by the Department of Real Estate here in California. Make no mistake about it, the booming market has created a saturation of jobs in these fields. This happens regularly in bubble economies. Think of the 2 million technology jobs that were lost due to the tech bust. Technology isn’t gone and good companies are still here with us such as Google, Yahoo!, and Ebay for the long-term. But those computer consultants that were making $50,000 a year with no degree are no longer in demand. Engineers with specific training and computer scientists are still in demand. Consulting is still booming. It is the nature of economics. When you realize how much fraud is going on in housing and we are now starting to see stories on a daily basis, you will understand the magnitude of this housing craze.

All of this is connected. Case and point. Sears announced dismal earning this past week. You can criticize the company for not doing enough to revamp and brand itself in a very competitive market. Yet when you look at the details you’ll notice that a large part of their revenue and business came from home accessory sales, tools, and items that are associated with housing. Housing slows down and so does retail. Take a look at Home Depot and Lowes. People cut back on their spending and you see sales decline. Now that the Black Friday rush is done, we realize that people spent less per shopping trip and most were aggressively going after rock bottom sales. Then we see consumer confidence slipping at a time of the year when it needs to be high. What this further means is that less financing is going on. Which we now hear that Citi will be laying off a large portion of their work force and over 190+ lending and mortgage operations are now imploded. These people will be looking for jobs. Yet the fields that are in demand such as engineering, accounting, nursing, healthcare, and energy require specific training and education. It will take time to retrain the workforce. At the same time education costs are increasing at a higher rate than inflation which will make it hard for many to be retrained. Those that do choose to go back to school will face higher loan rates and money will be diverted from discretionary spending to education spending.

At a time when inventory is rising and credit is tighter (of course we are at historically low rates) this will only add pressure to the housing market. That is why after looking at the data the housing bailout rate freeze plan is really a quick gimmick for the four lenders involved. Many subprime borrowers already have higher rates that range from 6 to 12 percent and many go into foreclosure much before the loan ever resets. Of course past data will not show this and here is why. A subprime borrowers purchases a home that they cannot afford. After a year they face financial problems. They realize they can sell their home and even make a little cash. What is recorded? A higher price, a sale, and subprime delinquency rates stay low giving investors a false sense of perception that subprime loans aren’t that risky. Now fast forward to 2007. Many subprime borrowers are subprime because they’ve mismanaged their credit or have lower income. There are reasons for lending guidelines and standards. It isn’t fair putting someone in a home they cannot afford. As you can see there are multiple variables interacting here but all of this is connected. Housing has become too intertwined with the economy and will lead us into a recession. The only question is how deep will it go?

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