Real Homes of Genius: Today we Salute you Glendale. When Prime is no Longer Prime and WaMu Dilution.
It isn’t a surprise that the lower-end of the housing market was the first to give way as the market started contracting. Now, we are seeing significant pressure on what were so-called prime areas and locations here in Southern California. There is now the interesting phenomenon of people going to their mailboxes in middle to upper middle class neighborhoods, opening up a piece of mail from their mortgage holder only to realize their home equity line of credit has been reduced or completely shut off. Why? Well it turns out that the equity that was supposedly once there has simply evaporated into thin air. Incredibly, the initial reaction from many of these folks is utter shock. How dare they touch that equity! Of course the home is still worth what it once was. After all, wasn’t it this same prestigious lending institution that financed that credit line? As many of these lenders are now scrambling in a mad dash for capital, they are pulling back these home equity lines.
An example of this market exuberance is that getting money isn’t always a smart play especially when you have to pay it back. Washington Mutual rallied Monday nearly 30 percent on news it would get a cash infusion. However, today it gave back 10 percent once people read the details:
“NEW YORK (Reuters) – Washington Mutual Inc, battered by mortgage delinquencies and defaults, said Tuesday it obtained a $7 billion capital injection from private equity firm TPG Inc and other investors, but projected a $1.1 billion quarterly loss and set plans to eliminate 3,000 jobs.
The largest U.S. savings-and-loan also said it will close its 186 stand-alone home lending offices and stop offering loans through mortgage brokers by the end of June. It will instead offer mortgages in its roughly 2,300 retail branches, where some of the affected workers will be offered jobs.
WaMu, as the thrift is known, will also slash its quarterly dividend per share to 1 cent from 15 cents, saving $490 million a year. It is the second dividend cut in four months.”
Not exactly good news especially for California who has many of those 3,000 jobs. Do you really think this move is good for the overall health of the economy? Certainly job losses are not a way to get ourselves out of a slump. Yet again we are witnessing a case of what is good for Wall Street isn’t necessarily good for Main Street. I mean look at the details. This money comes with major contingencies to get WaMu out of the sub-prime mortgage business completely and shore up the retail arm. Similar to what is occurring over with Bank of America and Countrywide, those that do have capital are swooping in like vultures only to pick up pieces of the institution they like. JP Morgan/Chase taking Bear Stearns. WaMu now with TPG Inc. In the end, the ultimate calculus of this all is major job losses and not necessarily any aid to a lagging economy.
It seems that Jim Cramer learned his lesson with the Bear Stearns faux pas:
“On this afternoon’s Stop Trading!, Jim Cramer and Erin Burnett discussed today’s most heavily traded stock: Washington Mutual. Shares of Washington Mutual have fallen about 10% today on news that the Company will raise $7 billion through the sale of equity securities, cut its quarterly dividend from $0.15 to $0.01, and expects to report a Q1 loss of about $1.1 billion, or $1.40 per share.
Cramer told viewers that WaMu is still highly overvalued and should be trading in the $9-$10 range max. He said the Street isn’t pricing shares of WaMu accurately due to overly optimistic investors who may not be recognizing the unfavorable terms under which the TPG deal was agreed upon, especially considering the large amount of dilution that will come with the infusion.”
Dilution is one thing. Or maybe it’s the $57 billion in Pay Option ARM mortgages they’ve made out here in California? Housingwire broke on the rumors of this deal:
“The bank’s portfolio includes $57 billion in option ARM mortgages; so-called negative amortization loans have been a fast-increasing source of losses for lenders as housing prices have fallen in key markets throughout the United States and put millions of borrowers in the position of owing more on their mortgage than their home is worth.”
And of course the bulk of those loans are here in sunny Southern California. $7 billion doesn’t look like a whole lot given the current projections for the California housing market and how we are nowhere near any bottom. The current market cap of WaMu is $10.46 billion so $7 billion is almost the entire market cap of the company. Looking at WaMu’s current balance sheet, they have $303 billion in total liabilities. Let us not look at the asset side for a second. Given their current liabilities and current market cap, they are leveraged by 30 times their entire market cap! It only makes you wonder where on their balance sheet do those $57 billion in option ARM mortgages sit and with what kind of homes. Mish over at Global Economic Trend Analysis has been tracking a pool of $488 million in WaMu mortgages. Take a look at the performance:
“January Pool Stats
19.3% 60 day delinquent or worse
13.15% Foreclosure
1.83% REO
February Pool Stats
22.69% 60 day delinquent or worse
11.62% Foreclosure
3.56% REO
March Pool Stats
25.3% 60 day delinquent or worse
13.35% Foreclosure
4.44% REO”
Some are placing their bets thinking we are near a bottom. Only time will tell who is right. But let us now look at an anecdotal home in a prime area that is no longer immune to the housing downturn.
Real Homes of Genius – Glendale
Glendale is a desirable middle to upper middle class neighborhood of Los Angeles County. The city has a population of 207,000 and is also the location of L. Ron Hubbard’s original Church of Scientology. Glendale had tremendous growth during the housing runup this decade. This above 3 bedroom home almost saw the light nearly reaching an astronomically high $865,000 price tag on 1,600 square feet; and this for a home that is considered a started home for a professional couple. Let us look at the sales history on this place:
Sale History
06/07/2006: $865,000
10/24/2005: $695,000
The current price has rolled back the clock to 2005 since it is currently listed at $699,000. Reading the description it looks like this home was previously under contract and the buyer was not approved because they didn’t qualify. Now, look once again at all the above data regarding powerhouse California lender WaMu. Can you take a wild guess why the buyer didn’t qualify? Even with the historically low rates out there, California mortgages are still high for larger mortgages simply because of the elevated risk premium. Let us assume you are a working couple looking to buy this place and are planning on putting 5 percent down:
Price: $699,000
Down payment: $34,950
PITI: $5,145 (assuming 7 percent 30 year fixed)
Now let us assume that you are looking at spending only 40 percent of your gross income on housing. You would need a gross household income of $154,350 to fall within those guidelines. Interesting how that gross yearly income almost matches up with the price reduction of $166,000 in a little under 2 years. Keep in mind that the PITI is paid from your net income per month. Clearly there are tax benefits but you need to make sure you have $5,145 each month allocated for a monthly house payment. And what’s the median rent for a 3 bedroom home in this area? How about $2,500.
Now even the prime areas are no longer safe. Today we salute you Glendale with our Real Homes of Genius Award.
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10 Responses to “Real Homes of Genius: Today we Salute you Glendale. When Prime is no Longer Prime and WaMu Dilution.”
One thing to keep in mind about the mortgage pool you mentioned, Doc, is that all of these securities have been put on notice that a downgrade from AAA is imminent. Luckily, though, the Fed just a couple of weeks ago started taking, what? Anybody? Something securities as collateral? Anyone? Mortgage securities as collateral, that’s right. But guess what they had to be? Anyone? AAA, they had to be AAA rated. So, let’s assume you are a holder of this garbage and you need cash. No one in their right mind would actually buy it from you, but guess what? I can give it to the Fed and they will exchange it at 100 cents on the dollar for good old US Treasuries.
And what do you think will happen when it is downgraded and already in the Fed’s hands? Think they’ll call the loans? Not a chance.
And that is how you and I will pay to bail out these dumb banks.
progress? An interesting video comparing the one income family from 1970 to today’s 2 income family. A cultures success can measured by its indviduals happiness, security and the protection of its most vulnerable members.
http://www.youtube.com/v/akVL7QY0S8A&hl=en
I find home prices fascinating, due to the massive range of prices across geographical lines. This house looks fairly comparable to mine which only cost $280K, though in not so sunny Ontario Canada. A similar house in Michigan may only run $80K. I can’t even imagine someone wanting to pay $600K for a starter home, and come to think of it my $280K is starting to sound a bit high.
Nick’s post was very interesting. The final points of the speech were right on. The point of a 2 class system is pretty much in place now. And guess what folks, this has all be promoted by our govt and the Fed with bad policies and the mantra of consumerism over the past 30 plus years. What great american citizens right?
I noticed that they finally took off Property Ladder and Flip this House off the nightly schedule on TLC.
True, they still show these programs on Saturdays, but not on weeknights any longer. I wonder why that is.
I can’t imagine what kind of flak they must be getting from showing all these people, night after night, making money in several weeks from flipping.
Those were the good ol’ days.
Those shows caused a spike in flippers, which only fueled the problem.
So by taking it off the schedule on weeknights, I assume they now acknowledge that these shows are encouraging/generating a potentially damaging situation;
Flip at Your Own Risk!
regarding Nick’s post and the video: does the savings amount include retirement savings/investments? If not then we’re comparing apples to oranges.
I think it is true that previous generations didn’t save as much for retirement and thus could have more liquid savings. There are several reasons for this. The primary reason for the shift in types of savings toward retirement plans is that previous generations were getting more our of social security and were far more likely to have a pension. Thus in many ways previous generations really were richer! But the secondary reason is that the one thing that has increased drastically in CA (besides house prices!) compared to previous generations is taxes. Taxable savings are punished pretty harshly. There’s a very strong incentive to put that money in tax deferred accounts or at least in tax free accounts.
I wonder a lot about how my parents did it (got by and bought a house and retired comfortably and everything). I ask them what percentage of their income they put away for retirement when they were younger. It’s shocking. For a long time my mom for instance put away very little for retirement! She wasn’t like me trying to put away at the very *minumum* 10% for retirement come hell, high water and the end of the earth. She claims she gave retirement savings low priority then because she was putting all her money into paying off the house early! As for me, property in CA is unaffordable (sad but true) but retirement savings are non-negotiable.
Values are subjective. In S. California there is a big influx of Asians that come to the states with money. They buy nice houses, cars and start businesses with there family. As there wealth grows they pool there resources and buy family members homes and help them start a business or get a college degree to become a Doctor or etc. The cost of housing is high, but there are other costs that help off set some of these costs. The cost to heat my house this past winter was @ $30.00 a month. $3000.00 for heating oil, nope! No salt on the roads means no rusted cars after a few years. There are costs and benefit off-sets to the prices of homes here. And there are people who feel the costs are justified. That is why the market sets the prices and buyers pay the prices. There are always times of price and demand increase and decreases.
When panic sets into a market it can become the driving force of the market. The federal government are buying these MBS’s to stabilize the market. A stable market will adjust itself to the correct pricing levels.
The average income in this area also includes the low wage Mexican immigrants, which there are many. It is not at all unusual for a married couple to make $150K per year here. That is the norm. That is how a $500K starter house is affordable. And when they are ready to move up to a 900K house in a fews years they take there equity from there first house which make the $900K affordable. It is all relative to the complete market in which it all operates.
In the next 30 days I will be credit card debt free. Then I am going to work on my home equ. In a few more years I should be riding fat. I payed $14,900 in credit card debt in 14 months! Shweet!
Jason
“Values are subjective. In S. California there is a big influx of Asians that come to the states with money. They buy nice houses, cars and start businesses with there family.”
That’s nice Don, could you please ask this loaded group of individuals to purchase some of the lovely homes in the San Fernando Valley (Toluca Lake, Studio City, Sherman Oaks, Encino), they’ve been languishing on the market for many months with numerous price reductions and they still aren’t moving.
“The average income in this area also includes the low wage Mexican immigrants, which there are many. It is not at all unusual for a married couple to make $150K per year here. That is the norm. That is how a $500K starter house is affordable. ”
What area are you referring to where the average income of a married couple is $150k per year?
@Don-
Your website link wasn’t linking.
I think what “What?!” is saying, is, generally speaking, all statistical generalizations never count none of the infinite variety of perfectly formed J-shaped curves supporting the perpetual increase in home values.
Or put another way, Horse hockey. If you make claims or spout platitudes, provide data or expect to get called out. And this piece – “The federal government are buying these MBS’s to stabilize the market. A stable market will adjust itself to the correct pricing levels.”
That’s EXACTLY the point. What ARE ‘the correct pricing levels’? Less or greater than what the gubmint is paying? The discontent you see is from people recognizing that taxpayers – US – foot the difference. Because if you think for one split second that the firms that sold the incorrectly priced MBS to US are gonna be forced to come up with the difference, once the market is ‘stabilized’ and they no longer are in imminent danger of collapse – sparky, I have a bridge with your name on it, crossing some Florida swampland. Or to update the cliche, an overpass of the 405 that you can buy.
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