First, I’m not saying this will happen but there is a possibility this can occur only if certain economic and financial conditions are met. For this event to occur the right conditions would have to happen in the right order and they would have to be severe. But if the home values did return to 1990′s prices, I think eventually demand would return and boost prices back to the early 2,000′s. However, according to historical data, there’s possibility of a return to 1990′s home values. I have documented this is happening in the 55 or older housing market in South Orange County, but that’s a very unusual case. Now, I can’t calculate the probability in percentages, it’s outside my expertise, but I would say there is an outside chance.
The Affect of Federal Debt on the Toal Debt Market
Mortgage rates are not set by the Federal Reserve, there are set by market forces of supply and demand. The Fed can influence and currently the Fed is performing straight out manipulation on interest rates, but rates always return to market forces. Mortgages are a smaller part of the greater market of borrowing in the US bond market. If market forces push interest rates higher in the bond market then mortgage rates will also follow this trend. Interest rates could increase much higher than current rates if confidence is lost in the US dollar. This would be due to the enormous federal debt and credit downgrades from rating agencies. The US federal debt is now over 100% of Gross Domestic Production and has resulted in US credit downgrade by Standard and Poors for the first time in history. Standard and Poors, Moody’s, and Fitch all indicated further credit downgrades if US borrowing continues without a longer term plan to get the debt under control.
When the US sells their debt instruments or Treasuries, it’s facilitated by auction. Now, if investors see the US federal debt and continued borrowing as a greater risk to their investments, then they will demand a greater return in the form of higher interest rates on US Treasuries. Currently, the interest rate on Italian 10 year notes are 5.75% due to concerns on their federal debt burden, as a side note US 10 year Treasuries are about 2% in comparison and mortgage rates are just under 4%. Even with these low rate’s the average California’s new purchase mortgage is on average $983 a month, that is not enough borrowing by home buyers to sustain these current home prices.
How much could the median household in Orange County afford with much higher historical mortgage rates?
If this mortgage rates were to occur, how it affect affordability and house values in Orange County. I picked January 1, 1999 and compared to compared it to January 1, 2012. I looked at three data points; Household Median Income, Mortgage Rates, and Affordability based on income and rates. The figure below has all three data points. Please Note on Affordability, I calculated what the median household could afford then added 20% for the downpayment, for total home price. What’s also interesting that historical median sale price is usually 20% below affordability, basically there is a 20% lag from median home prices to what households can afford. Here are the list of values:
| Values | January 1, 1999 | January 1, 2012 |
| Household Median Income | $61,899 | $70,000 |
| Mortgage Rates | 3.92% | 7.00% |
| Affordability with 20% Downpayment | $297,691 | $473,636 |
The next three tables below compares Household Median Income, Mortgage Rates, Affordability, and Historical Median Income. For the January 1, 1999 mortgage I picked 7.00%. During this period mortgage rate were 6.80% to 7.20%. For most of the late 1990′s rates rates where above 7.5%.
| Table 1 Jan. 1, 1999 Orange Median Income with mortgages in 1999 | |||||
| Household Income | DTI Rate | Mortgage Rates | Affordability with 20% Down | Median Sale Price 1/1/1999 | |
| 1/1/1999 | 61,899.00 | 31% | 7.00% | 297,691.56 | 229,000.00 |
| Table 2 Jan. 1, 2012 Orange Median Income with mortgages in 2012 | |||||
| Household Income | DTI Rate | Mortgage Rates | Affordability with 20% Down | Median Sale Price 1/1/2012 | |
| 1/1/2012 | 70,000.00 | 31% | 3.92% | 473,636.23 | 392,000.00 |
| Table 3 Jan. 1, 2012 Orange Median Income with mortgages in 1999 | |||||
| Household Income | DTI Rate | Mortgage Rates in 1999 | Affordability with 20% Down | Median Sale Price 1/1/2012 | |
| 1/1/2012 | 70,000.00 | 31% | 7.00% | 363,595.24 | 392,000.00 |
You can see in Table 3 if we return to 7.00% mortgage rates, then affordability will be $363,595 with a 20% downpayment that would put us at March 2002, while median home prices are currently $392,000. Remember median sales price is usually 80% of affordability. The next table will compare historical median and even higher mortgages rates, the next table will indicate what month and year the last time median sales price hit these values.
| Table of Current Median Income and historical Median Home Values | |||||
| Household Median Income | Mortgage Rates | Affordability with 20% Down | Affordability compared with historical Median | 80% of Affordability | 80% of Affordability compared with historical Median |
| 70,000.00 | 7% | 336,595.24 | March 2002 | 269,276.19 | June 2000 |
| 70,000.00 | 8% | 305,367.67 | September 2001 | 244,294.14 | September 1999 |
| 70,000.00 | 9% | 278,672.81 | June 2001 | 222,938.25 | September 1998 |
I created this last table to show what would happen at 7% to 9% mortgage rates to affordability. Will we hit these high mortgage rates in 2013 or 2014? Right now that just speculation and mortgages rates have continued to drop to rates so low I never though possible. If fact, it might be years until we return to 7% to 9% mortgage rates. In 2008 we hit 6.5% rates and then dropped back down. I presented the worst case scenario. In contrast, Federal housing programs are also tying to keep home values higher by using their low downpayment programs and federal loan guarantees, however these programs benefit banks not average Americans. Finally, the force that could prevent this drop in home values of a drop are rents. Rents have increase over this 13 year time period, it you see these home values drop to 1990′s prices, I also think you’ll values pushed up again by investors purchasing these homes and maybe more buyers that have been sitting on the fence.
This is a standard sale and I don’t have a purchase history. This house probably has a pre 1975 owner that rare in Southern California these days. Unfortunately I don’t have agent review for this house.
– —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- —- — ————————————————————————————————————————————-
Proprietary North OC Housing News home purchase analysis 
17098 GREENLEAF St Fountain Valley, CA 92708
$569,000 …….. Asking Price
$569,000 ………. Purchase Price
2/1/2012 Purchase Date
$0 ………. Gross Gain (Loss)
($45,520) ………… Commissions and Costs at 8%
============================================
($45,520) ………. Net Gain (Loss)
============================================
0.0% ………. Gross Percent Change
-8.0% ………. Net Percent Change
0.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$569,000 …….. Asking Price
$113,800 ………… 20% Down Conventional
3.85% …………. Mortgage Interest Rate
30 ……………… Number of Years
$455,200 …….. Mortgage
$107,203 ………. Income Requirement
$2,134 ………… Monthly Mortgage Payment
$493 ………… Property Tax at 1.04%
………… Mello Roos & Special Taxes
$142 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
………… Homeowners Association Fees
============================================
$2,769 ………. Monthly Cash Outlays
($342) ………. Tax Savings
($674) ………. Equity Hidden in Payment
$149 ………….. Lost Income to Down Payment
$162 ………….. Maintenance and Replacement Reserves
============================================
$2,065 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,190 ………… Furnishing and Move In at 1% + $1,500
$7,190 ………… Closing Costs at 1% + $1,500
$4,552 ………… Interest Points
$113,800 ………… Down Payment
============================================
$132,732 ………. Total Cash Costs
$31,600 ………. Emergency Cash Reserves
============================================
$164,332 ………. Total Savings Needed
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599……
sales@ochousingnews.com…..
We're sorry, but we couldn't find MLS # S687663 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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For more news, market analysis and property profiles, please see the OC Housing News.
Proposed Bill to Speed Up Short Sale Process and Prevent Foreclosure
To avoid losing homes to foreclosure due to long response times for short sale transactions, three senators introduced legislation to speed up the short sale process.
Senators Lisa Murkowski (R-Arkansas), Scott Brown (R-Massachusetts), and Sherrod Brown (D-Ohio) proposed the bill addressing the issue of short sales timelines on February 17. A short sale is a real estate transaction where the homeowner sells the property for less than the unpaid balance with the lender’s approval.
“There are neighborhoods across the country full of empty homes and underwater owners that have legitimate offers, but unresponsive banks,” said Murkowski. “What we have here is a failure to communicate. Why don’t we make it easier for Americans trying to participate in the housing market, regardless of whether the answer is ‘yes,’ ‘no’ or ‘maybe?’”
The legislation, also known as the Prompt Notification of Short Sale Act, will require a written response from a lender no later than 75 days after receipt of the written request from the buyer.
The lender’s response to the buyer must specify acceptance, rejection, a counter offer, need for extension, and an estimation for when a decision will be reached. The servicer will be limited to one extension of no more than 21 days.
The bill will also allow the buyer to be awarded $1000, plus “reasonable” attorney fees if the Act is violated.
According to a release from Short Sale New England, short sale homes do not bring down neighboring home values like foreclosed homes do, and 83 percent of short sale buyers are satisfied with their purchase, according to a 2012 Home Ownership Satisfaction Survey conducted by HomeGain.
“The current short sale process can be time consuming and inefficient, and many would-be buyers end up walking away from a sale that could have saved a homeowner from foreclosure,” said Moe Veissi, president of the National Association of Realtors. “As the leading advocate for homeownership, realtors are supportive of any effort to improve the process for approving short sales.”
Equi-Trax released a survey last year on the issues real estate agents face when completing short sales. Guy Taylor, CEO at Equi-Trax, said 71.9 percent of respondents reported that a short sale can take four to nine months to complete, and they think that is simply too long.”
The survey also found that 18.2 percent of deals require less than three months to complete, with 10 percent requiring more than 10 months.
When agents in the survey were asked to how the short sale process can be improved, 57.6 percent said lenders should take less time to close transactions, 14 percent said borrowers should be better educated about short sales, and 40.4 percent said both of these changes are necessary to improve the process.
In April 2011, a similar bill was introduced by Reps. Tom Rooney (R-Florida) and Robert Andrews (D-New Jersey), but this version requested a response deadline of 45 days instead of 75 from lenders. The legislation never came up for debate before a House committee.
This might push prices back to 1999 levels:
Overdue Mortgages Number 6,082,000
New data from Lender Processing Services (LPS) shows that as of the end of January, there were 6,082,000 mortgages in the U.S. going unpaid. That tally includes loans that are 30 or more days delinquent and loans in foreclosure.
LPS’ mortgage performance statistics are derived from its loan-level database of nearly 40 million mortgage loans.
The national mortgage delinquency rate as of January month-end was 7.97 percent. LPS determines the delinquency rate as a measurement of all loans behind by at least one payment, excluding those already in the process of foreclosure.
The delinquency rate registered a decline, both for the month and the year, with January’s rate down 2.2 percent from December 2011 and down 10.5 percent from January 2011.
The total foreclosure inventory rate hit 4.15 percent last month – up 1.1 percent compared to December 2011, but down a slight 0.1 percent when comparing year-over-year numbers.
According to LPS’ report, there were 2,084,000 properties that were counted as part of the foreclosure inventory last month.
The number of properties with mortgages 30 or more days past due but not yet referred to a foreclosure attorney tallied 3,998,000. Of these, 1,772,000 had been delinquent for 90 days or longer.
LPS says Florida had the highest percentage of non-current mortgages last month, followed by Mississippi, Nevada, New Jersey, and Illinois.
Non-current totals combine foreclosures and delinquencies as a percent of all active loans in that state.
States with the lowest percentage of non-current loans in January included Montana, Alaska, Wyoming, South Dakota, and North Dakota.
Home prices at lowest point in more than 10 years
NEW YORK (CNNMoney) — Home prices fell to their lowest point in more than a decade in January, which helped to lift the pace of home sales, according to a report from an industry trade group.
The National Association of Realtors reported that the median home price in January fell 2% from December to $154,700. That’s the lowest price reading since November 2001, before the run-up in home prices that became known as the housing bubble.
The median price is the point at which half of homes are sold for a higher price, and half are sold at a lower price. (Multi-million dollar foreclosures)
Serving as a drag on existing home prices is a large inventory of homes in foreclosure. Distressed home sales, which includes homes in foreclosure and so-called short sales in which the home is sold for less than what is owed on the mortgage, made up 35% of sales in January.
“Prices will continue to fall through the first half of 2012 due to the high share of distressed sales,” said Stuart Hoffman, chief economist with PNC Financial. “The recent agreement between the big mortgage servicers, state attorneys general and the Obama administration will also result in more homes going to foreclosure over the next few months, adding to downward pressure on prices.”
But the pace of sales rose to the highest level since May of 2010, helped by the low prices and rock-bottom mortgage rates. The seasonally-adjusted annual sales pace of 4.57 million homes was up slightly from the revised 4.38 million in December. The last time homes sold at that pace, buyers were rushing to qualify for an $8,000 homebuyer’s tax credit that was about to expire. The latest reading was roughly in line with the expectations of economists surveyed by Briefing.com.
“The uptrend in home sales is in line with all of the underlying fundamentals — pent-up household formation, record-low mortgage interest rates, bargain home prices, sustained job creation and rising rents,” said Lawrence Yun, chief economist for the Realtors.
The housing market has been showing signs of recovery in recent months. The combination of low mortgage rates and a decline in home prices means homes are more affordable than they’ve been in decades. PNC’s Hoffman agreed that the report is a further sign of recovery in the market, although he cautioned “it will remain a long process.”
New home starts by builders have been rising, along with their confidence and customer traffic, according to an industry survey.
The supply of existing homes on the market tightened slightly in the Realtors’ latest report, slipping 0.4% to 2.3 million homes, roughly a 6 month supply. That is down 20% from the supply of homes a year ago
I don’t see a return to 1990s prices as a shocking idea at all. Out in the Inland Empire, you can buy homes for less than they cost in the late 1980s in some cases. Higher rates in the future will put some serious pressure on prices as well, particularly in higher priced areas.