Irvine Housing Blog

Double Down

Two as One -- First to Last

When your playing blackjack and the dealer has given you great cards, you have the option of taking one more card and doubling your initial bet. When the odds are in your favor, it is a smart play. Since the real estate market was a "sure thing," and prices always go up, it makes sense that people would have doubled down in the real estate market. The more property you owned, the more money you made. Well, at least that was the idea after a few kool aids. If you made the mistake of drinking the kool aid in the summer of 2006 and buying two low-end properties right at the peak, your double-down bet was a short cut from first to last.

The Price of Being Wrong

Nantucket Sleighride -- Mountain

Don't cry little Robin-Marie 'cause you know you're losing your home...

It always makes me sad when I see these foreclosures and short sales with pictures from the children's rooms. The disruption to family life caused by the Great Housing Bubble has only one precedent in the United States: The Great Depression. Hopefully, this family will be able to move into a comfortable rental rather than a tent city or Hooverville, but they will have to move. Basically, anyone who bought late in the bubble rally is underwater, and these homedebtors will fall into one of two categories: 1. Those who are forced from their homes (or choose to leave), and 2. Those who are trapped in their homes. It is difficult to determine who is worse off. Those who are forced from their homes will have ruined credit and difficulty in obtaining a home in the future. Those who are trapped in their homes have a complete lack of mobility to take promotions and crushing debt service payments that prevent them from doing anything else. All of these problems boil down to one bad decision: they bought a house during a wild financial mania.

Equity Inferno

Disco Inferno -- The Trammps

The twin towers known as the Marquee at Park Place is a lasting symbol of everything wrong with the housing bubble (Two mass fires, yes! One hundred stories high.) These urban units were 30 years ahead of their time, and perhaps in 30 years, the buyers in these towers will be able to sell their units for what they paid for them. The obscenity of the prices there will be laid bare in today's post. I will run through the cost of ownership numbers as compared to the cost of a rental and demonstrate what these units are really worth to an owner occupant.

I must confess, I have been holding off profiling these towers. There is limited information available on these units in the data services I use, so my picture is somewhat incomplete; however, the main reason I have waited to post on these units is because in the very first post done on this unit back in early 2007, I lost it in the comments section. It is pretty rare that I lose my cool, but I did there. The exchange went as follows:

Middle Class HELOC Abuse

Country House -- Blur

The posts we do on over-the-top HELOC abuse are gripping because the dollar amounts are so large. However, focusing only on the extreme cases gives the impression of HELOC abuse is an unusual behavior of a few spectacular cases. HELOC abuse is not unusual or uncommon: it is widespread, and it is going to pummel the middle class.

What possesses people to borrow and spend so much money that they lose their homes? The simple answer is that they didn't think they would lose their homes. Most believed their house values would go up forever and their house would pay off all their debts. All they had to do was continually refinance with very low interest rates and service the debt will a little of their work income. It never occurred to them that they might actually be required to pay down this debt with their wage income. But even if people drank the kool aid and believed this pathological nonsense, why did they take the money out and spend it? Why not let it accumulate and build wealth? Our song today is about being caught up in the "rat race" and leaving it all behind for a house in the country. Many people who spent their equity were caught up in the rat race trying to "keep up with the Jones's." It is sad really.

I received an email from a reader some time ago telling the story of what happened to his group of friends during the bubble. A few of his buddies really drank the kool aid and began separating themselves from the rest of group. They were spending beyond their means acting rich and feeling superior to the members of their old clique. The remaining group that either rented or lived within their means remained friends and watched with amazement as their former friends spent lavishly entertaining the "in" crowd and worked to increase their social status. As you might imagine, the bills are now coming due and the housing ATM has been turned off. The illusion of wealth and status these people created is disappearing as well. Not surprisingly, the fiscally responsible members of the old circle of friends are responding with a mix of sadness and schadenfreude. Stories like this are more the rule than the exception.

Today's featured property is a typical, middle-class Irvine house. Perhaps a little above median, but certainly the kind of home a family making $125,000 a year (middle class in Irvine) should be able to afford. It is another sad and common story of HELOC abuse on a middle-class scale.

WOT 5-10-2008

In Da House -- Crazy Frog

Part of our formula for success at the Irvine Housing Blog is to be entertaining. Reading about the housing market can be dry and boring, or it can be lively and entertaining. We always try to make it fun, funny and entertaining.

FSBO - For Sale By Optimist

Don't Dream It's Over -- Crowded House

You don't need a realtor to sell a house. A title company can take care of most paperwork, and an attorney can draft the rest for a minimal fee. Realtors are supposed to be experts at sales and marketing, but if you possess these skills, there is no need to pay someone 6% to draft a poorly written property description and sit in your house on the weekends. You can do it yourself and save a great deal of money. There are advantages of to selling on your own. You don't have to base your asking price on comparable properties. You can make up a number and put the property for sale for whatever price you want. There is no neutral market observer to tell you your price might be too high. Who needs to pay attention to comps? Also, you don't have to worry about the time and money your realtor is going to spend marketing your home because you will pay all those expenses yourself.

Today's featured property has been featured on IHB before. The previous owner was unable to sell it using a realtor, and it went back to the bank in foreclosure. The current owners bought it from the bank. Surely, they will find the buyer who appreciates the unique qualities of this home and obtain their asking price. It is just a matter of good sales and marketing and a healthy dose of optimism (real estate optimism tastes best when mixed with kool aid.)

Woods WTF

Norwegian Wood -- The Beatles

The WTF prices of Great Housing Bubble are an obvious illustration of the greater fool theory. Usually, the detachment from fundamental values is not so great. Prices that look foolish in retrospect do not always look foolish in the moment. Irvine house prices from 2004 onward looked foolish even as people were paying them. The absurdity of the situation becomes even more apparent when you see the asking prices of those who purchased at the peak of the Ponzi scheme as they look to find the next greater fool. Today's property is one dramatic illustration. These buyers grossly overpaid right at the peak in summer of 2006. Rather than admit defeat, they are asking for 50% appreciation from the peak with an asking price that is so ridiculous you just have to ask, "WTF?"

The Ultimate Post

The Ultimate Sin -- Ozzy Osbourne

What would be the ultimate post we could do at the Irvine Housing Blog? We have been getting a great deal of attention lately for our posts on HELOC abuse, and our post on Monday showing the $500,000 loss was also very well received. This is only one way you can top what we have done to date: combine the two. Today's featured property is the new pinnacle. We are raising the bar. Today, we have a property where the owner took out over $1,000,000 in a series of small refinances and general HELOC abuse, and now the lender who has taken back the property is looking at a $650,000 loss.

It does make me wonder... How can I get a lender to give me $1,000,000 that I don't have to pay back?

35% Off the Peak

Comfortably Numb -- Pink Floyd

Have you become numb to the losses we see here at the Irvine Housing Blog? The dollar amounts we are talking about are almost too large to comprehend. Monday's property is going to be an over $500,000 loss. Today's is $140,000, and it is a tiny condo. It can be hard to relate to the size of these numbers, and even harder to relate when it is a big corporation losing most of the money. These losses will continue to mount. If the lenders had to do a mark-to-market on all their loans based on the value of the underlying collateral, our entire financial system might collapse. It might anyway. I guess it is a good thing that we have runaway consumer price inflation, or the monetary deflation of all these bank losses would be a real problem.

How to Lose $500,000 in a Year

Ship of Fools -- Robert Plant

Today we are breaking with our tradition of profiling a $250,000 loss, and we are going big time -- $500,000 lost on one property. This flip is sunk. These flippers are so far underwater, they are not on a ship of fools; they are on a submarine.