Monthly Archives: July 2008

Our Changing Relationship to Debt

Waiting on the World to Change — John Mayer

The next big psychological change to impact housing will be a change in homebuyers relationship with debt. Equity can be created in a home in two ways: you can pay down the debt, and the house price can appreciate. During the bubble rally, it was not fashionable to pay down debt. It is a slow way to build equity, and it requires sacrifice. During the bubble, appreciation happened much faster, and it required no additional funds to go toward a housing payment. Under those circumstances, only the most fiscally disciplined and conservative paid down their mortgage (and they are the only ones whose houses are not in jeopardy.) As the price decline drags on — which it will for several more years — people will come to realize that equity does not appear magically, but it is only obtained through retiring debt.

An acquaintance of mine bought a house in late 2007. I consider it my greatest failure of persuasion that I was unable to convince him to wait. The purchase was 70% emotional, but the 30% of him that rationalized the decision had convinced him that he could service the debt for 10 years with an interest-only fixed payment. He would then be able to refinance into another interest-only loan, and in 20-30 years when he went to sell it, he could take the profits to fund his retirement. It is thinking like this that will change. Instead of buying a house he could afford, he borrowed 5 times his income with an interest-only, and he has no funds left over to save for retirement (or anything else for that matter.) Since his purchase, an identical floorplan a few blocks away has been offered for sale for 20% less than he paid, and prices will decline another 20% befor they finish dropping. In ten years, he is likely to be still underwater, and he will either lose the home or struggle with a fully amortized payment on a 20-year schedule. If he had simply waited 2 to 4 years, he could have had the house, and he would have had the money left over to save for the future. There was probably no overcoming the emotional desire to have the house today (sadly,) but it is the intellectual rationalization that I found most interesting.

By 2010, people will realize the thought patterns of the bubble, the religion of real estate, are no longer operative. As this slow process of change grinds forward, people will start thinking in terms of taking on manageable debts with an eye toward paying it off to build equity the old fashioned way through retiring debt. This will be a big change for the market. People will be unwilling to put 50% or more of their gross income toward housing, and our economy will benefit because so much of our local wage income will not be going toward debt service. There is a silver lining in a price decline, and the rebalancing of household finances will be a great boost to our economy. Crushing debt service is like a tax that takes income out of our local economy and sends it to investors in far-away lands. When this money stays home, people have more money to spend on local consumer goods. None of this will happen quickly, as the lingering effects of kool aid intoxication will be with us for some time, but in the end, house prices will be affordable, and the local economy will recover — not through a Ponzi scheme of ever-increasing debt, but through working, earning and circulating that money in the local economy the way it is supposed to be. Until then, I guess we will keep waiting for the world to change…

189 Pineview Kitchen

Asking Price: $349,000IrvineRenter

Income Requirement: $87,250

Downpayment Needed: $69,800

Monthly Equity Burn: $2,908

Purchase Price: $424,000

Purchase Date: 8/4/2005

Address: 189 Pinewood, Irvine, CA 92620

Beds: 2
Baths: 2
Sq. Ft.: 1,202
$/Sq. Ft.: $290
Lot Size: 760 Sq. Ft.
Property Type: Condominium
Style: Townhouse
Year Built: 1977
Stories: 2 Levels
View: Lake Front
Area: Northwood
County: Orange
MLS#: P649161
Source: SoCalMLS
Status: Active
On Redfin: 1 day

New Listing (24 hours)

NO Short Sale, No REO. Great Value!! Beautiful view of the Main lake from the living room and patio! Association facilities; Pool, Tennis Courts, ClubHouse, BBQ. Association dues include water. Very bright & clean 2 Bedroom, 1.5 Bath 2 story Townhome. 1 Carport & 1 Parking Space. Great Starter Home! Super motivated seller will make every effort to work with you qualified buyers. Submit!!

NO Short Sale? Not according to the property records.

Great Value? If you want to own your $1,500 a month apartment, and if you are willing to overpay for it, I guess it is a great value. Properties like this will go for under $200,000 to a cashflow investor in a few years.

This property was purchased on 8/4/2005 for $424,000. The owner used a $339,200 first mortgage, a $84,800 second and a $0 downpayment. I don't see how this is not a short sale, unless the seller has $100,000 to bring to the closing table. If this property sells for its asking price and a 6% commission is paid, the total loss to First Franklin will be $95,940. I guess that is one way to retire the debt…

.

me and all my friends

we're all misunderstood

they say we stand for nothing and

there's no way we ever could

now we see everything that's going wrong

with the world and those who lead it

we just feel like we don't have the means

to rise above and beat it

so we keep waiting

waiting on the world to change

we keep on waiting

waiting on the world to change

it's hard to beat the system

when we're standing at a distance

so we keep waiting

waiting on the world to change

now if we had the power

to bring our neighbors home from war

they would have never missed a Christmas

no more ribbons on their door

and when you trust your television

what you get is what you got

cause when they own the information, oh

they can bend it all they want

that's why we're waiting

waiting on the world to change

we keep on waiting

waiting on the world to change

Waiting on the World to Change — John Mayer

Tragedy

Bee Gees — Tragedy

The behavior of HELOC abusing owners during The Great Housing Bubble was tragic. They believed the fantasies of the religion of real estate, drank the kool aid, and now they are losing their homes. The classic Greek tragedy a good person experiences a reversal of fortune most often due to the decisions and mistakes they made along the way. The tragic outcome for many homeowners was not caused by some unforeseeable, random event, but rather it is the direct result of the decisions they made and the actions they took because they subscribed to the fallacies of the religion of real estate. A good tragedy or morality play leaves the audience with mixed emotions. Part of you feels sorrow for the pain and suffering the character must endure, and part of you feels they character is getting what they deserve. It brings up feelings of schadenfreude and a sense of thankfulness that you did not suffer the same fate.

You can see this mixture of emotions in the comments on the blog which often exhibit both sides of this false dichotomy. Life is seldom black and white, and the tragic outcome for homeowners caught up in The Great Housing Bubble is no different. The full range of these emotions are normal and appropriate given the events we are witnessing. Hopefully, everyone who explores these issues and the outcomes that results from the behavior sees the mistakes these people made and does not repeat them in their own life. If that occurs, the I will feel my work at the Irvine Housing Blog has been worthwhile.

Today's featured property is another HELOC abuser who lost his home. Let's explore how he did it.

Asking Price: $389,900IrvineRenter

Income Requirement: $97,475

Downpayment Needed: $77,980

Monthly Equity Burn: $3,249

Purchase Price: $226,500

Purchase Date: 10/10/2000

Address: 9 Helena #26, Irvine, CA 92604

Beds: 3
Baths: 2
Sq. Ft.: 1,205
$/Sq. Ft.: $324
Lot Size:
Property Type: Condominium
Style: Other
Year Built: 1977
Stories: Split-Level
Area: El Camino Real
County: Orange
MLS#: S541769
Source: SoCalMLS
Status: Active
On Redfin: 1 day

New Listing (24 hours)

Single story condo in the Heritage Park community of Irvine. This home features 3 bedrooms, 1.75 bathrooms, a living room with a fireplace, a 2 car garage, and an enclosed patio. Home has access to the association pool. Great location: close to schools, parks, and entertainment.

It isn't hard to see how people were enticed to go over to the Dark Side. If you are living paycheck to paycheck, and the house you own suddenly doubles in value, and the entire mortgage industry is encouraging you to take the free money, it is a temptation too big for many to resist, particularly since the religion of real estate has convinced you the value of your house will go up forever. So how did today's owner make the journey?

  • The house was purchased for $226,500 on 10/10/2000. The owner used a $219,705 first mortgage and a $6,795 downpayment.
  • On 6/29/2001 the house was refinanced for $218,431. There was no mortgage equity withdrawal.
  • On 11/26/2001 he opened a HELOC for $72,400, but did not use it.
  • On 9/3/2002 he refinanced again with a $218,431 through the FHA. To this point, the owner has resisted temptation.
  • On 6/3/2003 he refinanced with a $303,300 first mortgage and opened a HELOC for $21,721. This was his first sip of kool aid. It was all downhill from here.
  • On 10/7/2004 he refinanced with a $400,000 first mortgage.
  • On 4/19/2005 he refinanced with a $475,000 first mortgage.
  • The total debt on the property was $475,000.
  • The total mortgage equity withdrawal was $255,295 including is $6,795 downpayment.

It really looks like this owner tried to resist temptation. There was ample opportunity to drink the kool aid before 2003, and he did not do it. He probably fell victim to the sales pitch of the mortgage industry and came to believe he could serially refinance the ever increasing debt which would be paid off by someone else when he sold. Of course, the homedebtor got in over his head and was unable to make the payments. The property went back to the lender on 3/12/2008 for $450,000. The total gain on the sale was $223,500. The are trying to dump it for $389,900. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the investor in DEUTSCHE BANK NATIONAL TRUST CO, ; NEW CENTURY HOME EQUITY LOAN TR 2005-4 will lose $108,494.

So what do you feel when you read these stories?

.

Here I lie

In a lost and lonely part of town

Held in time

In a world of tears I slowly drown

Goinhome

I just cant take it all alone

I really should be holding you

Holding you

Loving you loving you

Tragedy

When the feelings gone and you cant go on

Its tragedy

When the morning cries and you dont know why

Its hard to bear

With no-one to love you youre

Goin nowhere

Tragedy

When you lose control and you got no soul

Its tragedy

When the morning cries and you dont know why

Its hard to bear

With no-one to love you youre

Goin nowhere

Bee Gees — Tragedy

Open Thread 7-26-2008

Heartlight — Neil Diamond

Are the rich foreigners going to come buy our overpriced real estate? Not if they are from this planet. Perhaps ET and his buddies will come down to save us?

Beds: 4
Baths: 4
Sq. Ft.: 3,124
$/Sq. Ft.: $639
Lot Size: 9,600

Sq. Ft.

Property Type: Single Family Residence
Style: French Country, Tuscan
Year Built: 2006
Stories: 1 Level
View: City Lights, City, Hills, Mountain, Panoramic, Valley
Area: Quail Hill
County: Orange
MLS#: U8003269
Source: SoCalMLS
Status: Active
On Redfin: 7 days

This is One of the Best Locations in Quail Hill !! Beautiful Single
Level, almost new home, located at the end of a Cul-de-sac on Largest
greenbelt in Vicara. 180 degree panoramic views of Irvine Valley,
Mountains, City Lights & Breathtaking Sunsets. Single loaded
street, with Laguna Canyon surrounding you. Over $300,000 in upgrades
including Gourmet Kitchen with 20 Ceilings, Built-in Buffet with glass
Front Cabinets, Wine Fridge, Warming Drawer, all upgraded appliances,
Brazilian Granite, Stone backsplash w/ Decorative Iron Details, Faux
finished walls, Wok Room with sink & much more! Travertine Counters
in all Baths with Designer styled showers. Custom Lighting, Closet
Organizers in all bedrooms and garage. Sound System thru-out, custom
chandelier & sconces in Dining Room. Master Suite Bath is in
limestone w/upgraded cabinets, built-in High-boy, his/hers closets
& more!

Did you notice how they wet the pavement and sidewalk to get a better picture, but they did it in the mid afternoon when it dries to quickly and you don’t get the reflective effects?

I imagine this is a nice property, although I can’t tell because there are no pictures. $639/SF? WTF? If you look at the comps on Redfin, you can quickly see this property is $500,000 overpriced. Who knows, perhaps ET will phone home and see if mortgage brokers on his planet will finance the deal…

.


Come back again
I want you to stay next time
‘Cause sometimes the world ain’t kind
When people get lost like you and me

I just made a friend
A friend is someone you need
But now that he had to go away
I still feel the words that he might say

Turn on your heartlight
Let it shine wherever you go
Let it make a happy glow
For all the world to see
Turn on your heartlight
In the middle of a young boy’s dream
Don’t wake me up too soon
Gonna take a ride across the moon
You and me

He’s lookin’ for home
‘Cause everyone needs a place
And home’s the most excellent place of all
And I’ll be right here if you should call me

Turn on your heartlight
Let it shine wherever you go
Let it make a happy glow
For all the world to see
Turn on your heartlight
In the middle of a young boy’s dream
Don’t wake me up too soon
Gonna take a ride across the moon
You and me

And home’s the most excellent place of all
And I’ll be right here if you should call me
Turn on your heartlight
Let it shine wherever you go
Let it make a happy glow
For all the world to see
Turn on your heartlight
In the middle of a young boy’s dream
Don’t wake me up too soon
Gonna take a ride across the moon
You and me
Turn on your heartlight now
Turn on your heartlight now

Heartlight — Neil Diamond

Live Fast

Life In The Fast Lane — The Eagles

During The Great Housing Bubble California’s homeowners were living life in the fast lane. Free money was readily available, and people were taking it and spending it with abandon. Some people got lucky and found the greater fool to bail them out, and some people did not. Today’s featured property was purchased with 100% financing at the top of the bubble from a HELOC abuser. Of course, the lender is left holding the bag.

819 Yorkshire Kitchen

Asking Price: $474,900IrvineRenter

Income Requirement: $118,725

Downpayment Needed: $94,980

Monthly Equity Burn: $3,957

Purchase Price: $625,000

Purchase Date: 11/1/2006

Address: 819 Yorkshire, Irvine, CA 92620

Beds: 3
Baths: 3
Sq. Ft.: 1,481
$/Sq. Ft.: $321
Lot Size:
Property Type: Condominium
Style: Mediterranean
Year Built: 1998
Stories: 2 Levels
Area: Northwood
County: Orange
MLS#: S540579
Source: SoCalMLS
Status: Backup Offers Accepted
On Redfin: 6 days

End unit townhome with large wrap-around private patio. Nicely
upgraded: hardwood floors in formal living and dining rooms; beautiful
kitchen with white cabinets and black countertops; new stainless steel
appliances; tile flooring in kitchen and bathrooms; recessed lighting,
plantation shutters, closet mirror doors and organizers. Corporate
owned; easy to purchase; can close in 30 days.

Colons and semicolons: fancy.

Corporate
owned? Not according to the records. Perhaps she has a corporate deal where they will make up all the losses. I don’t know.

This property was purchased on 11/1/2006 with 100% financing. Now it is a short sale, and if it sells for its asking price (which it looks like it might,) the total loss on the property will be $178,594. Citibank will lose $125,000, the full amount of their second mortgage, and Wells Fargo will lose the remainder. Perhaps there is a corporate entity willing to pay off these lenders, or perhaps the realtor is making up the part about being corporate owned. Either way, it is a big loss for less than 2 years of ownership.

The subplot here is with the previous owners, the ones who were saved by the current owner. They lived like this:

  • The house was purchased on 8/24/2000 for $295,000. There was a $235,920 first mortgage and a $29,200 second, and the owners put 10% down.
  • On 9/9/2002 they refinanced for $265,000. No MEW.
  • On 10/7/2004 they refinanced for $333,700 pulling out their downpayment plus about $40,000 spending money.
  • On 11/21/2005 they opened a HELOC for $100,000.

These people were not as hardcore as some we have profiled, but they probably represent a typical family going about its business during the housing bubble. When they sold their property, they paid off their debts and had around $175,000 to spare. As you can see, the habit of mortgage equity withdrawal was reinforced by the market. I would not be surprised if they continued their somewhat subdued behavior in their next property. Why wouldn’t they? They got to live beyond their means for a time, and there were no repercussions.

There is a price to be paid for living in the fast lane. Californians are having their bills come due, and it appears as if they cannot pay them…

For anyone who believes we are anywhere near a bottom, look at the chart above (courtesy of Bubble Markets Inventory Tracking.) We are nowhere close to a bottom. It looks like we are having quite a rally in foreclosures.

.

He was a hard-headed man
He was brutally handsome, and she was terminally pretty
She held him up, and he held her for ransom in the heart
of the cold, cold city
He had a nasty reputation as a cruel dude
They said he was ruthless, they said he was crude
They had one thing in common, they were
good in bed
She’d say, ‘Faster, faster. The lights are turnin’ red.”
Life in the fast lane
Surely make you lose your mind, mm
Are you with me so far?

Eager for action and hot for the game
The coming attraction, the drop of a name
They knew all the right people, they took
all the right pills
They threw outrageous parties, they paid heavenly bills
There were lines on the mirror, lines on her face
She pretended not to notice, she was caught up
in the race

Out every evening, until it was light
He was too tired to make it, she was too tired
to fight about it

Life in the fast lane
Surely make you lose your mind
Life in the fast lane, everything all the time
Life in the fast lane, uh huh
Blowin’ and burnin’, blinded by thirst
They didn’t see the stop sign,
took a turn for the worse

She said, “Listen, baby. You can hear the engine
ring. We’ve been up and down this highway;
haven’t seen a goddam thing.”
He said, “Call the doctor. I think I’m gonna crash.”
“The doctor say he’s comin’, but you gotta pay him cash.”
They went rushin’ down that freeway,
messed around and got lost
They didn’t care they were just dyin’ to get off
And it was life in the fast lane
Life in the fast lane

Life In The Fast Lane — The Eagle

Life's Been Good

Life’s Been Good — Joe Walsh

I nominate today’s featured song as the ode to The Great Housing Bubble. If you drank the kool aid, I mean really drank the kool aid (like today’s owner), life must have been very good. All this free money allowing you to do whatever you want whenever you want. Life must have been very good to those who lived off their houses. There is nothing wrong with living well, and there is nothing wrong with becoming accustomed to a certain style of life, it just isn’t very wise to build this life on an unsustainable foundation of Ponzi Scheme financing — it will collapse, and you will lose the life to which you have become accustomed.

Perhaps I should nominate Tequila Sunrise by the Eagles? The hangover must be a killer…

16 San Clemente Kitchen

Asking Price: $489,000IrvineRenter

Income Requirement: $122,250

Downpayment Needed: $97,800

Monthly Equity Burn: $4,075

Purchase Price: $289,500

Purchase Date: 6/21/2000

Address: 16 San Clemente, Irvine, CA 92602

Beds: 3
Baths: 3
Sq. Ft.: 1,664
$/Sq. Ft.: $294
Lot Size:
Property Type: Condominium
Style: Bungalow
Year Built: 2000
Stories: 2 Levels
Area: Northpark
County: Orange
MLS#: S540591
Source: SoCalMLS
Status: Active
On Redfin: 5 days

Beautiful Guard Gated Community with 5 Pools. Enjoy Real Hardwood
Floors, Crown Moulding, Surround Sound, In Wall Speakers, Custom Paint,
Finished Framed Windows & Custom Window Treatments, Nice Master
w/Walk-n-Closet & Small Balcony. Finished Garage w/Built in
Storage. 3rd Bedroom is currently a loft w/Built in Bookcases. Lots of
extra parking. Walk to Elem. School. Sep. Laundry Room upstairs.
Amazingly quiet and safe neighborhood. Highly sought after floor plan,
rarely on the market.

Highly sought after floor plan,
rarely on the market. This kind of nonsense statement always annoys me.

Sep. Laundry Room upstairs. What is going on with this sentence? Why abbreviate separate? Perhaps the realtor can’t spell it? Why capitalize Laundry Room? In fact, why did the realtor switch between Title Case and sentence case throughout the description?

Have you had your fill of HELOC abuse stories yet? I am constantly amazed at how common this behavior was. Today’s owner is going to make $200,000 on the sale and fail to pay off the bank. Let’s look at what she did:

  • The house was purchased on 6/21/2000 for $289,500. There was a $231,200 first mortgage and a $58,600 downpayment (20%).
  • On 11/5/2001 she refinanced with a $235,000 first mortgage and opened a HELOC for $85,000.
  • On 2/4/2004 she opened a HELOC for $150,000. So far she was conservative by local standards, but the kool aid must have tasted good because she went all out afterward.
  • On 4/30/2004 she took out a stand-alone second for $233,500 and paid off the HELOCs.
  • On 9/16/2004 she opened a HELOC for $250,000.
  • On 4/20/2006 she opened a HELOC for $395,600.
  • On 9/27/2006 she refinanced with a $559,200 first mortgage.
  • On 9/27/2006 she opened a HELOC for $84,860. Based on her history, it is safe to assume she spent it.
  • The total property debt is $644,060.
  • The total mortgage equity withdrawal including her downpayment is $412,860

Countrywide was her last refinance, so they will endure the losses, or perhaps it is the CDO these loans were packaged into. Who knows? If this property sells for its asking price, the total gain on sale will be $170,160. The total loss to Countrywide will be $184,400.

This woman is obviously a serial refinancer whose spending is out of control. I can understand the borrower. She is just acting like a child trying to get whatever she wants without regard to the consequences, foolish but understandable. I can understand the lenders. They did not care if she defaulted because these losses are passed on to some investor somewhere who doesn’t have the slightest clue what they are investing in. I can understand the investors because they were buying a product given a AAA rating from a rating agency who is supposed to understand this stuff. I can understand the rating agencies that were running statistical analysis on data from a bull market. As long as the bull market continued, everything would be OK. Of course, the ratings agencies were so far removed from the micro circumstances of the individual borrowers that they had no idea whether or not people could afford their payments to keep the bull market going. Everyone was doing the right thing in their little world, and the system was too complex and unwieldy to hold together. Those few people who saw this and warned of its collapse were ignored because everyone involved was making money and the religion of real estate said prices always go up, so we built an enormous financial bubble. All perfectly understandable and totally wrong.

BTW, you have to love the album cover for this one.

.

I have a mansion but forget the price
Ain’t never been there, they tell me its nice
I live in hotels, tear out the walls
I have accountants pay for it all

They say I’m crazy but I have a have a good time
I’m just looking for clues at the scene of the crime
Life’s been good to me so far

My Maseratti does one-eighty-five
I lost my license, now I don’t drive
I have a limo, ride in the back
I lock the doors in case I’m attacked

I’m making records, my fans they can’t wait
They write me letters, tell me I’m great
So I got me an office, gold records on the wall
Just leave a message, maybe I’ll call

Lucky I’m sane after all I’ve been through
I can’t complain but sometimes I still do
Life’s been good to me so far

[Instrumental Interlude]

I go to parties sometimes until four
It’s hard to leave when you can’t find the door
It’s tough to handle this fortune and fame
Everybody’s so different, I haven’t changed

They say I’m lazy but it takes all my time
I keep on goin’ guess I’ll never know why
Life’s been good to me so far

Life’s Been Good — Joe Walsh