Give It 2 Me

Give It 2 Me — Madonna

They say that a good thing never lasts
And then it has to fall
Those are the the people that did not
Amount to much at all

I didn’t amount to much… much debt that is…

Isn’t this really the siren song of the Great Housing Bubble? Give It 2 Me.
The free money was available, and people took as much as was being
given out. There was no thought given to paying it back because the
house was responsible for that. Five to ten years from now, the houses
would be worth $2,000,000 and we would all be able to finance this sum
by continually rolling over Option ARMs with 1% teaser rates. Now that
this system has come crashing down, perhaps we should just forgive all
this debt and let the irresponsible fools who spent all this money get
a free pass. That seems to be the popular idea with our presidential
candidates. Any politician proposing a homeowner bailout should come
here are read the tales of HELOC abuse and ask themselves if these
people deserve a bailout. If they still think a bailout is a good idea,
you can be sure I will be maxing out my HELOC during the next bubble,
and so will everyone else. (That moral hazard thing is a real pain for policy makers).

In preparing today’s post, I looked at several properties. All of them, I repeat all of them, had mortgages in excess of the original sales price.

396 Quail Ridge, Irvine, CA 92603: Purchase Price $535,000; Total Debt $639,395

469 E Yale Loop, Irvine, CA 92614: Purchase Price $370,000; Total Debt $606,500

5302 Sierra Roja Rd., Irvine, CA 92603; Purchase Price $337,000; Total Debt $561,210

328 Dewdrop, Irvine, CA 92603: Purchase Price $369,500; Total Debt $514,650

2109 Ladrillo Aisle #85, Irvine, CA 92606: Purchase Price $200,000; Total Debt $438,600

44 Solstice, Irvine, CA 92620: Purchase Price $569,500; Total Debt $650,000 Option ARM, WTF Price.

I usually look for the most egregious HELOC abusers for my posts because they are the most interesing, but today, I am going to show you a typical property that I look at — an average HELOC abuser.

{adsense-ir}

14111 Moore Ct Kitchen

Asking Price: $739,500IrvineRenter

Income Requirement: $184,875

Downpayment Needed: $147,900

Monthly Equity Burn: $6,162

Purchase Price: $254,000

Purchase Date: 6/26/1997

Address: 14111 Moore Ct., Irvine, CA 92606

Beds: 4
Baths: 3
Sq. Ft.: 2,066
$/Sq. Ft.: $358
Lot Size: 5,000

Sq. Ft.

Property Type: Single Family Residence
Style: Traditional
Year Built: 1974
Stories: 2 Levels
Area: Walnut
County: Orange
MLS#: L27633
Source: SoCalMLS
Status: Active
On Redfin: 10 days

Rarely available The Colony neighborhood home! Imagine, just a short
stroll along wide community streets to the private association pool and
park area AND great nearby shopping! Home updates include solid maple
cabinets and granite counter tops in kitchen, travertine and granite in
the all new master bathroom, and a backyard featuring lush exotic
plants, built in backyard grill island, and four person spa!

{adsense-ir}

So how does an average HELOC abuser manage their debt?

  • The house was purchased on 6/26/1997 at the bottom of the market for $254,000. They used a $203,200 first mortgage, a $38,100 second mortgage, and a $12,700 downpayment.
  • On 11/12/1998 they refinanced with a $240,600 first mortgage.
  • On 4/3/2001 the opened a HELOC for $25,000.
  • On 2/6/2002 they refinanced again for $265,000.
  • On 6/20/2003 they refinanced again for $275,000.
  • On 8/20/2004 they opened a HELOC for $100,000.
  • On 12/26/2007 they refinanced again for $470,000.
  • Total property debt is $470,000.
  • Total mortgage equity withdrawal is $228,700

As you can see, this wasn’t too bad. It looks like they were probably paying off the yearly credit card bills. They got a bit more aggressive in 2004 and 2007, but these people managed to only double their debt loads — only double. That is conservative by Irvine standards. They will probably not be a short sale as they kept their debt growth to something less than bubble appreciation. Of course, if they don’t sell now, they will probably not have any equity left in a few years, but if they sell today, they will probably walk away with $200,000. The market is not exactly punishing this behavior — at least not for them.

Mortgage equity withdrawal was not an isolated phenomenon. It was not the exception; it was the rule. I come across about 1 property in 10 that did not increase their mortgage debt. It might not be that bad over all of Irvine, but it certainly is with houses that are available for sale today. There are some still clinging to the false hope that the foreclosures will not be too bad in Irvine. People have too much debt. Their incomes did not double as their debt did. Everyone who went to the housing ATM is in trouble, and from what I am seeing, that is nearly everyone…

It has been an eventful week here at the Irvine Housing Blog. We were picked up by Eschaton blog on Tuesday, and we had a 12,648 unique visitors. That is about 4 times our normal traffic. Then we were picked up by Slate Magazine and Newsweek through Daniel Gross’s column. I guess the collapsing real estate market has everyone’s attention now.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

:)

.

What are you waiting for?
Nobody’s gonna show you how
Why work for someone else
To do what you can do right now

Got no boundaries and no limits
If there’s excitement, put me in it
If it’s against the law, arrest me
If you can handle it, undress me

Don’t stop me now, don’t need to catch my breath
I can go on and on and on
When lights go down and there’s no one left
I can go on and on and on

Give it 2 me, yeah
No one’s gonna show me how
Give it 2 me, yeah
No one’s gonna stop me now

They say that a good thing never lasts
And then it has to fall
Those are the the people that did not
Amount to much at all

Give me the bassline and I’ll shake it
Give me a record and I’ll break it
There’s no beginning and no ending
Give me a chance to go and I’ll take it

Don’t stop me now, don’t need to catch my breath
I can go on and on and on
When lights go down and there’s no one left
I can go on and on and on

Give It 2 Me — Madonna

63 thoughts on “Give It 2 Me”

  1. Hey, it looks like some of that MEW actually was put back into the house! That is refreshing to see as well!

    1. We can only hope that someone takes care of it while it’s waiting to sell. Speaking as a horticulturalist, I read about the back yard full of exotic plants and nearly screamed. I’m sure that the owners took great care of the plants, but if the house is sitting empty, they could be looking at upwards of $10,000 worth of cycads and fruit trees that shrivel and die due to lack of care.

      Yeah, I know, I know, it looks as if I’m worrying more about the plants than the people. I’m looking at this as a purely financial concern. When you look at a lot of the extras that get put into houses for legitimate uses of HELOCs, most people forget that these require a lot of maintenance. I’ve seen a lot of pictures lately of houses with monster swimming pools, where the pools were neglected so long that any new owner will have to repaint to get rid of the algae stains. I’m seeing those fruit trees and cycads, which aren’t cheap in the first place, that were cared for and cherished until the house was taken away, and all of that is potential house value that’s vaporizing as the trees die from neglect. The banks sure as hell don’t have the resources necessary to keep things up, and they’re usually lucky if they have someone come in to mow the lawns who doesn’t girdle everything with a gas-powered weedeater because he Simply Doesn’t Care. That’s also money that’s wasted, and I speak from experience that dead, neglected, or ragged trees and shrubs will kill a sale as fast as a swimming pool full of frogs and snakes.

  2. I would like to ask the owners of this house the following questions:

    Is your current income “184,875?”

    “Would you be able to afford your own house today if you were in the same financial position that you were in back in 1997?”

    “Is it fair that someone else should have to leverage themselves 3x more than you did just to grant you a windfall?”

    Say whatever you want about inflation. 254,000 dollars was a lot of money back in 1997 and it is still a lot of money now. Incomes have not gone up THAT MUCH.

    Certainly not enough to justify these house prices. We are just a lot more accustomed to seeing these outrageous sticker prices these days that they seem “normal” making 1997 looking absurdly cheap.

    I see no reason why this place is worth a penny above 300K.

      1. I don’t believe that the rollbacks are going to stop at the 2003 prices.

        It was valued around 300K back in 2000.

  3. I like the backyard and the added “casita” on the Sierra Roja House. A $500,000 loan for a Turtle Rock house is not that unreasonable.

    1. It is the belief that the resale value of the house justifies the amount of the loan that created this mess. People are supposed to pay off their mortgage notes, not add to them as their house values increase.

      1. I would suspect that in a cheaply built 40-year-old tract home you would have to do quite a bit of updating. In my opinion, it would make more sense to get a tax deductible loan at a low fixed interest rate rather than pay cash.

  4. Wonder what rental parity looks like in OC with unemployment at 10-11%? Or higher. $140/sf is my suspicion.

    I stroll over to North Berkeley one of these mornings to check the “Au Pair” index.

  5. I am glad to see your column getting the recognition it deserves. I just wish that Paulson, McCain, et al. would read it before it is too late (if it isn’t already so).

    1. McCain admits to not being able to use a computer so it doesn’t look like he will be able to enjoy this blog.

      Paulson seems to be coming around now, he’s talking about buying prefered shares in banks, something that makes a lot more sense then these reverse auctions for “distressed” CDOs.

  6. Astute observations? Ho-kay, that leaves me out!
    I’ll just get on my HELOC-Davidson and ride off into the sunset. If it won’t start I’ll just coast down the Dow. It’s all downhill from here, folks!

  7. IR, From Marketwatch article today.

    “In fact, many wealthy Americans thought the weak housing market was an opportunity to buy, according to research released earlier this year by the Harrison Group, a market research and consulting firm.”

    http://www.marketwatch.com/news/story/even-wealthy-nervous-about-buying/story.aspx?guid={2D343547-67DD-42E0-A790-5CAF4A2A4580}

    I told my wife it is only a matter of time as wealthy and trade up buyers stop buying over-priced housing. Even billionaires make mistakes.

  8. I know that there were many people who used their HELOC’s for frivelous things – expensive cars, vacations, etc. BUT, there is also another side to this whole story and that is the massive price inflation that has gone over the past 10-15 years for things like cars (normal regular ones), car repairs, healthcare, insurance, and college. In one sense I can see how people felt they needed to use this money in order to just to provide their family with the things they need to be healthy and successful in life. Now, I know we can argue that college is not “necessary” to survival, but personally I would rather not live in a country where it is so expensive that it is only accessible for the top 3% of the population income wise – and same with healthcare.

    1. There is some truth in what you are saying, but it is still Ponzi Scheme financing being used to justify a sense of entitlement to things one cannot really afford.

      1. It it like the snake eating it’s own tail.

        Baby boomers lived it up, pushed up the national debt.

        Baby boomer kids buy houses they can’t afford, borrowing the money via schemes cooked up from Wall Street to borrow from the boomer’s pensions and 401Ks.

        Baby boomers see their retirement disappear.

        Baby boomer grandkids are gonna get the short end of the stick though … don’t get to live it up first …

        1. I did not want to come right out and demonize the Boomers But I agree with you somewhat.

          However the boomers did do a lot of good things so it’s a bit of a catch 22 I think.

    2. On college being “necessary:”
      Unfortunately, it almost is. Plenty of employers won’t even look at you without a BA, when the skills for the job don’t even vaguely require the skills a higher education is supposed to provide. Why does one need a BA to be a cubicle slave? As a professor, I can tell you that TOO many people are getting a college education. And we give it to them because we have to…without it, nobody will hire them to do anything besides flip burgers.

      1. Why does one need a BA to be a cubicle slave?

        Because our high schools are doing squat – and why, because we are soooo focused on those that are not succeeding in school that we ignore and dumb down those students that are successful. The children that behave enough to learn are forced to sit through all the down time brought about by those kids who need more attention. Both types of kids have needs.

        I also taught at a university – the skill levels (or lack of) are simply astonishing.

        There needs to be options for people who cannot be rocket scientists – options in which they can support themselves in a manner appropriate to our great nation – that doesn’t mean driving porsche. And, we shouldn’t have to pay $50,000 for a BA degree just to be able to get a survival job.

        1. Certainly not spoken by a person who has a special needs child.

          The only reason there is any focus on lower performing children is because it brings down the overall test scores of the school.

          Trust me, the smart children are being well taken care of.

          1. That is absolutely not the only reason – there have been numerous lawsuits requiring huge amounts of money spent on special education – where does that extra money come from – regular education.

            I certainly do not think that children with special needs don’t deserve what they get – nor do I believe they are getting all they should. And in fact, I actually do have a special needs child and I am huge advocate for special needs rights.

          2. LOL thats like saying Welfare money is comming out of tax breaks that rich people should be recieving.

            By the way, I have nothing against smart people, some of my best freinds are smart people.

          3. so then where is the money coming from when the need exceeds the special education budget?? – obviously you don’t know the answer.

          4. What do you mean?

            If both are entitled by federal law to the same education how is one party being shorted?

            Becuase per individual it cost more to educated someone with downs syndrome, Autism or blind?

            Tell me how I am wrong when it is a “right” spelled out specifically in Federal Law?

          5. The “right” is to an appropriate education – appropriate is where things get hung up. Many parents of special needs children have taken school district to task and won with regards to the needs of their children – some results being valid in my opinion – other completely extreme.

            Because there is only limited money allocated for education when the needs for special education exceed the special ed budget the rest of the money must come from the general fund – which in turn shorts the general ed. students.

            When did you ever hear someone being concerned about the special needs of the gifted child – gifted children don’t really even have any rights like a special needs child.

            What about the child who loses valuable class and teacher time every single day because of the disruptive child – is that an appropriate education for the first child – all depends on your perspective.

        2. “because we are soooo focused on those that are not succeeding in school that we ignore and dumb down those students that are successful.”

          Are you sure? What happened to A.P. and remedial corses? My sister graduated H.S. in ’07, and she had a bunch of A.P. classes. I doubt there were many trouble makers in there holding her back. Your complaint sounds like a radio talk show gripe, and doesn’t match with reality as I know it.

          1. Observation does not equate fact.

            The original poster is correct, our high school system is currently a complete failure. Search on Google and compare the average education you can get at our high school system verses those in most other countries in the world and you will be very surprised at how poorly we are doing.

            The fact that in California high school seniors are complaining that they must pass a test made for a 7th grader is an indication of the current state of our educational system

          2. Someone who truly desires an education is going to recieve it. We cant keep blaiming the schools because children are lazy or dont care about Algebra and Earth Science.

          3. It is not the fault of the school at all – they are barely keeping their heads above water. It is the fault of our societal belief that nobody should be held responsible for their behavior – it comes down to the parents and their expectations that “others” should be responsible for educating their children.

        3. “There needs to be options for people who cannot be rocket scientists – options in which they can support themselves in a manner appropriate to our great nation…”

          How about brokering mortgages?

          Oh…nevermind.

  9. Other life necessities inflated for the same reason that housing did, because of easily available and aggressively promoted credit.

    And everything else inflated BECAUSE housing did. My own landlord tells me that it is now impossible to acquire a large multifamily building in my area because the cap and multiples are just too high for the kind of rents you can fetch for the places. Additionally, as property values inflated, taxing authorities seized the opportunity to puff their takings and hiked the taxes accordingly. Here in Chicago, large (more than 12 unit)rental properties are classed as commercial property and taxed at the highest rate, and commercial taxes have TRIPLED in the past 8 years, driving rents in front of them to the point where it is now impossible for anyone making less than $25K a year to afford a 1 bed rental of any quality, no matter how low, within the city limits of Chicago.

    This credit debacle started setting up in the 1990s. However, it really gained steam post 911, when the current administration decided to make debt creation and asset inflation the centerpieces of its economic policy, given that we had nothing else to base economic “growth” on, as another point of policy was to do everything possible, mostly tax incentives, to drive manufacturing offshore.

    Why did America decide to commit suicide? I mean, WE ARE SUICIDAL. Why ARE we suicidal? For we saw, decades ago, a time coming just such as this were this country to continue to lose commerce and manufacturing while depleting its natural resources- a time when the only way to “create wealth” would be to create “wealth” out of thin air by means of asset inflation and credit creation, the last resort of every faltering post-industrial empire in history, just before it fails totally.

  10. In my experience, as I have know realtors and how they work. The most important thing for them is to get the “listing” They will say and do whatever it takes. Even though they know that the house will never sell for the amount that a homeowner wants they will originally list it for that price, of course after about a month they will approach the seller and say “we have to lower the price, we are not getting any action” It is a well known technique that many agents use. They know that a lot of homeowners are emotionally attached to their home and theirs is the “best” and they should get their price. As far as the rich buying right now, believe me they didn’t get their money by being stupid. I happend to know some very wealthy business people, and they got out last year before christmas, both stocks and housing, they knew when the party was over. Looking back now I wish I would of went with them, (stock market) Keep your cash safe, liquid, check the news on your banks everyday, If you are looking to buy, start looking now, before the herds roll in, then when it is time to buy you know what to do. Go on all the banks reo websites, there are thousands of listings, prices are dropping. Example: Apple Valley, 3bd 2ba 1560sq ft. $68,000, 19000 sq lot, this is chump change.

  11. Anybody with a well-oiled pr machine is trying to blame this mess on “THE POOR” and “THE BLACK”.(how original) One need only take a casual glance at places like Ft.Lauderdale….or North Dallas…or IRVINE to know this is’nt true.Thanx IR.Keep the reality chex coming.

  12. can someone explain “monthly equity burn” to me? i am an atrios reader who has come over (or back) this week. i don’t understand that figure.

    1. Monthly equity burn is the amount of money a homeowner losses each month due to the falling market prices for real estate. It is calculated based on the idea that prices will drop 10% a year for the next two years (they will probably drop more). The reason I have converted this to a monthly figure is because most buyers focus totally on their monthly costs without regard to how much they are actually paying for the house. This monthly equity burn should be figured in to their calculations because it will be coming out of their downpayment equity for the foreseeable future.

      1. You should just include a link on the equity burn so people can click on it and have it pop up a window that explains what it means.

        This question comes up a lot.

    1. Took the words right out of my mouth.

      This house is $160k anywhere other than coastal CA, maybe less now that markets are in freefall. What’s the Irvine premium again? 2x? 3x? Even at 4x it’s still overpriced by $100k.

      Wanna watch this one on your radar IPO? I’m curious what it sells for, if it ever does.

  13. I’ve been noticing that realtors description of houses are getting better and better. Have you noticed this? No more ALL CAPS and a lot of exclamation points.

    Is this because of this blog? Have you criticized realtor writing skills so much that they have improved?

    Or are you still seeing the same crap descriptions in Irvine? There are probably more Irvine realtors reading this blog then you think.

    1. Actually, I too have noticed an improvement in the descriptions. As for why… Maybe we are having an impact. I can just see a homeowner telling the listing agent, “Don’t write something so stupid that it is ridiculed on the IHB.”

  14. I have an OT question that someone here may be able to answer. What is the drive like between Huntington Beach and Irvine? Also, what is the best value in terms of price to proximity to a good surfing beach if someone were to want to surf in the morning, but was employed in Irvine? I’m fine with renting for the next couple of years or so. Thanks in advance, and sorry for derailing the conversation.

    1. The joke about the 405 freeway is that it takes 4 o’ 5 hours to go home during rush hour. At least on the radio. I hear of delays every day.
      It’s not that horrible once you get used to teh OC lifestyle – parking on the freeway from 5pm to 6pm. :D
      (Luckily, my drive is from Santa Ana to Irvine, so it’s ‘only’ 20 to 30 minutes)

      You might be able to take PCH (highway 1) instead, but I’ve never driven that route during rush hour.

      My suggestion: check out the sigalert website over the course of a week to figure out best and worse traffic times.

      (I save 10 minutes by shifting my work schedule to 8:30am start time instead of 8am. but i’m blessed to have that luxury)

      1. I’ll probably be working from 10:30am – 7:30pm if that makes a difference. We have really flexible hours in my industry.

        I live really close to the 405 up here in LA, but I’m only 3 miles from work so even on surface streets my commute is about 10 minutes. It scares me when I drive by it during rush hour. Traffic into the valley is chaos everynight, I can’t imagine why anyone would do that commute everyday. I’d rather slit my wrists.

        1. UCI to Bolsa/Bolsa Chica…
          9:30 AM. 25 min. Northbound on the 405 from Culver to Bolsa.

          6:30 PM. 30 min. Southbound on the 405 to SR73 getting off Bison and driving through UCI

          The traffic the other way, though, is much heavier. In the mornings I see heavy southbound traffic from Bolsa to Euclid/harbor. In the evenings the traffic is stop and go from way south of the 73 all the way up to Bolsa. I assume it’ll take you 35 min in the morning and maybe 45 min in the evening.

          Assuming you’re going to John Wayne… any further and then you’re hosed because the 405 is heavy in the evening on the stretch from the 55 to University.

  15. Hey all, after this week’s crisis, you can think of it this way:

    Before the crisis: 1 million dollar is not enough

    Now: 1 million dollar is rich

    :-)

  16. “…if they sell today, they will probably walk away with $200,000.”

    If they sell now, they can buy the same house again in 2 years for what they walked away with.

  17. Huntington to Irvine would be less than 45 minutes average commuting time. I have done Huntington to Lake Foest in less time showing up to work at 8:30 AM.

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