Apr 2nd, 2007
Many people when they first discover bubble blogs think housing bears are tinfoil-hat-wearing crackpots with extremely pessimistic outlooks on life. There are perma-bears (Roubini, Shiller, Fleckstein) as well as perma-bulls (Watts, NAR, Kudlow). The truth is generally somewhere in between. I learned long ago that extremists are never happy people because they seldom get their way. As the Buddha noted, it is the "middle path" that leads to happiness. I have spent my voting life as a independent/Libertarian voting for whoever I believed to be the best candidate, most generally a moderate. However, there are times when what is perceived as an extreme is actually the correct view. As Barry Goldwater noted, "...extremism in the defense of liberty is no vice! ... moderation in the pursuit of justice is no virtue." Many who read my post "Predictions for the Irvine Housing Market" thought the scenario I described as extreme. It only looks extreme because the psychology of the bubble as skewed the collective perspective of the market. That Predictions post was moderate; this one is extreme.
We have been witnessing a great deal of bad news lately, the impact of which cannot be good. If the perfect storm continues to form over our local housing market, things could become much worse, much faster than even the most bearish among us think possible. Have any of you noticed the carnage in Sacramento? For the doomsday scenario to take place, we would need the following: Foreclosures, unemployment, rising interest rates and tightening credit, and a decrease in home ownership. The combination of these forces could make the price collapse a catastrophe.
We all know the wave of foreclosures is coming.
And it should continue unabated for 5 more years.
There isn't much more to say. It is not bad yet, but it will be very bad, and it will go on for a long time.
We know layoffs are coming to Irvine/Orange County. New Century went bankrupt along with numerous other sub-prime lenders based in Orange county. People are already losing jobs. I think it is save to speculate this will have ripple effects through the local economy. Even if unemployment remains low, how much will incomes decline? Mortgage brokers, realtors and others in the REIC have been living on the transactions created by the borrowing of those about to go bankrupt. They may find other work, but the $250,000 a year days are over. The only mystery is how bad the unemployment problem will become. Right now, things don't look good.
Rising Interest Rates and Tightening Credit
We know mortgage interest rates are near historic lows.
The large number of foreclosures will make lenders more cautious (either that or the losses will put them out of business). Increased lender caution will result in a tightening of credit and an increase in interest rates to compensate them for the increased risk. An increase to 8%, which is near the historic norm, would seem to be likely. If lenders become very cautious, an overshoot to 10% or more could easily take place. Interest rates have not begun to rise yet, and many are holding out hope that the FED will save them. It won't. Due to the increasing risk premiums, the best one can hope for is a lowering of the FED funds rate to compensate for the increased risk premium. We will have to wait and see.
Credit is already tightening. This cannot be denied. The increased cost and decreased availability of credit will have a severe impact on demand.
Credit Suisse estimates the most recent credit tightening just eliminated 21% of the borrowers in the market. This is assuming further problems in Alt-A or prime loans do not force credit to tighten even further (in other words, credit will tighten further.) This will crush demand and it will also put an end to serial refinancing. The inability to refinance is what will cause all the resets shown in the previous chart to go into foreclosure. Which leaves us with the most important question: Who is going to buy all of these houses in foreclosure?
Decrease in Home Ownership Rates
Ownership rates in Orange County have risen 2.8% between 1994 and 2005. This is actually behind the rest of the country where homeownership rates have increased nearly 5%. This is a direct result of lending money to those borrowers previously excluded from the housing market either because the borrower did not have the downpayment, or they lacked good credit.
Home ownership rates will decline as homeowners lose their homes in foreclosure. With foreclosure comes bad credit; those with bad credit just got eliminated from the buyer pool. Therefore, people who lose their house to foreclosure will move into a rental, and the previously owner-occupied home will likely enter the rental pool. (A popular misconception is that rents will go up. The number of rentals will increase along with the number of renters.)
There will be some new buyers (like many on this board) who have cash and good credit; however, this group is small in number, far smaller than the number of foreclosures about to hit the market (if you don't believe me, ask yourself how many potential buyers you know with cash and good credit.) This means a significant number, perhaps a majority, of the houses due to hit the market due to foreclosure will be purchased as rentals.
If the bulk of the houses going through foreclosure are going to be purchased as rentals, prices will have to decline to the point where a rental generates a positive cashflow. Prices are double that today! Home prices will have to decline at least 50% for properties to make financial sense as rentals, so if this is the fate of the bulk of the upcoming foreclosure inventory, prices will decline at least 50% before buyers will enter the market and adsorb this inventory.
Foreclosures, unemployment, rising interest rates and tightening credit, and a decrease in home ownership are all required in some measure to create the doomsday scenario. Do I think this will happen? Probably not, but it could. Did anyone think the NASDAQ could drop from 5200 to 1200 from 2000-2003? Did anyone think housing prices in California would drop from $200K to $177K from 1991-1996 in our last "correction?" Did anyone think real estate prices in Japan would drop 64% between 1991 and 2005? When bubbles collapse, they often drop lower and last longer than anyone thinks.
Today we do not have any of these conditions to an impactful degree. Maybe these conditions will not develop further; however, all indications are that these problems will develop and get worse. So how bad could bad get? Ask them in Sacramento, their party is just getting started.
Market Decline Extreme Spreadsheet
Get this party started on a Saturday night
Everbody's waiting for me to arrive
Sending out the message to all of my friends
We'll be looking flashy in my Mercedes Benz
GET THE PARTY STARTED by: Pink
Mar 30th, 2007
Asking Price: $918,000
Purchase Price: $678,000
Purchase Date: 6/9/2005
Address: 43 Rising Sun, Irvine, CA 92620
Sq. Ft.*: 1,708
Year Built: 2005
Type: Single Family Residence
$/Sq. Ft.*: $537
Status: Active on market
On Redfin: 11 days
Craigslist, Redfin, Zillow
$918000 SELLER NEEDS TO GET OUT !!!
This according to the ad on Craigslist. I call BS on this one. This flipper is so desperate, they only want to make $184,920 in profit (after 6% commission) in less than 2 years? If this flipper is successful, their house will have made them more than the median income in Irvine over the last two years ($83,891 * 2 = $167,782). That is one hard working house!
This seller is not the only one cracking the whip on their house. The neighbors at 32 Rising Sun want $1,139,000 for the Former Woodbury Model Home they bought for $940,500 on 6/29/2006. They are working their house even harder. After a 6% commission, they stand to make a profit of $130,160 after only 9 months.
When a prop'ty comes along
You must flip it
Before the home sits out too long
You must flip it
When somethings going wrong
You must flip it
Now flip it
Shape it up
Try to detect it
Its not too late
To flip it
Flip it good
Mar 29th, 2007
Asking Price: $879,500
Purchase Price: $869,000
Purchase Date: unknown
Address: 39 Bamboo, Irvine, CA 92620
Sq. Ft.*: 2,492
Year Built: 2004
$/Sq. Ft.*: $353
Status: Active on market
On Redfin: 23 days
Do you get the feeling flippers are getting nervous? There are 46 addresses on Bamboo Street in the Northwood neighborhood adjacent to Woodbury; 7 of them are for sale. 41 Bamboo just sold on 2/13/2007 for $820,000, so there is activity in the area. There are 7 other homedebtors looking for the greater fool to save them. The owners at 39 Bamboo just got nervous and decided to sell even if it is at a loss. Zillow thinks the property is worth over a million dollars. Apparently the market does not agree.
Real estate always goes up, or so buyers are bamboozled into believing by realtors. It only takes a few nervous neighbors to drive down property values in an entire neighborhood. Comps are set at the fringes where the transactions take place. I'm sure the owner at 57 Bamboo would like to make his $211,106, but it is more likely that 39 Bamboo is going to lose his $42,740 first.
Originally posted November 17, 2006
Address: 29 Shade Tree, Irvine, CA 92603 (Turtle Ridge)
Plan: 1993 sq ft - 3/2.5
MLS: U6603755 DOM: 4
Sale History: 5/13/2005: $1,010,000
06/02/2003 — $701,500
Current Price: $1,150,000
Here we have a detached condo in the Canyon's Edge tract built by Standard Pacific in Turtle Ridge. This home was purchased in May 2005 with 5% down.
I don't have much to say on this one yet. If they get their asking price, they stand to make about $71k after 6% in selling costs. Pretty nice return on their $50,500 investment in 18 months.
Has anyone been inside this tract? It's part of Turtle Ridge but it is completely separated from the rest of the homes in Turtle Ridge which are all off Summit Park. Strange location...
UPDATE #1 - March 26, 2007
Thanks to a tip from Owen in the forums, I've come to realize that this home has been relisted (MLS U7000708) and the price has now been reduced to $1,099,000. Assuming 6% in selling costs, their expected profit is now about $23k. Where did the other $48k go?
Mar 24th, 2007
Today was a beautiful, blue-sky kind of day, the kind of day that reminds me why I love Irvine so much. My little boy and I played for quite a while at "Bob the Builder Park" (aka, Colonel Bill Barber) as well as a small pocket park in Westpark. But first, on our way over to Bob the Builder park, I couldn't resist making a short detour. I pulled into Columbus Grove and saw the line-up of protest signs along the main thoroughfare, Sweet Shade. I pulled up to the curb, put on my blinkers, gave my boy his Clifford Reading game on his Leapster, and chatted for a few minutes with homeowner Bob Spillar. He was sitting in a beach chair with, at the time I was there, two other men whom he identified as neighbors. I told Bob I was a blogger, writing for a blog on the local housing bubble, and Bob didn't quite seem to get what I was referring to. (First clue, right? Too bad Bob hadn't spent some time here, or over on
Ben's housing bubble blog or on Rich's site...) Bob was very eager to share his story with me. Here it is:
This is their second weekend protesting William Lyon Homes, Inc. He and 17 other buyers of Phase I Lantana homes plan on sticking it out for the foreseeable future, until Lyons makes appropriate restitution. They have clearance from the Irvine police to hold this protest; they are on public land and Lyon has no recourse to remove them. Bob said that Lyon has not tried to make them leave.
Mid-2005 Bob decided to buy one of the homes in Phase I. He closed in May 2006. He received lots of assurances from the salespeople that prices would not drop in future phases. He said that he feels "coerced, manipulated." Bob acknowledges that he should not have signed the contract without reading it in its entirety (no kidding!), however he said the sales team promised him he didn't have to do so. After the purchase, he and his 17 neighbors read "Addendum G" in their contracts which apparently states the standard legalese stuff about this written contract being the only legal agreement, that any verbal agreements not included in the contract would not be considered valid, etc.
So now, Lyon has dropped asking prices significantly in newer phases, and he and the neighbors are hoppin' mad. Bob told me that he put 20% down when he purchased this home - he said that it was a requirement and you couldn't buy the house from Lyon unless you put 20% down. (I don't quite believe this could be true, however this is what he told me). He further told me that he took out a 100k second mortgage to pay for landscaping, etc., and that its rate is going to adjust in August and he is going to be forced to refinance in order to afford his payments. He believes that most of his neighbors also took out seconds that will be adjusting and they are all in the same boat. The whole "I put 20% down but took out a 100k second" just didn't quite sit right with me, but I didn't push it since my boy was itching to get going to the park!
He handed me a copy of the protest letter he and his neighbors wrote, letter to Lyons (new information: here's the back of the petition)as well as a one-page flyer they are apparently giving to would-be new homebuyers who come to check out the models. Take a look: Experience the Lies
In their letter to Patrick McCabe, Project Manager for Lyon Homes in Newport Beach, the neighbors have this to say, "The undersigned phase I residents in the Lantana neighborhood are writing to you today to ask for your consideration to make things right...During the selling process, given the real estate market uncertainties, we had numerous conversations with the sale staff (Nancy, Jennifer, etc) about prices and we were reassured that the home purchase prices would remain stable throughout the development of our community. We believed in the community and you. We understand fluctuations and economics, but a $75,000-$200,000 price reduction? What does that say to your phase I buyers?...Given all the startup problems we endured through the first phase of development, we are asking for William Lyon to consider some type of compensation to all of us. Afterall, when we think of the sub-contractors and laborers that completed work; the quality was average at best. We trusted in you and now feel like we were misled and betrayed..."
So I asked Bob what exactly he wanted from Lyon. He stated that he does NOT want a "refund." He wants Lyon to refinance the Phase I owners into lower-rate loans; he wants a "small stipend" and he wants free upgrades, retroactively. He said Lyon had already met with the protestors and informed them that the contracts they signed were completely legal and they had no intention of giving the homeowners anything they were asking for now.
So I thanked him and drove away, not having the heart to tell this poor, sweet guy that the carnage had just begun and his equity evaporation was just going to get worse over the coming several years. Best of luck to you and your Lantana Phase I neighbors, Bob.
I launched into a diatribe on Quiggleme.com on who bears responsibility for the bubble we are now watching deflate. I wanted to share it here. So who is responsible? Borrowers, lenders, investors, the FED: IMO, they are all responsible; it is only a matter of degree.
Irresponsible borrowers are like children, if you offer them something they want, no matter the terms, they will take it. The federal government realized this basic fact years ago when they passed predatory lending laws. Does that make the borrower any less responsible? No, but by definition, sub-prime borrowers are irresponsible. If they took responsibility for their debts, they wouldn't be sub-prime. So if you offer a bunch of money to the most irresponsible among us, what would you expect? I would expect them to spend it irresponsibly and not worry about paying it back. That is their history, is it logical to expect anything different from these people? In my opinion, it shouldn't have taken a rocket scientist to see this sub-prime experiment was going to end badly.
That being said, when will people start being responsible for their actions? Has our entire culture become based on having victim status and not being responsible? These borrowers should not be bailed out by any government program as it would just create more dependence. These fools who paid too much and can't pay it back need to lose their homes, lose all their assets, and file for bankruptcy. Tough $hit. They may live their lives being irresponsible, but it doesn't mean the responsible among us should pay for that. This is one of those instances where they will be made to take responsibility. It will feel like they are getting their noses rubbed in it, but that is what they deserve.
However, the lenders are also responsible in this matter. I have a dim view of the lending industry, particularly of credit cards. Consumer debt lenders are akin to drug dealers in my mind. They serve no function in our society other than to leach off people by taking advantage of their inability to save money. But I digress, at least mortgage lenders provide a service because without them most people would be dead by the time they saved enough money to buy a home for cash; however, when they start handing out HELOC's for consumption, they are as bad as the credit card / drug dealers preying on people's reckless irresponsibility. Once mortgage lenders crossed that line, they ceased to be serving the needs of homebuyers and instead began serving the wants of the credit addicted: Shame on them.
Of course, none of this would have happened without the enablers at the Federal Reserve and on Wall Street. Greenspan lowered rates and then told borrowers to take out adjustable rate mortgages. As one might suspect, he did this so his fellow bankers would not be stuck with low-interest loans for 30 years, but he gave the world of homebuyers the "green light" for taking on high risk loans. Then Wall Street investors flooded with liquidity from cheap money from home and overseas started chasing returns. These high-interest sub-prime loans looked attractive, and as long as house prices went up and nobody defaulted, everything was fine. Who do you blame for that situation? The bank of Japan for creating the carry trade? The federal reserve for lowering rates to avoid a recession? Investors chasing high yields? I don't know. That one is too big for me to ferret out a culprit.
In my opinion, the borrowers are certainly at fault; if for no other reason than they signed the papers and took the money. The lenders are also at fault because they should have known better than to give sub-prime borrowers loans they could not afford. Lenders simply cannot abdicate responsibility in this matter for financial, legal and moral reasons. The Federal Reserve and Wall Street investors are also at fault for creating the situation and enabling this to occur. In the end, all the responsible parties will be ruined: borrowers will lose their houses and go bankrupt, lenders like New Century will go out of business and/or lose billions, Wall Street investors will be sharing in those losses with the lenders, and Alan Greenspan will be remembered by history as the architect of the largest, most painful financial bubble in history.
Mar 23rd, 2007
Asking Price: $2,275,000
Purchase Price: $1,471,500
Purchase Date: 2/24/2005
Address: 35 Tall Hedge, Irvine, CA 92603
Sq. Ft.*: 2,825
Lot Sq. Ft.*: 6,300
Year Built: 2005
Type: Single Family Residence
View: Catalina Island, City Lights, Ocean, Panoramic, Water, Other
Neighborhood: Turtle Ridge
$/Sq. Ft.*: $805
Status: Active on market
On Redfin: 31 days
Craigslist, Zillow, Redfin
This one was bought two years ago, so it might be argued it isn't really a flip, but when you believe your house has gone up in value 50% over the last two years (particularly the last two), you are certainly thinking like a flipper. This is a nice home full of the requisite pretentious accouterments one would expect in a
Tuscan Villa / Irvine Tract Home. To quote Redfin:
"Tuscan style home in Turtle Ridge offers 4 bdrms. , 4.5 bths. , 3 car ga rage. This highly upgraded home has walnut hardwood floors, 6 crown molding, custom paint and travertine flooring in kitchen & baths. The chef s kitchen has upgraded appliances, granite countertops & walnut cabinets. Custom built balcony off master bdrm has endless city lights & ocean views of Catalina and Pales Verdes. The backyard includes a wood burning fireplace, outdoor B. BQ w/ travertine counter tops & fountain."
It looks like there may be some disagreement in the market as to the value of this property. Zillow thinks the house is worth about $1,850,000. Of course, their neighbors at 25 Sylvan just sold for $2,150,000; I imagine these owners must believe their house is better.
However, it is a nearby house at 20 Highpoint that must have caught these people's attention. 20 Highpoint was purchased on 4/7/2005 from the builder for $1,873,000. It was sold on 1/19/2007 for $2,800,000. Assuming a 6% commission (which is probably too high for an expensive home) these people made $759,000 in about 18 months! Could this be fraud? Zillow thinks the new owners overpaid by $400,000. When you map the comps, this one does seem like an outlier. In any case, there seems to be some activity with these pricey homes, so maybe our flippers will get lucky.
You know, I worked the last 18 months, and I did not make $759,000. I should flip houses.