Irvine Housing Blog

The Renting Stigma

Don't waste your time on jealousy;
sometimes you're ahead,
sometimes you're behind.
The race is long, and in the end,
it's only with yourself.

Everyone's Free -- Baz Luhrmann

Link to Music Video

I have ranted on numerous occasions on this blog about people's desires to feel superior to their fellow man. I find it to be the least desirable feature of California's culture. This need people have to raise their low self-esteem at the expense of other people is part of the impetus behind my posts on The Grand Illusion and The Reservoir of Schadenfreude. Releasing the anger caused by these interactions is part of the energy I find for writing on this blog. Today I want to address one of these California traditions and examine why homeowners feel superior to renters and see if there is any validity to these feelings.

Any group that feels superior to another group can live with their happy delusions forever. Every religious zealot or racial bigot carries a false belief of superiority. We can all laugh at them and let them be (assuming the "superior" group is not violent.) If those placed in the inferior position do not share the feelings of inferiority, the "inferior" group is not harmed -- their energy is not stolen. It is when this latter group accepts and believes the feelings of inferiority that harm is done. To put it in terms of the housing market, homeowners can feel they are superior if they want to, but it is only when renters believe it that renters are harmed. Other than than the need to prop up a weak ego, why would a homeowner feel superior to a renter?

There was a time when home ownership was obtainable only by people of character. You knew if you met a homeowner, they went through the rite of passage necessary to achieve that status. Demonstrating the character necessary to become a homeowner used to be a good reason to respect someone -- not anymore. I wrote in the post, Brio New World, "Previous generations had a formula for a “normal,” happy life. You used to save your money until you had a 20% downpayment, then you bought a house, and if you had increases in income, you could move up to a nicer place. Home ownership was a symbol of success. It proved you could save to reach a goal; it proved you were responsible; it made you happy. It was also a ticket to financial security as your home equity would become a savings account you could use to fund your retirement when you downsized to smaller accommodations. These were the rules of old.

The lending industry changed all of that. They eliminated all measures of responsibility including honesty with “liar loans,” integrity with low FICO scores, and accountability with 100% financing. When homes can be purchased by people who lie, cheat and steal, the prestige of home ownership is diminished — no make that eliminated. Home ownership no longer symbolizes sacrifice and success, instead it now is synonymous with greed and gambling in the commodities market. Welcome to our Brave New World."

It reminds me of fashion fads. When a new fashion comes out, good-looking people buy the fashion, and it becomes popular. As long as the fashion is the exclusive purview of good-looking people, the fad will remain popular. Eventually, the not-so-good-looking who want to join the club purchase the fashion, and it goes out of style. When people who do not possess the attributes of the club they are trying to join are given access, the prestige of the club is immediately diminished. As Groucho Marx said, "I don't want to belong to any club that will accept me as a member."

Many homeowners are still living with the belief they are superior and they are members of an exclusive club. They turned a blind eye to the not-so-desirable element that was admitted to their exclusive club during the rally. Why would they care when admitting these people made them huge amounts of phantom equity?

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However, the fact remains, there are a great many "homeowners" who are not financially responsible, they do not know how to save, and they do not know what it means to sacrifice. These late entrants to the housing club are now defaulting in record numbers. They aspire to the respect homeowners were given in the past; they desperately want to look down on their renting acquaintances with that feeling of moral superiority of generations past; however, they just don't possess the attributes which made homeowners a group to respect. The presence of these interlopers has made home ownership something to be ashamed of not something to be aspired to.

Flushing these interlopers out of the system is going to be painful. House prices are going to decline to pre-bubble levels when the fundamentals make sense again. It will be as if the bubble never happened. Homeowners who survive will be left with lingering memories of what their houses were temporarily selling for during the bubble. Those who are not qualified to be homeowners will be forced to rent again after the foreclosure. They will end up in the "renting class" all over again.

When this time comes, many "bitter renters" who sat out the rally and subsequent crash with money in the bank will step in to save the day. After the painful purge, the prestige of home ownership will be restored, as only owners will be the financially prudent who can sacrifice and save money -- the attributes of respect formerly associated with home ownership. These are the times I look forward to. The next time a homeowner denegrates a "bitter renter," I hope they realize these are the people who will step up and restore the prestige of home ownership when the time is right.

Irvine Median Home Price History

I thought everyone might find this data interesting.

1988 $216,464
1989 $237,410
1990 $239,024
1991 $242,877
1992 $237,451
1993 $230,598
1994 $228,529
1995 $229,959
1996 $246,865
1997 $245,437
1998 $263,172
1999 $278,148
2000 $308,089
2001 $334,741
2002 $379,852
2003 $461,888
2004 $609,397
2005 $635,675
2006 $722,928
2007 $665,807

Has IHB Impacted the Market?

I've got the power hey yeah heh
I've got the power
Oh-oh-oh-oh-oh-oh-oh-oh-oh yeah-eah-eah-eah-eah-eah
I've got the power
Oh-oh-oh-oh-oh-oh-oh-oh-oh yeah-eah-eah-eah-eah-eah
Gettin' kinda heavy

The Power - Snap!

Link to Music Video

As you might have surmised, the real estate community is not thrilled with the writings of yours truly and the exchange of accurate, un-bullish information at this blog. Realtors in particular are accustomed to controlling the information regarding real estate, and media outlets like this blog are a threat to their monopoly.

They even have the audacity to criticize anyone who broadcasts a negative truth as if the dissemination of information is the problem and not the information itself. After we published Irvine Realtor Ratings 7-8-2007 the realtors pressured OC Home Review to stop giving the general public access to the information we used in our report. Apparently incompetence and poor performance are OK with the real estate community. It is all part of the old game of blame the media.

Does the real estate community have anything to worry about? Is it possible for the Irvine Housing Blog to have an impact on the housing market?

It Didn’t Work Out

Should have been different but
It wasn’t different, was
Same old story, dear john, and so long
Should have fit like a glove
Should have fit like a ring
Like a diamond ring
A token of true love
Should have all worked out
But it didn’t

There's Your Trouble -- Dixie Chicks

Link to Music Video

The rally was supposed to be different this time, wasn't it? People say it every time, but it never is. Today's property was purchased during the peak of the frenzy to buy real estate. It should have been a ticket to riches; it should have all worked out, but it didn't...

Asking Price: $649,000

Income Requirement: $162,250

Downpayment Needed: $129,800

Purchase Price: $685,000

Purchase Date: 6/22/2005

Address: 73 Chula Vista, Irvine, CA 92602

1st Loan $547,920
2nd Mtg. $136,980
Downpayment $100

Beds: 3
Baths: 3
Sq. Ft.: 1,820
$/Sq. Ft.: $357
Lot Size: -
Type: Condominium
Style: Other
Year Built: 2002
Stories: Two Levels
View(s): Has View
Area: Northpark
County: Orange
MLS#: M107208
Status: Active
On Redfin: 91 days
Unsold in 90+ days

From Redfin, "Great Opportunity! Highly Upgraded WIth A View!!!! Short Sale!!! Must Go Fast!!! Priced Below Market Value For Quick Sale!!! Present All Offers!!!"

Enough with the exclamation points. Do realtors realize how incredibly stupid they look when they write like that? My guess is no!!!!!!!!!!!!!!!!!!!

What Is With The Title Case?

Must be written for the ADHD buyer. Each sentence has between 2 and 7 words.

That description is painful to my eyes. If realtors are trying to stand out in the crowd with their descriptions, they are succeeding. They stand out as being terrible.

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If this seller gets their asking price -- which seems unlikely after more than 90 days on the market -- they stand to lose $74,940 after a 6% commission. Of course, the seller is only losing $100, and the bank will lose $74,840. Yet another 100% financing deal gone bad.

I know I am flagellating the equine which has already perished, but 100% financing is hastening the decline of prices. These borrowers have no holding power. These are gamblers who saw an opportunity to make huge sums with no risk, and they acted on it. How many of these properties does it take to cause prices to plummet? How many more of these time bombs are awaiting detonation? If there is any one factor which has the potential to greatly increase the rate of price decent, it is 100% financing deals.

Works for me. I would be happy to buy sooner rather than later...

Does anybody really know what time it is? Sometimes I wonder if I have too much time on my hands.

Another week has passed at the Irvine Housing Blog. Come join us next week as we continue to chronicle ‘the seventh circle of real estate hell.’ Have a great weekend.

Ignore that REO

What I want, I want now
And it's a whole lot more, anyhow
I wanna climb a mountain
I wanna jump, jump, jump, jump a mountain

I understand all destructive urges
It's seems so perfect
I see, I see no evil

See No Evil -- REM

Link to Music Video

What do you do when the property across the street destroys the comps? Ignore it. Pretend it never happened. See no evil...

Asking Price: $1,299,900

Income Requirement: $324,975

Downpayment Needed: $259,980

Bank Purchase Price: $1,149,500

Bank Purchase Date: 7/24/2007

FB Purchase Price: $1,400,000

FB Purchase Date: 6/15/2006

Address: 5 Roseleaf, Irvine, CA 92620

Beds: 5
Baths: 3.5
Sq. Ft.: 3,300
$/Sq. Ft.: $394
Lot Size: 7,200 sq. ft.
Type: Single Family Residence
Style: Mediterranean
Year Built: 1999
Stories: Two Levels
View(s): Hills, Trees/Woods
Area: Northwood
County: Orange
MLS#: S505342
Status: Active
On Redfin: 18 days

From Redfin, "Magnificent home in exclusive gated community of Sommerton. Beautiful valley and hills views!!! Big kitchen, high ceilings, open, spacious floorplan. Dramatic entry, wide stairway, upgraded flooring & moldings. Downstairs bedroom. New kitchen appliances will be installed this week. Great location! Quiet, peaceful, culdesac! Private access to hiking trail."

The exclamation points are back!!!

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Check out the $250,000 loss someone (probably the bank) took on this property. Unfortunately, it looks as if our next seller used the previous, peak-purchase price as their comp to set their wishing price. It certainly looks like they are ignoring the REO as an aberration. Reality is the REO was reflective of the market. It might even be lower...

Asking Price: $1,550,000

Income Requirement: $387,500

Downpayment Needed: $310,000

Purchase Price: $1,263,500

Purchase Date: 12/30/2004

Address: 10 Roseleaf, Irvine, CA 92620

Beds: 5
Baths: 4
Sq. Ft.: 3,700
$/Sq. Ft.: $419
Lot Size: 8,000 sq. ft.
Type: Single Family Residence
Style: Mediterranean
Year Built: 1999
Stories: Two Levels
Area: Northwood
County: Orange
MLS#: P599657
Status: Active
On Redfin: 20 days

From Redfin, "Exclusive Standard Pacific Somerton Estate, 4BR+Huge Bonus Room, Main Floor BR with Bath Spacious Driveway, Pool Sized Lot, Marble and Hardwood Floor, Granite Counter Top, Plantation Shutters, Master BR with Jacuzzi Tub, Cast Iron Stairs Railing, Close to Hiking Trails and Award Winning Schools, Great Cul-de-Sec Location, Price to Sell-Recently Reduced"

Why Is This Written In Title Case?

Price to Sell-Recently Reduced? LOL

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The other day, I asked, "Is fear gripping the market?" This seller is not afraid and is clearly still in denial.

Passage

Now here you go again
You say you want your freedom
Well who am I to keep you down
Its only right that you should
Play the way you feel it
But listen carefully to the sound
Of your loneliness
Like a heartbeat.. drives you mad
In the stillness of remembering what you had
And what you lost...
And what you had...
And what you lost

Dreams -- Fleetwood Mac

Link to Music Video

Doesn't that song capture the frustration of missing the market peak, and now you can't get out?

Today's post, in its entirety, came to me as an email from an anonymous fan. Enjoy.

Asking Price: $600,000

Purchase Price: $612,500

Purchase Date: 11/19/2004

Address: 47 Passage, Irvine, CA 92603

1st Loan $359,400
Downpayment $253,100

Beds: 3
Baths: 3
Sq. Ft.: 1,582
$/Sq. Ft.: $379
Year Built: 2004
Stories: 2
Type: Condominium
View: City Lights, Mountain, Panoramic, Park or Green Belt, Trees/Woods, Has View
County: Orange
Neighborhood: Quail Hill
MLS#: S497537
Status: Active
On Redfin: 73 days

From Redfin, "Designer touches and upgrades compliment this beautiful home in the heart of Quail Hill. Travertine flooring, granite counters, stainless steel appliances, plantation shutters, designer paint, and surround sound make this home a delight. This perfect Quail Hill location allows walking distance to the association pool, fitness center, tot lot, restaurants and shopping. Quail Hill is located just minutes from the entertainment center called the Irvine Spectrum and the beautiful Laguna Beach."
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If today’s seller gets their asking price, they stand to lose $48,500 (after 6% commission) after three years of ownership. They have the equity to absorb the blow, but it must still be quite disheartening. What is unique about this home is that it was purchased from William Lyon Homes (the builder) brand new. There has been no price-inflating flipping on this property. This one underscores how bad the bubble was: Purchased directly from the builder in 2004 and they are hoping to get out with "just" a $50,000 cash equity loss. But wait! Don't home prices in Orange County ALWAYS go up?

The $179K Bedroom

You're in denial, you never will believe it's you
Denial, you always hide behind the truth
You'll never believe it, you never believe it's you
You'll never believe it, you never believe it
Secrets told you, dreamland holds you, secrets told you
You wouldn't believe it, you couldn't conceive it
Secrets told you...

Denial -- Ozzy Osbourne

Link to Paranoid Video

This is a difficult time to sell a home. With some in denial and some in fear, sellers are unsure how to price their homes, so there is variety in pricing among similar products. However, there are some disparities that are so large that one has to ask, "Did you even look at the neighborhood comps?"

First our rollback...

Asking Price: $499,999

Income Requirement: $124,999

Downpayment Needed: $99,999

Purchase Price: $565,000

Purchase Date: 9/27/2005

Address: 5294 Plum Tree, Irvine, CA 92612

1st Loan $452,000
2nd Mtg. $113,000
Downpayment $0

Beds: 2
Baths: 2
Sq. Ft.: 1,224
$/Sq. Ft.: $408
Lot Size: 2,988 sq. ft.
Type: Single Family Residence
Style: Ranch
Year Built: 1973
Stories: One Level
Area: University Park
County: Orange
MLS#: S505717
Status: Active
On Redfin: 13 days

From Redfin, "Fantastic opportunity to own a distinctive home with a modern feel and a abundance of amenities. A spiraling staircase leads to a enclosed loft that could be used as a office or an extra bedroom. Contemporary lighting throughout with vaulted ceiling and skylight in the living room. Exceptional association facilities with 2 pools, clubhouse, greenbelts, spas, and BBQ. Great location with easy access to freeways and shopping."

This seller forgot to ask for the 99 and nine tenths of a cent. I guess this does put them under half a million...

Did you see the red spiral staircase? The only thing this apartment is missing is the stripper's pole.

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This owner is serious about selling their property. If they get their asking price, they stand to lose $95,000 after a 6% commission -- well, actually the bank stands to lose that much.

Isn't 100% financing great? It is a free call option. There is no risk of loss to the buyer, and they get all the upside.

Asking Price: $678,000

Income Requirement: $169,500

Downpayment Needed: $135,600

Purchase Price: $582,000

Purchase Date: 5/28/2004

Address: 5341 Plum Tree, Irvine, CA 92612

1st Loan $465,600
2nd Mtg. $87,300
Downpayment $29,100

Beds: 3
Baths: 2
Sq. Ft.: 1,532
$/Sq. Ft.: $443
Lot Size: 6,600 sq. ft.
Type: Single Family Residence
Style: Contemporary, Ranch
Year Built: 1975
Stories: One Level
View(s): Hills
Area: University Park
County: Orange
MLS#: S504269
Status: Active
On Redfin: 25 days

From Redfin, "One of a kind corner location, extra long driveway and great curb appeal. Large yard with extra privacy. Remodeled kitchen, new flooring, and much more. Hard to find SINGLE level home in a move in condition. Very close to shops, schools, parks, Freeway and UCI."

One of a kind corner location? You mean one of a couple dozen similar corner locations? Plus, it is next to the collector street, so it is noisier.

This entire neighborhood is full of single story homes. They are hard to miss, not hard to find.

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This seller is not serious about selling their house. It is not the best comparable to the first property as it is 300SF larger and it has one more bedroom (I suspect they are counting the loft.) However, it is the same street, the same style, the same age, etc., and the purchase prices were almost the same. Basically, this seller is asking you to pay $179,000 more for the third bedroom. I believe 3 bedrooms should carry a premium over 2/2s, but not that much.

You tell me, would you pay $179K in premium for a bedroom?

What Caused the Bubble Rally?

In an earlier post, How Sub-Prime Lending Created the Housing Bubble, I gave a brief description of the impact of adding a large number of new buyers to the market. However, the title is somewhat misleading because it does not fully explain how the bubble was inflated. In this post, I hope to provide a more detailed explanation of what factors and conditions combined to drive prices so high.

The Great Real Estate Bubble was caused by 4 interrelated factors:

1. Separation of origination, servicing, and portfolio holding in the lending industry.
2. Innovation in structured finance and the expansion of the secondary mortgage market.
3. The lowering of lending standards and the growth of subprime lending.
4. Lower FED funds rates as a catalyst (Lowering mortgage rates was not a big factor.)
5. The negative amortization loan (Option ARM.)

The secondary mortgage market came into being in the early 1970s to provide greater liquidity to banks and other lending institutions to facilitate home mortgage lending. Freddie Mac and Sallie Mae were set up to package loans together into pools and sell them to investors as mortgage-backed securities.

As the secondary mortgage market continued to grow, lending institutions began to sell the loans they originated rather than keeping them in their own portfolio. The banks began to make money by originating and servicing loans rather than through keeping them and earning interest. This was a dramatic shift in lending practices.

With this shift came an equally dramatic shift in incentives: lending institutions stopped being concerned with the quality of the loans because they didn’t keep them, and instead they became very concerned with the volume of loan origination and the fees this generated. This fundamental change in the behavior of lenders leads inevitably to a lowering of lending standards. Lower lending standards opened the door for lenders to provide loans to those with low FICO scores: subprime borrowers.

Subprime lending as an industry barely existed prior to 1998. There were no lenders willing to loan to people with poor credit, and there was no secondary market to purchase these loans if they were originated. The growth of subprime was the direct result of the lowering of lending standards created by the change of incentives brought about the creation of the secondary market.

These factors alone were not enough to create the Great Housing Bubble, but they provided the basic infrastructure to allow house prices to take flight. The catalyst for the inflation was the Federal Reserve’s lowing of interest rates in 2001-2003.

Many mistakenly believe the lower interest rates themselves were responsible by directly lowering mortgage interest rates. This is not true. Mortgage interest rates declined during this period, and this did allow borrowers to finance somewhat larger sums with the same monthly loan payment, but this was not sufficient to inflate the housing bubble. This is also why a lowering of interest rates will not be able to save the housing market. The only thing that would do that would be another massive influx of capital.

Notice that mortgage interest rates have ranged from a high near 7% in 2001 to a low near 5.5% from 2002 to 2005. The drop from 7% to 5.5% would have supported a 15% increase in prices, not the 150% increase in prices which actually occurred.

The lower Federal Funds rate did cause an expansion of money supply, and it lowered bank savings rates to such low levels that investors sought other investments with higher yields. It was this increase in liquidity and quest for yield that drove huge sums of money into mortgage loans.

This is where another of the lending industry's innovations comes into play: structured finance. Debt is money. If you can find a way to create more debt, you create new money. The problems comes when you create more debt than there is cashflow to service it which is where we are now. There is a tipping point where the debt service exceeds the cashflow, and when this tipping point is reached, the entire debt structure collapses in a deflationary spiral. The structured finance products such as collateralized debt obligations and their derivatives are highly leveraged instruments with a very sensitive tipping point. This is why the hedge funds at Goldman Sachs imploded so quickly and so completely.

With a huge influx of capital into the secondary mortgage market, the industry was under tremendous pressure to deliver more loans to hungry investors. This caused the already-low loan standards to be all but eliminated. All of the worst “innovations” in the lending industry occurred during this period: Negative Amortization loans, Stated-Income loans (Liar Loans,) NINJA loans (no income, no job, no assets,) 100% financing, FICO scores under 500, one-day-out-of-bankruptcy loans, etc. The joke was if you could “fog a mirror” or if you “had a pulse,” you could get a loan for as much as you wanted to buy a house.

The real culprit in the housing bubble was the negative amortization loan. No other innovation or practice drove prices higher than this one because it allowed borrowers to take on so much debt.

The same monthly housing payment with an Option ARM finances double the loan balance. As I stated in, The Anatomy of a Credit Bubble, "Stop for a moment and ponder the math: the same payment now finances 100% more money. Is it any wonder the real estate market was 100% overvalued at the top? People purchasing with Option ARMs were buying at the rental equivalent value. From a financing perspective, the market was not overvalued. People were paying exactly what they should have been paying. They were just doing it with loan terms which were going to destroy them — hence the term “suicide loan.” " Now that Option ARMs are disappearing, what do you think will happen to house prices?

Conclusions

First, the infrastructure was built to deliver capital to the housing market, which in turn changed the incentives in the lending industry. Next, the FED created conditions where large amounts of capital was seeking a new home (pun intended.) Finally, the lending industry "innovated" and found unique -- and inherently unstable -- ways of putting this capital to work. What you get in the end is a massive asset bubble.

There is a larger issue here pertaining to the FEDs monetary policy that I hope you see. The creation of the secondary market for mortgages alone was not the problem. The change in lender incentives might have created some issues, but without a huge influx of capital to put pressure on the system, it probably would not have broken. When the FED stimulates the economy through lowering interest rates and increasing the money supply, that money will go somewhere. When it does, it creates massive distortions in asset values and with it a commensurate inefficient use of investment capital. This is not free-market capitalism, it is government welfare doled out to the investment class. Ben Bernanke is taking us down this road yet again. If he continues to lower interest rates, investment capital will flow into a new asset class (no, it will not flow into housing and save the day.) How many more bubbles must we endure before the FED stops creating them?