Irvine Housing Blog

The Little Drummer Boy

"Little Drummer Boy", David Bowie and Bing Crosby

.

.

I hope you are enjoying your holiday season...

Christmas In Killarney

The holly green, the ivy green
The prettiest picture you've ever seen
Is Christmas in Killarney
With all of the folks at home

It's nice, you know, to kiss your beau
While cuddling under the mistletoe
And Santa Claus you know, of course
Is one of the boys from home

The door is always open
The neighbors pay a call
And Father John before he's gone
Will bless the house and all

How grand it feels to click your heels
And join in the fun of the jigs and reels
I'm handing you no blarney
The likes you've never known
Is Christmas in Killarney
With all of the folks at home

Christmas In Killarney -- Bing Crosby

.

.

Looking for something interesting to read over the holiday weekend? Try this:

Historic Turning Points in Real Estate

As you might imagine, I am a fan of Robert Shiller. The PDF link above is to his latest paper.

Excerpts:

Exerpts The real estate market changed its direction markedly around 1990, from a booming market to a market in the doldrums for the better part of a decade, and then the market started accelerating upwards at increasing rates. The national home price boom since the late 1990s appears unprecedented in US history, although the “baby boom” in housing of the late 1940s and early 1950s comes close, and there have been some very large local booms. The rate of US housing appreciation slowed after 2005, and, to some eyes at least, it would appear just sometime after mid 2006, we are entering a new regime of downward price changes.

It would seem that demand for housing services should be relatively inelastic in the short run, especially with regard to the number of units (rather than their size). Most families want just one house. The decision to own two or more houses, or the decision to break up the family to spread out over more houses, is not made very often—most commonly only at important life turning points or job changes. It is difficult for builders to transform two small housing units into one larger unit, or one large unit into two small housing units, without great costs. Hence, even small changes in the number of housing units might be expected to cause major short-run changes in home prices. However, home prices do seem to show enormous momentum, and sudden changes in the market seem rare. In a speculative market, a sudden change in some component of supply or demand may produce little price change if people think that the change is temporary, and so another component, a speculative component, offsets the sudden change. But the speculative component is inherently psychological, potentially unstable, and subject to contagion and herd behavior. People may change their mind about whether a change in price is only temporary or is the beginning of a new trend. They are especially likely to change their mind because we have professional marketers whose job is to get some kind of social response moving, and, when they do find some advertising pitch that resonates with investors, they will run it for all it is worth.

Analysis of past booms seems to indicate that investors in both the stock market and the housing market seem often not to understand the supply response to price increases. These are normal intelligent people, why would they repeatedly make the same mistake again and again? There seems to be what I will call a uniqueness bias, a tendency for investors to overestimate how unique an investment they favor is, failing to take account of the inevitable supply response to high prices. The uniqueness bias is reflected in quite a number of anomalies of human judgment that psychologists have documented, including the “representativeness heuristic,” “overconfidence,” “wishful-thinking bias,” “spotlight effect” and “self-esteem bias.” The uniqueness bias is related to failure to imagine how many possible competitors there are, a tendency to think highly of oneself and one’s associates and an association of investments with one’s sense of personal identity with an identified business model.

The uniqueness bias has its effect in the housing market when people imagine that the city they live in is unusually attractive, and increasingly so. They fail to understand that new such cities can be constructed in what are today cornfields or forests. In their 1990 paper, “The Baby Boom, The Baby Bust and the Housing Market,” N. Gregory Mankiw and David Weil argued that the housing market would soon crash as the baby boomers retired, neglecting to consider how supply would adjust to any such change in demand. In their 2004 paper “Superstar Cities,” Joseph Gyourko, Christopher Mayer and Todd Sinai argue for extrapolating some long-standing trends in major US cities, arguing that these superstars will only grow in status, assuming implicitly that there can be no new supply of the services those cities provide.

These narrative accounts do not prove anything, and we do not know that the change in thinking that appears to accompany ends of booms was in any sense the cause of the end of the boom. The change in thinking cannot be measured accurately, as we have only media accounts that suggest at it, that represent some journalists’ impressions that may not be replicable. Some economists would therefore be inclined to exclude any such effects from the economic model of the boom, and to try to explain the change in terms of some more well-measured economic effects.

But, if one considers that the prices paid for houses, as for any other speculative investments, surely reflects people’s willingness to pay, then the change in attitudes must have had an impact on prices. Just because we cannot precisely quantify and prove such an effect does not mean we should revert back to a null hypothesis that the changing psychology has no effect on home prices.

The best guess is that ends of housing booms have multiple causes, and cannot generally be interpreted as just an unraveling of boom psychology. Still a rising sense of enthusiasm and excitement for the investments, followed by a sense of betrayal and embarrassment at having fallen for the boom and underestimating the supply response to the boom, played a significant, if unquantifiable, role in the booms and their subsequent break.

I’ll be Home for Christmas

I'll be home for Christmas
You can plan on me
Please have snow and mistletoe
And presents 'neath the tree

Christmas eve will find me
Where the love light gleams
I'll be home for Christmas
And you'll be in my dreams

I'll be home this Christmas, darling
I'll be coming home to you
And there's nothing in the world
Gonna get in my way

I'll be home for Christmas
You can plan on me
Please have snow
And mistletoe
And presents 'neath the tree

Christmas eve will find me
Where the love light gleams
I'll be home for Christmas
And you'll be in my dreams
I'll be home for Christmas
Till then you'll be in my dreams

I'll be Home for Christmas -- Josh Groban

.

.

Asking Price: $1,890,000

Income Requirement: $472,500

Downpayment Needed: $378,000

Purchase Price: $1,850,000

Purchase Date: 7/24/2007

Address: 51 Valley Terrace, Irvine, CA 92603

Sales History
Date.............. Price
07/24/2007 $1,850,000
05/11/2005 $1,925,000

Beds: 5
Baths: 4.5
Sq. Ft.: 3,300
$/Sq. Ft.: $573
Lot Size: 8,400 sq. ft.
Type: Single Family Residence
Style: Other
Year Built: 2004
Stories: Three or More Levels
View(s): City Lights, Hills, Mountain
Area: Turtle Ridge
County: Orange
MLS#: P608773
Status: Active
On Redfin: 39 days

From Redfin, "Stunning 5 BR 4.5 BA Model Pefect Home in The Executive Guard Gated Communityof the Summit at Turtle Ridge, Large Corner Lot. Professional Landscaped w/ Fountains, Outdoor Fireplace & Built-In BBQ * * Stunning Views * * Gourmet Kitchen w Stainless Vicking Appliances & Built-In Refri * * Expensive Hardwood, Marble Floor * * Venetian Plastered walls * * It's A MUST SEE. 51 Valley Terrace, Irvine * *"

Asterisks instead of periods? What is wrong with periods?

A Gourmet kitchen, of course. Remember our graphic?

Expensive floor. Ooooh! I am impressed. It isn't necessarily high quality, it is just expensive. I guess if you are only pretending to be rich, cost is more important than quality.

Venetian Plastered walls? Did they bring an artist in from Venice to do this work?

.

.

If the lender can get their asking price, and if they pay a 6% commission, they will lose $148,400 from the original sales price.

BTW, San Diego has been a leading indicator of our market since 2000. They started to bubble first, and they started to collapse first. Have you seen the latest chart?

Like many of you, I will be spending time with family over the holidays. There will be a new post every day, and if any of you want to check in and talk about your holiday, it will be a welcome respite from the hardcore housing crash discussions we have been having. I hope you all stop by for a dose of classic Christmas music from Bing Crosby, Josh Groban, and Frank Sinatra. I wish you all a happy holidays, and I will be back next week to finish off 2007 with more coverage of ‘the seventh circle of real estate hell.'

I'll Be Home For Christmas -- Frank Sinatra
.

Are You Prepared?

O Holy night, the stars are brightly shining
It is the night of our dear Savior's birth
Long lay the world in sin and error pining
Til He appeared and the soul felt it's worth
A thrill of hope the weary world rejoices
For yonder breaks a new and glorious morne
Fall on your knees

O hear the angel voices
O night divine!
O night when Christ was born
O night divine!
O night, O night divine!

And in His Name, all oppression shall cease
Sweet hymns of joy in grateful chorus raise we
Let all within us praise his Holy name
Christ is the Lord!
Their name forever praise we

Noel, Noel
O night, O night Divine
Noel, Noel
O night, O night Divine
Noel, Noel
O night, O holy Divine

O Holy Night -- Celine Dion

.

.

Asking Price: $524,900

Income Requirement: $131,225

Downpayment Needed: $104,980

Purchase Price: $682,763

Purchase Date: 5/29/2007

Address: 81 Chantilly, Irvine, CA 92620

Beds: 2
Baths: 2.5
Sq. Ft.: 1,824
$/Sq. Ft.: $288
Lot Size: -
Type: Condominium
Style: Other
Year Built: 2005
Stories: Two Levels
Area: Woodbury
County: Orange
MLS#: S515272
Status: Active
On Redfin: 3 days

From Redfin, "Great 2 level condo located in Woodbury!! Very open and spacious with large rooms throughout. Family kitchen, wood and stone tile floors, living room with fireplace, seperate laundry, and private courtyard entry are just some of the features of this home. Close to everything Irvine has to offer!!"

Two exclamation points? I thought three was the standard?

seperate?

.

.

Sales History
Date...................Price
05/29/2007 $605,032
09/08/2005 $679,000

I assume this is an REO. Interesting that it took them 6 months to list it. If they get their asking price, assuming they originally loaned $679,000 and they pay a 6% commission, the total loss would be $185,594. Notice this asking price is 22.6% off the peak sales price. Yikes!

There is a reason for the credit crunch: lenders are losing money. Lenders don't like to loan money when people do not pay them back. The more they get burned, the more conservative they become. As they get more conservative, fewer people qualify for loans and loan amounts decline. This in turn puts more people underwater makes refinancing that much more difficult and causes even more bank losses. It is a classic downward spiral. This is why credit will not loosen any time soon. There are people out there who believe the credit crunch is a temporary thing that will pass soon. It isn't, and it won't. In fact, it is likely to spread to other forms of borrowing as the situation continues to deteriorate.

So what does all this mean, and how do you prepare for it? Basically, it means borrowed money will not be widely available, and what is made available will be more expensive. If you live a life without credit dependency, the credit crunch will not impact you much. If someone takes away something you do not use, it doesn't harm you much. However, if you are like most Californians and you are addicted to credit, you are in for some struggles.

The best thing you can do to prepare for the upcoming deepening credit squeeze is to stop using credit. Pay off what you have and stop using it. If you don't, you might find your interest expense increasing dramatically, and you will find yourself subject to the whims of your creditors. There is no freedom when you have debt. The next thing you can do is to start saving money. Things could get very bad, particularly locally. We have already seen waves of layoffs in the real estate industrial complex, but this could easily trigger a wider slowdown in the economy and put people in related fields out of work. It could be you. Save now, and you will be prepared to weather the storm.

HELOC Abuse

Jingle bell, jingle bell, jingle bell rock
Jingle bells swing and jingle bells ring
Snowing and blowing up bushels of fun
Now the jingle hop has begun

Jingle bell, jingle bell, jingle bell rock
Jingle bells chime in jingle bell time
Dancing and prancing in Jingle Bell Square
In the frosty air.

What a bright time, it's the right time
To rock the night away
Jingle bell time is a swell time
To go gliding in a one-horse sleigh
Giddy-up jingle horse, pick up your feet
Jingle around the clock
Mix and a-mingle in the jingling feet
That's the jingle bell,
That's the jingle bell,
That's the jingle bell rock.

Jingle Bell Rock -- Bobby Helms

.

.

When I first started blogging about the housing debacle, some of the more bullish commenters would bristle when I suggested that a great many people refinanced all their equity out of their homes and would end up in foreclosure when prices went south. I have already profiled some pretty egregious HELOC and refi abuse on this blog, but today's listing sets a new standard.

Asking Price: $1,618,800

Income Requirement: $404,700

Downpayment Needed: $323,760

Purchase Price: $870,500

Purchase Date: 12/11/2002

Address: 34 Westlake, Irvine, CA 92602

First Mortgage $696,000
Second Mortgage $699,900
HELOC $436,700
Total Debt $1,832,600
Total Cash out $962,100

Beds: 5
Baths: 4
Sq. Ft.: 4,000
$/Sq. Ft.: $405
Lot Size: -
Type: Single Family Residence
Style: Other
Year Built: 2002
Stories: Two Levels
View(s): Park or Green Belt
Area: Northpark
County: Orange
MLS#: S514550
Status: Active
On Redfin: 10 days

From Redfin, "Executive luxury home backed to tree-lined greenbelt, elegant wrought iron staircase-distressed hardwood flr entry, main flr bedroom/bath, huge kitchen w/ center island, granite, maple cabinets, butler's pantry, wine compartment, built-in media center, surround system, decorator paint, shutters, crown moulding, French doors, large upgraded master suite w/ extensive wardrobe organizers, backyard w/ built-in BBQ, fireplace, ref/sink, garage w/ epoxy finish, cabinetry, resort ass. amenities"

Resort ass? Is this the person you fool around with when you are on vacation?

.

.

This house was purchased 5 years ago, and these people have already taken out at least $525,400. If they have also maxed their HELOC, then they have taken out an unbelievable $962,100! That comes to $192,420 per year of additional spending money. If their house were a W2 employee, it would have been making over $300,000 a year to generate that kind of take-home income.

So how bad is the bank going to lose on this one? Assuming they maxed their HELOC, they get their asking price, and they pay a 6% commission, the lender will lose $310,928. For the lender's sake, I hope the owners have not tapped their HELOC.

Do you imagine these sellers think they are rich? After all, they probably make around $200K, and they have been spending as if they make $500K. Only rich people do that, right? As the housing bubble continues to deflate, we will all see who was pretending. As Warren Buffet said, "Only when the tide goes out do you discover who's been swimming naked."

I wonder how well they will adjust to the 50% drop in spending money and being cut off from credit after the short sale?

America’s Debtor Prisons

It's the most wonderful time of the year
(Most wonderful time)
With the kids jingle-belling
And everyone telling you
Be of good cheer
It's the most wonderful time of the year
(Wonderful time)

It's the hap-happiest season of all (wonderful time)
With those holiday greetings
And great happy meetings
When friends come to call
It's the hap-happiest season of all

There'll be parties for hosting
Marshmallows for roasting
And caroling out in the snow (out in the snow)
There'll be scary ghost stories
And tales of the glories
Of Christmases long, long ago

It's the Most Wonderful Time of the Year -- Andy Williams

.

.

Asking Price: $630,000

Income Requirement: $157,500

Downpayment Needed: $126,000

Purchase Price: $436,500

Purchase Date: 12/13/2002

Address: 219 Terra Cotta, Irvine, CA 92603

First Mortgage $629,600
Second Mortgage $157,400
Total Debt $787,000

Beds: 3
Baths: 2.5
Sq. Ft.: 1,510
$/Sq. Ft.: $417
Lot Size: -
Type: Condominium
Style: Modern, Other
Year Built: 2003
Stories: Two Levels
View(s): City Lights, Hills, Mountain
Area: Quail Hill
County: Orange
MLS#: S515205
Status: Active
On Redfin: 4 days

From Redfin, "Vaulted Ceiling In Living Room, Private Corner Lot With Open View Of Outdoor Sports Center. Spectacular City Light View From Master Bedroom Balcony & Other Area. Beautifully Upgraded In Spacious Private Courtyard. Wood Floor On Fist Level, Dining Room Open To Kitchen, Convenient 2nd Floor Laundry Room. Plantation Shutters, Granite Counters, Stainless Steel Appliances."

.

.

So how is it that someone can own a house for 5 years, sell it for $200,000 more than they paid, and still end up leaving the bank with a huge loss? Welcome to the Great Housing Bubble mania. Today's seller refinanced this property in July of 2005 for $787,000 taking out a whopping $350,500 cash. Now that the day of reckoning is at hand, if they get their asking price and pay a 6% commission, the shortfall will be $194,800. This is a recourse loan as it is a refi. Do you think they have $194,800 in assets for the bank to go after?

Should this seller be sent to debtor's prison? I would like to think so, but in reality, they are escaping debtor's prison -- their house.

What is a debtor's prison? A prison is any place you cannot leave until you have served your sentence, and these debtors will not be able to leave until they can pay off their mortgage. Most will not be able to do so until market values go back up. Hopefully, it is a gilded cage, but it is still a cage.

Houses are America's new debtors prisons. By the end of 2008, anyone who purchased between 2004 and 2007 will be underwater. Let's say for a moment that the government comes up with some substantive bailout program where homeowners can stay in their house and continue making payments of 50% or more of their gross income. House prices will still fall, albeit at a somewhat slower rate if there are fewer foreclosures. Everyone who is underwater and making crushing home payments will be stuck in their homes until values climb back above their purchase price. Since there are a great many people in this circumstance, and since each of these people is in at a different price point, each one will have a different term in debtor's prison, but when their sentence is up, most will opt to sell to get out from under the crushing payments. Each of these people selling their home keeps prices from rising. This is called overhead supply. It is also why the market will not see meaningful appreciation without capitulatory selling. A bailout will make for a slightly higher bottom and a much slower recovery.

Anyone who purchased in the late 80s or early 90s knows the feeling of being imprisoned in their house. This is not a new phenomenon. This time around the sentence will be much longer, and the debt service will be much larger.

Home, sweet home? We will see...

My question to you today is this: Who is better off, the homedebtor rotting in their debtor's prison, or the family thrown to the curb in a foreclosure?

Knife Catcher Wanted

By request...

(all right you Chipmunks! Ready to sing your song?
-I'll say we are!
-Yeah!
-Let's sing it now!
Okay, Simon?
-Okay!
Okay, Theodore?
-Okay!
Okay, Alvin? Alvin? ALVIN!
-OKAY!!!)

Christmas, Christmas time is near
Time for toys and time for cheer
We've been good, but we can't last
Hurry Christmas, hurry fast
Want a plane that loops the loop
Me, I want a hula hoop
We can hardly stand the wait
Please Christmas, don't be late.

The Christmas Song -- Alvin and the Chipmunks

.

.

Asking Price: $1,324,998

Income Requirement: $331,248

Downpayment Needed: $264,999

Purchase Price: $962,000

Purchase Date: 12/17/2003

Address: 139 Treehouse, Irvine, CA 92603

First Mortgage $769,342
HELOC $500,000
Total Debt $1,269,342 + Neg Am

Beds: 5
Baths: 4.5
Sq. Ft.: 3,049
$/Sq. Ft.: $435
Lot Size: -
Type: Single Family Residence
Style: Contemporary
Year Built: 2003
Stories: Two Levels
View(s): City Lights, Hills, Has View
Area: Quail Hill
County: Orange
MLS#: S511977
Status: Active
On Redfin: 38 days

From Redfin, "Back on the market. Buyer take over existing loans. .view side. .Gourmet Gas (5 burner cooktop) Granite kitchen. Stainless steel appliances. .2 convection ovens+microwave. .Enormous walk in pantry. Giantfamily rm/cozy fireplace. Downstairs bedroom and full bath. Wood floors thru out downstairs. .Extra lg. lgrm & DR. 2nd floor plush carpet. Fabulous master/retreat(or 5th bedrm) Separate oval tub & big stall shower. 3/4 bds. up+loft. The builder states plan 3 is 3049 Sq ft plan 2 is 2841 sq. ft. $275 mo. mello"

.

.

Buyer take over existing loans? Whoa! Think about what is going on here... This seller has taken out a negative amortization loan with a 3.6% teaser rate that is about to recast. She has also taken out a $500,000 HELOC to cash out her downpayment and likely fuel some consumer spending. Now that the bills are coming due, she wants someone else to come in and pay them. Unbelievable!!!

(I feel like such a realtor :( )

Any of you want to overpay for her depreciating asset so she can pay off her bills? I will pass.