This property went back to the bank on 1/10/2008 for $850,719. It was sold on 2/28/2008 to a couple who spent $789,000. They took out a $700,000 first mortgage, and they took out a $50,000 second on 4/14/2008. They now have $39,000 of their money into this property. Are they in it for the long haul? Or do you think they will abandon ship when the value of this drops down to about $600,000?
On Friday, May 23, 2008, I went to the Ron Paul rally in San Diego. My main purpose in going was to meet the man himself and speak with his senior staff and see if I could get them interested in my manuscript. If I could get Ron Paul to co-author or write a forward to my book, it would sell more copies. He mentions the collapse of the housing bubble in his stump speeches as part of the problems with a lack of fiscal discipline and the use of a fiat currency through the Federal Reserve. I bought a copy of his book, The Revolution: A Manifesto, but I didn't wait through the two-hour line to get it signed. It was a cool, blustery day in San Diego. It rained for the hour before the rally, but it did not deter about 500 people from attending and listening to his hour-long stump speech. What surprised me was the number of young people there. I did not expect his message to resonate with young people. He isn't offering any handouts. Maybe fiscal responsibility will not die in our society.
Check out Howlin' Wolf's description of the blues (it's at the beginning.)
It cannot be denied (rationally) that we are currently in a declining market. In a declining market, banks look at appraisals and comps differently than they do in a rising market. When prices are rising the lender will look at the highest comparable sales to determine total value upon which they will base their loan. When prices are declining like they are now, the lender will look at the lowest comparable sales or asking prices to establish the value upon which they will base their loan. This is a major headache for sellers. Remember the post I did on the big drop in Turtle Rock recently How to Lose $500,000 in a Year? Once that seller put that house on the market asking $800,000, he ruined the comps for every similar home within a mile of his location. Let's say you are the neighbor at 6022 Sierra Siena Road who is asking $950,000 for a similar property. If you find a buyer willing to pay $950,000 and put 20% down, the lender is going to look at the neighboring house asking $800,000 and say, "I can only loan your buyer 80% of $800,000." For the buyer of the Seirra Siena Road property to make a sale, the buyer will need to put down $310,000 -- almost 30% because of the low asking price on Silver Cres.
Also, in a declining market lenders will raise loan-to-value requirements. The lenders I have spoken to have told me that right now, there is no market outside of the conforming loans of the GSEs (Freddie Mac, Fannie Mae) or the FHA. The FHA will allow loans with 3% down, but the income requirements are so tight, that it is very difficult to qualify. The GSEs allow higher DTIs, but they are also requiring higher downpayments. Even now, very few loans are being approved without 20% down. Another interesting thing I was told is that nearly all of the buyers over the last several months were renting at the time of their purchase. It is a classic case of those renters who felt "priced out forever" jumping at the chance to own -- more kool aid. There is almost no move-up market right now, probably due to the deep price drops at the low end of the market. People getting out of entry-level housing do not have any equity, and those who still have equity, are not able to sell their homes.
Today's property is a classic flip. The owners bought it in March, and they are asking $119,000 more than they paid for it. In the bubble rally, they might have pulled it off because the bank would have ignored their low purchase price and financed anyone with 100% financing at almost any price they wanted to ask. However,in today's market, they set their own comp, and the lender is not going to ignore it. For them to get their WTF asking price, someone is going to have to put down a large amount of cash. In short, it is not going to happen.
Asking Price: $659,000
Income Requirement: $164,750
Downpayment Needed: $227,000 based on their purchase price as a comp
The Village of Woodbridge is a desirable Irvine Village. It is an interesting study in the collapse of the market. Woodbridge is laid out with a large loop road framed with large duplexes giving the impression of driving through a series of manor homes. Behind this pleasant veneer is a great deal of high density housing. Outside the loop has the highest concentration of attached product while inside the loop has many large, single family detached homes. As the market decline has progressed, the low end has been deteriorating more quickly than the high end, and this has created a great disparity between the prices on the outside of the loop as compared to prices on the inside of the loop. This large disparity cannot persist forever. Either prices outside the loop will rise (which isn't very likely) or prices inside the loop will fall. People who might want to live inside the loop will find the price differential so great, that many will purchase outside the loop as a next-best substitute. It is this substitution effect that pulls down the prices in the most desirable neighborhoods. It can be seen in small scale within Woodbridge, or it can be seen in large scale between Riverside County and Orange County. As prices drop in adjacent markets, sales volumes will continue to dwindle in the higher priced neighborhoods until the price curve flattens to its natural balance. This is why the big increase in sales volumes being touted by the bulls is only happening in the most downtrodden communities. The high-end properties still suffer from anemic sales volumes and significant price pressures.
Today's featured property is a nice 3/2 outside the loop in Woodbridge. It is a typical starter home that will likely bottom in the $375,000 to $400,000 range. A household making $90,000 to $100,000 a year should be able to comfortably afford a property like this. Right now, they can't.
Sometimes when you see an egregious case of HELOC abuse, you have to ask, "On what did you spend the money?" On many of the properties we profile, the owners at least put some of the money into the property and outfitted it with pergraniteel. Apologists offer the possibility of health issues or investment, but it seem pretty obvious that most of these people just blew the money. It is living like a shooting star, you burn brightly, but it can't go on forever, and when your equity has burned up, you just fade away. Today's featured property took over $400,000 out of their home, and it is being offered for sale as a fixer upper. So I ask again, "On what did you spend the money?
As far as HELOC abusers go, today's sellers are just like boys playing in the street. They made a big noise, tried to take on the world, and ended up a big disgrace. The market put them back in their place.
HELOC abuse crosses all socioeconomic lines. We have profiled high end, middle class, and now small-time condo owners freebasing the kool aid and spending themselves out of house and home. Everyone has ambitions to better themselves and their station in life. However, some people hatch plans to accomplish this goal that are not completely successful. Sometimes it is just fate or bad luck that causes some people to win or lose in life. Sometimes it is bad execution, and sometimes it is just bad planning. HELOC abuse would fall in the "bad planning" category.
How was this supposed to work? Even if the kool aid dreams were true and you could perpetually borrow against your house as it increased in value. What is the end game? Is there no limit to the amount of debt you can support? What happens when you sell and the house is no longer providing income? Does the house ever retire? Or does it provide endless free money forever? In reality, there was not plan. Everyone just took the free money and spent it without regard to future consequences, and now that there are consequences, everyone is avoiding responsibility and letting the lenders deal with the fallout.
The owners of today's featured property managed to find a lender who thought their sub $200K condo was worth over $580K and loaned them money accordingly. These owners may set the record for the greatest return on their initial investment. They put down $5,500 in 1999 and took out more than $400,000 over the 8 years that followed.
As far as HELOC abusers go, today's sellers are just like boys playing in the street. They made a big noise, tried to take on the world, and ended up a big disgrace. The market put them back in their place.
