There are many ways people lose their houses. Borrowing two and one-half times what you paid for it is one method unique to the Great Housing Bubble. Perhaps I am just naive, or perhaps it is because I had never lived in a bubble market prior to moving to California, buy I had never heard of mortgage equity withdrawal for anything other than necessary home repairs and improvements. The whole idea that one could or would add to a mortgage to pay off other debts, buy consumer goods, take vacations or supplement one's lifestyle is an alien concept. In fact, I did not realize how common this behavior was until I started studying what went on during the bubble. I am still astonished every time I see a property like today's.
"The wolf also shall dwell with the lamb, and the leopard shall lie down with the kid; and the calf and the young lion and the fatling together; and a little child shall lead them." Isaiah 11:16
Builders are now leading the charge in our race to the market price bottom. We have made much about the presence of REOs in the market and the downward pressure they put on prices. However, REOs are not the only form of must-sell inventory. The builders also must sell homes or go out of business. Early in the deflation of the bubble, particularly on the Irvine Ranch, builders held to peak prices and watched their sales volumes drop to near zero. Since the credit crunch signaled the end to crazy financing, the builders have been consistently lowering their prices to generate sales and liquidate their inventories. This has happened without much fanfare here on the blog because we focus on the resale market; however, since the builders are also competing with resellers for the small number of available buyers, their activities are important as they will strongly impact resale home prices.
The builders have already trashed the resale market in the Villages of Columbus. Check out 22 Honey Locust now being offered for $350,000 off the original purchase price. The price drops in VOC have little to do with the quality of the homes, the location or anything else. It is almost exclusively due to the activities of the builders trying to get out of the project. It is my opinion that VOC will be on price parity with Westpark in 5 years, and this will not happen through appreciation in VOC.
Today's featured property is a new home being offered in Portola Springs at $275/SF. That is new construction for $275/SF. What do you think that will do to the resale market? In a normal real estate market (if such a thing exists in California,) new homes command a premium of around 10% over resale mostly because they are new. If you look at the listing price history, you can see this home has already seen a 5% haircut, and it seems likely that builders will need to drop prices further to generate sufficient sales volumes to stay in business. I believe new home sales prices will bottom between $225/SF and $250/SF while most resales will fall to $200/SF or below. Even now at $275/SF, why would someone go pay someone $350/SF or more for a used house when you can get a new for much less? The fact that the builders are at these price levels and still lowering price to generate sales speaks volumes about the future prices of resale homes.
Not everyone who took out money on their HELOCs blew it. Some people remodeled their houses or took the money to purchase other assets. And yes, many people took that money and bought other real estate (Right now they wish they hadn't.) When I first saw today's featured property, I couldn't help being drawn in to the fun the owners created. Look at that pool area. To me, it looks like a fun place. Check out the home theater. Another place for good times with family and friends. The thing that really impressed me was that these people did not break the bank creating this playground. Yes, they did add to their mortgage, but looking at the property, it becomes obvious where it went. There is no other history of serial refinancing, so even with the money they spent on improvements, they still have plenty of equity in their property. Which brings me to my last point, they also have seen the light on falling home prices and they have priced it to move in today's market ($249/SF.) That is one of the luxuries you have when you haven't spent all your equity.
Imagine yourself sitting on all that bubble equity. Your conservative enough not to HELOC yourself into oblivion, but you do have access to all this cash. What do you do with it? I could see me doing something like this if I were in their shoes. Maybe that's why I find this property so interesting. Let's party!
Yesterday's post stirred up quite a controversy, and today's probably will as well. It is politically incorrect and full of stereotypes that will make many cringe. There is a reason we have those politically incorrect stereotypes -- they describe large groups of real people who exhibit stereotypical traits and behaviors. The Political Correctness crowd may not like it, and they may pressure people from expressing these stereotypes (at least to the degree that people fear the vengeful wrath of the PC police.) However, if people fit a profile, then there must be some validity to it.
One of the unique characteristics of the Great Housing Bubble was the large increase in market participation among women -- sometimes single women and sometimes as married women buying property on their own. Some amount of this is to be expected as single women establish careers and put off marriage. In the past, most single women rented as did most men in their 20s. Men would often buy a house even if they were single. I suspect many viewed this as proof of their ability to be a provider and to attract a mate (I know I did.) Women more often would not buy a home when they were single. I suspect many did not because they knew they would have to deal with two houses when they got married, and the property would be a hindrance. Also, when you look at consumer demographics and personal savings, single women have not historically been big savers. Sure there are always some who are responsible from a young age, but many single women prefer to run up big credit card bills obtaining the latest fashion trends than worry about saving money (and yes, single men spend a lot on beer too.) The trend toward married women buying property as "her sole and separate property" was also a new phenomenon.
So what changed during the Great Housing Bubble? First, since saving was eliminated as a condition of ownership, many single women decided to buy and have a home of their own. Rather than a property being a hindrance, it became a great speculative asset that provided huge amounts of extra spending money. Several of the properties I have profiled with excessive HELOC abuse have been solely owned by women (not that men were any more responsible.) With the large number of women working as mortgage brokers and
realtors, it is likely that many of the purchases by married women as their sole and separate property were by those in
the business. It was all part of making a living.
Why did I pick the song Stupid Girl? Well, these purchases did not turn out to well for many. Was it stupid? I guess if you got to "live large" in your 20s from the HELOC on your house, perhaps not. The memories are great, and you still have time to recover financially. For the older singles and married women who speculated in the real estate market, there will be more serious ramifications. I don't think anyone is going to label these purchases as a work of genius. Today's featured property was purchased by a married woman as her sole and separate property, and now, after the foreclosure she has bad credit. Do you think this has impacted the family? It can't be a plus.
Last Friday, I wrote a post titled Downpayments Are Back. After taking the weekend to contemplate what this really means for homeowners who are thinking about walking away from their obligations, I have changed my mind on what I believe they should do. If they can manage their payments, they should consider trying to hold on, even if the house value has dropped well below their purchase price. There are still a great many overextended homeowners and speculators who cannot possibly manage their payments, and trying to hold on until the market comes back is a foolish waste of time and resources. The market is not going to come back before they go under. However, for those who can make the payments, there emotional benefit of home ownership may be worth the financial hardship it entails. When downpayment requirements were eliminated during the bubble rally. Many people who are not in the habit of saving were suddenly able to purchase a home -- albeit at a greatly inflated price. For people who do not have the habit of saving money, they will never come up with even a 3% downpayment to obtain an FHA loan much less a 20% downpayment like everyone else will need. The house they are in right now may be the only house they ever own in their lifetime. If they bail out, the new (and permanent) downpayment requirements will probably ensure they never own again. Under these circumstances, even if they are upside-down on their mortgage, and even if it might make more sense financially to go back to renting, there is a strong emotional desire to own a home, and this may be their only chance to satisfy this emotion. Many of our decisions in life are not based purely on a basis of economics. Having children is not a great economic decision, but the love of family makes the economic sacrifices worthwhile. If satisfying the emotional desire to own a house is worth the sacrifice in terms of elevated household expenses, perhaps it is the proper decision for those owners on the margin to stay put. It is not the right financial decision, but perhaps it is the right life choice.
I have another piece of advice for the homeowners who are facing an exploding Option ARM that will not save them from foreclosure, but it may provide a way for them to reenter the housing market at some future date. Freddie Mac recently changed their servicer guidelines and eliminated compensation to servicers who foreclose quickly. The effect of this change in incentives will be a longer foreclosure process once people stop making payments. This is where the advice comes in. When owners with an Option ARM face their loan recast, there is little hope of affording the payment, so they should not try. What they should do is immediately start saving the amount of the payment they used to make on their mortgage. If the foreclosure process drags out a year or more, they could easily save the 3% necessary for a downpayment on an FHA loan. They may have to wait a while for their FICO scores to improve to qualify for the FHA loan, but when they do, they will already have saved their downpayment. Will many people do this? Probably not. Many people will simply spend the money they should be saving and be no better off for not having a housing payment for an extended period of time, but for those that do, they have the opportunity to save and prepare for home ownership again.
So what do you think? Should they stay, or should they walk?
Today's featured property is a short sale. It is owned by a speculator who already got what he could out of the property, and now he is walking away.
