The Irvine Housing Blog has an unwritten policy concerning privacy that needs to be stated.
We do not use names. We do not have an ax to grind with any particular homeowner. The stories we convey are representative of many faceless owners and borrowers in Irvine and around the country. We uncover the microeconomic factors that underpin the major macroeconomic problems facing the country and the world today. There is no need to reveal names, although since these names are in the public record, we could do so if we chose to.
We post information from the public record. All the sales and mortgage information is a matter of public record. There is no expectation of privacy concerning this information. If the owners of the properties we profile have a problem with that, I suggest they take it up with the state legislature. Of course, that will not go anywhere because our entire real property transaction system operates on the public nature of this information. Up until the real estate bubble, there weren't any real stories found in these public records, so very few people bothered to write about it. Now there is, so now we do.
The information is accurate. There may be instances where the public record is in error, but not very often. I occasionally read about bloggers being threatened with libel lawsuits. This is crazy. First, for the printed word to be libelous, it must be inaccurate. What we post is not. Second, the inaccuracy of this information must be reasonably known to the person printing it. Since we post only what is in the public records it is either accurate, or there is no way we could have known it was inaccurate. Either way, we are not being libelous. If someone wants to bring suit anyway, I suggest they read California Civil Code Section 425.10-425.16: the anti-SLAPP legislation.
I can understand that some people find this information embarrassing. Of course, they should have thought of that before they did something that they might find embarrassing later on. Those who are obsessed with "keeping up with the Jones" and worried about what the neighbors think are the most prone to abuse their HELOCs and pretend they are rich. These are the people who feel the most embarrassment because they obsess on what they believe other people think about them. There is an old adage which says, "you wouldn't worry about what other
people think about you if you realized how little they did." I cannot control people's reactions to these posts, nor do I want to. Quite honestly, I don't give them a second thought after the post has had its day. I am certainly not going to stop blogging because someone might be embarrassed if their illusion of wealth and prosperity is exposed for what it is.
I am not trying to embarrass people. If these stories could be told in a way so nobody was embarrassed, I would do so. Unfortunately, there is no other way to tell these stories, and the lessons these stories teach to individuals and society are important. If these stories are not told, another generation might be tempted to abuse their HELOCs and refinance themselves out of their homes. If these stories are not told, another generation of lenders may repeat the mistakes of the bubble and risk a catastrophic implosion of our financial system. If we do not learn the lessons of history, we are doomed to repeat its mistakes.
Today's featured property was purchased right at the peak with 100% financing. Of course the owners are walking away now, and the lender is absorbing the loss. For those keeping score, this on is being offered for 27.6% off its peak purchase price.
They said it was the land of milk and honey Now they say it's the land of money Who ever thought they'd ever make that stick It's unbelievable you could get this rich this quick.
Isn't
this whole situation a bit surreal? It is almost unbelievable that we
are witnessing such a catastrophic crash in our financial markets
coupled with a dramatic economic slowdown. The root cause of all this
turmoil is the behavior of owners like those I profile every day. So
many people took on so much more debt than they can afford to service,
and the geniuses on Wall Street securitized these toxic loans and
poisoned the entire world economic system. Think about this for a
moment: if the many borrowers in the bubble markets had not
borrowed so much money to inflate this massive housing bubble, our
current economic problems would not have occurred. There are many
responsible parties, and it always takes two to tango, but if the
demand for toxic loans had not been present, the toxic loans would not
have been issued.
It's unbelievable it's strange but true It's inconceivable it could happen to you
Why would anyone be selling right now? Prices are 20% off the peak, and there are a number of REOs to compete with. Homeowners who are not distressed are not selling now -- perhaps with the exception of those who recognize prices are going lower. Measurements of distressed properties only consider REOs and short sales; however, there are a number of overextended homeowners who are trying to get out before they become one of these statistics. These homeowners are just as distressed, but if they can manage to get out now, they will not lose all their remaining equity and good credit. Like the truly distressed properties, these owners will sell. They will either sell now while they do not meet the technical definition of distress, or they will sell later when they do. For most of these homeowners, hanging on is probably not an option. Most have more than doubled their mortgages, and when their ARMs reset, they will be unable to make the payments. So when pundits say our inventory is not distressed, they may be technically correct, but many of what appear to be organic sales are truly distressed sales. And even many of those that are not distressed are choosing to sell now because prices are dropping, and they know they will be able to reenter the market at a lower price point. A significant portion of the non-distressed sales are still highly motivated.
Today's featured property is for sale because it is distressed. It does not fit the classical definition because it is not a short sale or an REO, but the long-term owners of this property got caught up in the financial mania, and they doubled their mortgage. Now they have an Option ARM about to explode, and they are hoping to sell before it does. They made mistakes when they got caught up in a financial mania, but selling now -- before they lose everything -- is the best decision they could make.
The wheels of progress keep turning here at the Irvine Housing Blog. Some of you may have noticed that we have introduced a new rent versus own decision calculator. It is still a work in progress, but it is good enough to put on the main site. We hope to add some formatting and create a stand-alone version for people to download and use.
Our goal was to create an accurate and detailed accounting for the true cost of ownership. This is a point-in-time calculator. You are not asked to make assumptions about inflation or appreciation. There are no projections for the future. People who invest in real estate (I am not talking about stupid amateur speculators) always look at the stabilized cashflow in the first year of ownership. If it doesn't make sense in year 1, then it isn't an investment, it is a speculative gamble. There are a variety of rent versus own calculators out there. Most are put up by realtors. They are totally biased and ignore costs and exaggerate benefits. Some are put up by bubble bloggers that are biased the other direction. We want to be accurate.
Most of the underlying assumptions are documented in the post Rent versus Own. Most of the inputs are in the left-side column, and most of the outputs are on the right (the exception is the HOA fees which are plugged in directly on the cost side). Play with these assumptions at your own risk. As I documented in the Rent versus Own post many of the costs are underestimated, and many of the benefits are overestimated. The most common mistakes are to ignore maintenance and replacement reserves and to overestimate the tax savings. The true tax benefit is not the highest marginal tax rate you pay.
The primary function of the calculator is to determine the true cost of ownership to compare to a base rent. However, we have added a reverse calculation that allows renters to put in the rent they are currently paying and show them how much house they can afford. Since this is not a spreadsheet calculation and we could not iterate to run the calculations backward, we cheated: we use a percentage of rent that goes to the cost of ownership beyond the payment and subtract this from the rent to compute the purchase price, downpayment and loan amount. You will see the two methods produce very close results both forward and backward.
Any comments or suggestions for improvement will be appreciated.
In other news, I wanted to remind everyone that we are having an Irvine Housing Blog party and book signing at 6:30 on Wednesday, November 12, 2008, at JT Schmids at the District. All who wish to be a part of the IHB community and meet others
in the community are encouraged to attend. We may have staff writers and photographers from OC Weekly in attendance to write a story on the IHB community. You can avoid the pictures and remain anonymous if you wish. Participation is voluntary.
Look for an interview with me in the Irvine World News on Wednesday and the OC Register on Thursday.
I was having a conversation about current events and the massive deleveraging we are witnessing globally and I realized something rather remarkable: most residents of California have seen their new worth decline 40% or more over the last 2 years. Think about that for a moment. The California median home price is down 40% according to the California Association of Realtors. Since houses are almost always hugely leveraged, many homeowners have lost all the net worth they once had as equity in their houses. The stock market is more than 40% down in the last year. Anyone invested in the market either directly or through their retirement plans is down 40%. Stocks, bonds, real estate, commodities, and currencies: nearly every asset class is down, and down big. The only group that has not seen a huge decline in their net worth has been renters who are mostly in cash.
What is going to become of this huge "reverse wealth effect"? There have been many studies on how much people spend when their stocks or houses appreciate. I don't think anyone have every studied what people do when every asset they own declines significantly in value. I don't know if it has ever happened before. You have to imagine this will create a giant sucking sound in our economy. The only people who aren't impacted by this and who don't care are the Amish. Maybe there is something to be said for the simple life...
We have talked about cash being king. Right now, it really is.
As I walk through the valley where I harvest my grain I take a look at my wife and realize she's very plain But that's just perfect for an Amish like me You know, I shun fancy things like electricity At 4:30 in the morning I'm milkin' cows Jebediah feeds the chickens and Jacob plows... fool And I've been milkin' and plowin' so long that Even Ezekiel thinks that my mind is gone I'm a man of the land, I'm into discipline Got a Bible in my hand and a beard on my chin But if I finish all of my chores and you finish thine Then tonight we're gonna party like it's 1699
We been spending most our lives Living in an Amish paradise I've churned butter once or twice Living in an Amish paradise It's hard work and sacrifice Living in an Amish paradise We sell quilts at discount price Living in an Amish paradise Amish Paradise -- Al Yankovic
When the market was at its peak, there was a 40% or greater fall in front of it. The first wave of losses and defaults were late buyers using 100% financing. This made the banks the bagholders. This is why the banks have lost so much money so far and why our entire financial system is on the verge of collapse. The banks have generally eaten the first half of the drop, and they have not been anxious to be the bagholder for the other half. So the lenders have been lining up people with good credit and 20% downpayments to take one for the team.
Every knife catcher buying in 2008 will see their 20% downpayments evaporate before this decline is over. If they hang on long enough, they will get it back, but the banks are trying to provide enough of an equity cushion in the transaction to make sure they are not the bagholders for round 2 of the price declines. This is why equity requirements and qualification requirements went up so quickly. The lenders are betting that those with good credit and plenty of their own money in the deal will not walk away when prices drop. This is a good bet on their part. There will still be a healthy default rate from loans orginated in 2008, but it will not be near as bad as the defaults from 2004-2007.
Banks don't loosen credit until well after the crisis is over. If you are waiting for the banks to bring back 100% financing when prices bottom, that is not going to happen. In fact, credit will be at its tightest at the bottom of the market. When almost nobody qualifies for a loan, and when almost nobody has the required downpayment, prices will be at their lowest because demand will be small (Remember, Desire is not Demand). If you are one of those who qualify and has cash, you will get a great deal.
In the meantime, the banks are lining up bagholders to absorb the remaining market losses. There is still plenty of kool aid in the market in Irvine, and there seems to be no shortage of those with good credit and enough cash willing to buy at our inflated prices. Of course, there is also no shortage of distressed properties either, and this supply will continue to grow. Bagholders provide a useful function. If these people did not step forward to overpay for housing, the banks would be absorbing even larger losses, and our economic system would be put in even more jeopardy.
So what do you think, do you wanna be a cowboy and ride the market missile all the way to the bottom?
Today's featured property is a recently purchased REO that has been put on the market as a quick flip. It really looks to me like the buyer got cold feet and is trying to make a quick and graceful exit from the transaction. Smart move...
The boy began to sigh, looked up in the sky, And told the moon his little tale of woe.
People have harvested all the money they are going to get out of their houses for quite some time. From 2001-2006, the median home price in Irvine rose each year by an amount equal to the median income. Every homeowner had another breadwinner in the family: the house itself. People proceeded to harvest this free money. A few resisted the temptation. Some took it out slowly, and some took it out as fast as it accumulated. From what I am seeing in my daily searches through the property records, the majority took out something, many took out a great deal, and some took out all of it.
There are those readers who believe I make too much of this issue; it can't really be that bad. Well, when I start running out of new properties where the sellers took out all their equity, I will start to believe those that did this are already purged from the system. As it stands today, I have a steady stream of new properties with HELOC abuse, and there are many more that I don't write about. I am able to be choosy. I can pick the most egregious cases or the ones with the most interesting storylines. There is no shortage of these borrowers out there.
Today's featured property is an interesting case study in how owner's managed their debts, and how lenders enabled this insanity. The lenders are now reaping the harvest they were sowing during the bubble years. The toxic loans they planted have grown to poison our entire financial system.
I was having a conversation about current events and the massive deleveraging we are witnessing globally and I realized something rather remarkable: most residents of California have seen their new worth decline 40% or more over the last 2 years. Think about that for a moment. The California median home price is down 40% according to the California Association of Realtors. Since houses are almost always hugely leveraged, many homeowners have lost all the net worth they once had as equity in their houses. The stock market is more than 40% down in the last year. Anyone invested in the market either directly or through their retirement plans is down 40%. Stocks, bonds, real estate, commodities, and currencies: nearly every asset class is down, and down big. The only group that has not seen a huge decline in their net worth has been renters who are mostly in cash.
As I walk through the valley where I harvest my grain
In the meantime, the banks are lining up bagholders to absorb the remaining market losses. There is still plenty of kool aid in the market in Irvine, and there seems to be no shortage of those with good credit and enough cash willing to buy at our inflated prices. Of course, there is also no shortage of distressed properties either, and this supply will continue to grow. Bagholders provide a useful function. If these people did not step forward to overpay for housing, the banks would be absorbing even larger losses, and our economic system would be put in even more jeopardy.
