You take the weight off me Honey when you knocked on my door I gave you my key
Does anyone remember Pepe le Pew? He was the happy-go-lucky French skunk who fell in love at every opportunity. Unfortunately, he smelled so bad that none of the objects of his affection wanted him around.
HELOC abusers must have been very happy-go-lucky during the bubble. They had few limits on the money they could spend, so there was plenty of reason to bounce around oblivious to the damage they were inflicting on everyone else. The stench of their pilfering is only now spreading a pestilence on the economy. Most probably have no idea what they have done, and they are probably too self-involved to care. I imagine their only real concern is their inability to sustain their Ponzi Scheme lifestyles.
Today’s featured property has been profiled before. It was a WTF award winner back in mid-2007. The owner was asking $900,000 for this place. Today we will learn why.
The damage is done You’ve had all your fun The party’s begun The enemy has won
One phenomenon of the Great Housing Bubble we have not talked much about is the collapse of all the real estate empires. Many people who really got caught up in the bubble rally bought multiple properties. Why wouldn’t they? If one property can throw off enough income to support a family, why not buy two or three of them?
One of the statistics about the housing bubble that always astonished me was how much prices went up relative to incomes. From 2001-2005, a period of 5 consecutive years, the median house prices went up an amount equal to the median income each year. According to DataQuick, in 2001 the median was approximately $335,000, and in 2006, the median peaked at $723,000. This was a $388,000 increase in the median income in 5 years. That averages to almost $78,000 a year. The median household income ranged from $72,000 to $84,000 during the same period. Any homeowner who was unemployed from 2001-2005 had a house making the median income for the area. With mortgage equity withdrawal, the appreciation could be converted to income, and a typical homeowner could live as if their home was another breadwinner. In fact, this was better than making the median income because there is no income tax withholdings on mortgage equity withdrawal. On an after-tax basis, the house was earning $110,000 gross. No wonder home ownership was in such high demand. Where do I sign up for my free income?
As one might expect, people were signing on to get as much of this free money as possible. Today’s featured property is one of two houses previously owned by the same couple. They put no money down, extracted as much appreciation income as possible, and then let the properties go into foreclosure when prices quit going up. It is a classic example of predatory borrowing.
Pearl Harbor Day was Sunday, December 7. One of the enduring images of “A date which will live in infamy” is the wreckage of the USS Arizona. One thousand one hundred and seventy-seven crewmen died aboard the USS Arizona that day. The sunken hull sits quietly submerged beneath the waves.
Americans were not prepared for World War II. Peacetime isolationism and lingering problems from the Great Depression left us ill prepared for the challenges our nation faced. We ultimately prevailed, and the peacetime that followed ushered in a new era of prosperity in the United States. We are only now getting a taste of the economic upheaval of the Great Depression, and as a society, we are equally unprepared for the consequences. We will survive, and hopefully we will begin a new era of prosperity. However, some of the images of The Great Housing Bubble will also endure (I hope).
Some historians have argued that the military made a critical error
having so many ships in port at Pearl Harbor. We did not anticipate the
attack, and we were not prepared for it. Like the USS Arizona, many homedebtors today are underwater. Their lack of preparation for this catastrophe has left them deeply in debt with little hope of recovery. For those who became dependent upon a lifestyle of mortgage equity withdrawal, this is the end of times. Many are hoping our new President will be a messiah. They cling to false hopes for a bailout that will allow them to go back to living the good life of Ponzi Scheme financing. That isn’t going to happen.
Today’s featured property is another HELOC abuser who lives on Arizona and is just as underwater as the ship.
When I first started researching the property records for my daily posts, I was astounded by all the mortgage equity withdrawal. I still am. At first I was surprised that borrowers would do it. It would have never occurred to me to actually increase my mortgage indebtedness (yes, I have had a mortgage before). I can understand taking out a loan for home improvements, but never for consumer spending. Then, the more I pondered the issue; I came to realize that borrowers are like drug addicts: if you make money available to them, they will take it. Combine that tendency with a drug as addictive as kool aid, and you get people who truly believe their house is providing them with free money, so it is OK to borrow this money. Once the fear of debt is gone, even fiscally conservative people get into the act.
Finally I came to realize it was the lenders who were the stupid ones. Rational lenders want to make sure they are going to get their money back with interest. They are supposed to be the experts at determining the creditworthiness of a borrower because they are the ones ultimately taking on all the risk. Lenders started drinking the kool aid and began giving out any amount of money to just about anyone. They also believed they had no risk because they believed house prices would always go up. Even if people defaulted, they would not experience any default losses. It is the stupidity of lenders and investors in mortgage-backed securities that is truly mind-boggling.
You never give me your money You only give me your funny paper
Most of the houses for sale today have some amount of mortgage equity withdrawal. The conservative ones only added a little, but the average Irvine homeowner who bought before 2001, and who is selling today, doubled their mortgage. That’s right, most of them doubled their mortgages. However, some people really got carried away. Some people borrowed every penny of equity as it accumulated and spent it.
Usually when people go on an irresponsible borrowing and spending spree, there are consequences for this action. People get burned, and they learn not to repeat their mistakes. However, those people who were the most egregious HELOC abusers, are the ones being punished the least. Borrowers who took out all their equity have transferred 100% of the loss in value to the lenders (remember Mortgages as Options?) What have these people learned? And what lesson is being taught to everyone else?
The worst HELOC abusers have learned there are few consequences for their behavior. Yes, they will lose their homes and face bad credit issues, but they still got to spend all the money. Perhaps they will suffer the loss of their lifestyles as the free money dries up, but I imagine they will be first in line to buy another home and start the process all over again when their credit clears up. The rest of us witnessing this behavior have to be asking ourselves, “Why won’t we max out or debt during the next cycle and pass the losses on to the lenders?” Based on what we are seeing, perhaps the fiscally conservative ones were the fools.
Out of college, money spent See no future, pay no rent All the money’s gone, nowhere to go Any jobber got the sack
Today’s featured property is a particularly bad case of HELOC abuse enabled by Stearns Lending Inc. (Bears Stearns?). The peak appraised value of this property based on the loans attached was $1,138,500. The asking price is 40% off this figure. I have profiled this property before, but since the discount is so large, it is worth revisiting.
According to recent reports, 50% of home resales are foreclosures. This statistic speaks volumes about the health of our housing market, but if you look at the overall inventory of distressed properties, the evidence is even more alarming. I look at a variety of property records every day to prepare to posts for this blog. It is very rare that I come across a property where the owner did not add to their mortgage. As a general rule, Irvine homeowners who are trying to sell their properties in today’s market have doubled their mortgages over the last several years. If you add together all the foreclosures, short sales, underwater homeowners, and those owners who have increased their mortgage debt to the point they can no longer handle the payments, and I estimate 90% of our market is distressed.
Well I never got home, but I did what I did And I got myself this house and you can’t come in
There are very few properties available for sale by homeowners who either are not underwater or who did not add significantly to their mortgage. Homeowners in that category are not trying to sell. Why would they? Some owners have to move for a relocation, some owners must sell because they are unemployed, and some owners believe prices will drop further and they are going short (There are a few like that, but not very many). The remainder of the population of non-distressed homeowners are not trying to sell. Most believe this price drop is temporary and prices will rebound soon, and many simply do not care what happens to house prices because they are primarily interested in providing shelter for their families. All this means that non-distressed homeowners are not selling now. By the same reasoning, the homeowners who are selling now are, by definition, distressed.
Like many others, I have been thinking about all that I am thankful for with the holidays approaching. I have stresses about the economy like many others, but my worries are centered around what might happen. Many people who are financially distressed and waiting for their mortgages to blow up, they are worried about what is going to happen. Remember the Cold War when we all lived with the worry about a full-scale nuclear war between the superpowers? That was a worry about what might happen. Imagine if the news broadcast that the missiles had been launched. Then we would have been worrying about what was going to happen. Do you see the difference? Owners of most of the properties for sale today are financially distressed, and many of them are living with the worries about what is going to happen.
I spent eleven long years in a hot house zone I spent twentynine more trying to get home
The saddest stories of the housing bubble have to be the long-term
homeowners who spent their houses. Some we have already profiled ended
up as short sales or foreclosures, and some who still have equity are
on their way there. With price falling and resets looming, most of
these people are doomed. These people are not going to be living in their homes in the future. Many will face credit problems. There is no telling how bad it will get for them, but there is a negative certainty about their future prospects. The stress levels of this group of people must be very high because they are worried about what is going to happen.
Today’s featured property is a long-term homeowner who over the course of the last 14 years managed to steadily and significantly increase their mortgage debt. It appears they have enough equity left to get out without being a short sale, but unless their income has more than doubled over the years, they are facing much more arduous mortgage payments if they do not sell, and even if they do sell, they will not get the cash their term of ownership could have provided.
Topaz is a beautiful and somewhat rare mineral that comes in a variety of colors. Our housing market also has its somewhat rare counterpart: a 2003 rollback. We will see many, many more of these before this crisis has past, but for now, each one is duly noted as another milestone on our way to the bottom. If any of you have been following ocrenter's blog at Bubble Market's Inventory Tracking, you know he has been consistently calling for 2001 pricing at the bottom. Many properties in San Diego County are already at this price level. They were a year ahead of us on the way up, and they are also a year ahead of us on the way down. Assuming we do not have a collapse of incomes and rents in the upcoming recession, pricing in Irvine should bottom out at 2001/2002 price levels. There are downside risks if interest rates rise dramatically, or if foreclosures balloon out-of-control. We have been resting on price support at 2004 price levels for months now, but with the recession deepening, and the prime selling season behind us, prices may resume their downward decent.
Today's featured property is owned by a HELOC abuser who borrowed every penny of equity as quickly as it accumulated. As many before him, he is leaving the bills for someone else to pay off.
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.
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Pearl Harbor Day was Sunday, December 7. One of the enduring images of “
