distractions from the ordinary real life just not good enough explanations hard to come by
Is it so bad to live an ordinary life? We have it pretty good in Southern California. The weather is great, there are lots of activities, and with the wages being higher than the national average, it is not too difficult to support a family. I guess for many, a real life, a life of living within one's means, is just not good enough. It takes HELOC dependency to fuel a better-than-average life for ordinary citizens. Why do we all have to live that way? Explanations are hard to come by. Have we have all becomes slaves to the pavement, or perhaps, slaves to our payments.
i wish i could safely say all the right decisions were always made
Based on the unprecedented drop in prices and the equally unprecedented debt levels many homeowners took on, it is safe to say that all the right decisions were not made. When you reflect on what happened, and think about all the debt people took on, you come to one inescapable conclusion: nobody thought they would ever have to pay it back, certainly not from their wage income. In fact, many of them are not. Some sold their properties and transferred the debt to someone else, and some simply walked away from their properties and let the bank take their debt back. There has been a lot of conjecture on the walkaway phenomenon. Is it real? Will it get worse? Judging from what we see here everyday, it is easy to believe it will get much worse. People don't want to pay the money back. It is that simple. If they can't pass this burden on to someone else, they will default. People don't go from wildly irresponsible to miserly and responsible overnight, if they ever change at all. I speculate that many, many more people will walk once they accept that prices are not coming back. When denial turns to fear and acceptance, the burden of the debt will become very real, and the crushing burden will be too much to bear. Until then, most will carry on with the fleeting hope that prices will recover in a couple of years and the titanic debts on their shoulders will be transferred to a greater fool when they sell their properties. The walkaway phenomenon is already observable in markets wiped out by subprime defaults. When the Alt-A and prime ARMs reset and the Option ARMs explode, Irvine will be no different.
Today's featured property is another HELOC abuser who refinanced himself out of his family home. Faced with the prospect of paying back a debt that had more than doubled in 6 years, he chose to walk. He will not be alone.
Most of the REOs and short sales I have profiled are homeowners or speculators who bought during the bubble. These people either did not live in the house long enough to have a storehouse of memories and attachments, or they did not care about the house at all because it was just a stucco box to trade. When these people lose their houses, they are not necessarily losing their homes. The children's rooms don't have a wall where their child's height has been measured over the years, they don't have a sidewalk with their children's name etched in it, and they did not plant a shade tree in the back yard to enjoy in the future. Some of these stories are sad because many of these families intended to make the house their home, but they did not get a chance. However, today's featured property is something different. It belonged to an owner that got caught up in the fantasies of the bubble, took out all their equity, and lost the family home. A home they had for 17 years...
Time is running out. Congress is working to pass a massive banking bailout before our economy completely implodes (which it might anyway). They have taken the steaming pile of manure they rejected earlier this week, candy coated it, and resold it to the American people. Of course, a major selloff on Wall Street probably helped sway public opinion as well. After they pass the bill, there will probably be a relief rally on Wall Street celebrating the massive government intervention, and this rally will be touted by all as confirmation that Congress did the right thing.
In the meantime, house price are still falling, and some of our speculators are trying to sell before they go underwater. Today's featured property found some motivation recently, and he lowered his asking price about 30% to try to move the property. Of course, the original asking price was totally WTF, so he isn't getting multiple bids over the ask.
"In the sweat of thy face shalt thou eat bread, till thou return unto
the ground; for out of it wast thou taken: for dust thou art, and unto
dust shalt thou return." Genesis 3:19
You can't take it with you. This is a rational argument justifying HELOC abuse. If you spend your whole life hoarding your money, you will die with a big pile of unspent money. Your heirs will undoubtedly be pleased, but if you didn't live a little while you had the chance, what was all the money for? How much HELOC abuse does this justify? All of it? If your house made you $800,000 over the course of 10 years, would it be OK to spend it all?
Today's featured property spent it all. This isn't the record for HELOC abuse, but it is pretty close.
Today's featured property demonstrates the living-off-your-house mindset in action. Apparently, all you had to do was buy a house, any house, and start extracting money from it. It didn't require any money of your own to invest, and if things go bad, well... it's not your problem. This house was purchased on 2/10/2006 for $705,000. The owner used a $564,000 first mortgage, a $141,000 second mortgage, and a $0 downpayment. On 9/29/2006, a mere 7 months later, the property was refinanced using a $632,000 first mortgage and a $158,000 second. This netted the owners $85,000 in mortgage equity withdrawal. That is the median income in Irvine, and these people got it simply for owning a house for 7 months! Actually, it is better than that because if you earned $85,000, you would have to pay taxes and have withholdings. To net $85,000, you would need to be making more like $120,000. Further, to get this in 7 months, you would need to be making $205,000 per year. That is one hard working house!
I profile these day after day. Are you starting to get a sense how common this was? Look at how much money these people got to spend for doing absolutely nothing. Is it any wonder houses were such a popular investment? Was it logical to think this could go on forever?
As a society during the real estate bubble, we put enormous sums of money into assets that produce nothing. This isn't like investing in a factory or machinery or infrastructure of some other sort of productive use. These are houses. They only have consumptive value. There is no production here. Is this where society's resources should be diverted?
How can a society thrive when it ties up all its resources in non-productive assets? I joke about hard-working houses because the whole idea is so absurd. Imagine if we took every resource in our economy and put it into house production. For a time, everything would be OK because everyone would be working in construction, they would be making money, and we would all have houses, but what happens once we were done? Houses can't produce anything else. Once the boom was over, the entire economy would collapse because there are no productive assets.
This is basically what we did since the collapse of the NASDAQ stock market bubble. Our manufacturing base never did recover from the recession of 2001. When liquidity was added to the financial system, this money poured into mortgage loans rather than business infrastructure. It is a misappropriation of resources that will likely haunt us for quite some time.
A few Fridays ago, I profiled some homeowners who conservatively paid off their mortgage, and now they will have a great equity nest egg for retirement. This is how it should be done. Today's featured property owners did the opposite. They bought ages ago for very little money, they HELOCed themselves into a massive debt, and now they will probably sell and end up with nothing.
Living life well is about balance, and the argument can be made that HELOC spending to "live for today" has its place. How much is too much? Is any amount OK? Many of the properties that I have profiled had evidence of HELOC abuse by previous owners. Many people pulled out $200,000 while their houses went up $500,000. They lived on their HELOCs and still sold for a hefty profit. Were these people foolish and irresponsible? It certainly appears now that the foolish ones were the ones who didn't refi and HELOC themselves to the max in 2006. Those people got the full benefit of the appreciation turned to income. Of course, those people now have bad credit, but few, if any, of them are paying it back. I know what I believe to be right, but I am interested in hearing your opinion: How much is too much HELOC use?
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.
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.
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?
.
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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?
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