Sometimes you just have to surrender to the absurdities in life. Despite my efforts to figure it out, the housing bubble, and the behavior of the people who participated in it, is simply unfathomable. Mommy's alright, Daddy's alright, they just seem a little weird.
Today's featured property is another in our endless series on HELOC abuse. Another day, another homeowner who spent themselves out of house and home...
I hope you are enjoying your 4th of July holiday. Like many others, I am not traveling this year, and instead I am staying near home and spending the day with my family.
When George Washington lead the Continental Army across the Potomac River on Christmas Eve to surprise the Hessian mercenaries camped on the other side, he took an enormous risk to secure the future of our country. He and the soldiers he commanded are heroes to all Americans. Today's featured property is on Potomac in Irvine. It is a sad story of how corrupted our great country's financial system has become. The people involved with this property are not heroes.
Watch out for the raging bull market! Like a matador, you will need to dodge the stampeding bulls as they put in multiple offers over the ask. The matador kills the bull in the end. The market will do the same. There is still a lot of bullishness in today's market, despite the obvious signs of a catastrophic price collapse. The bullish behavior is a sign that we are nowhere near the bottom, for as many authors and songwriters have noted, "only fools rush in where angels fear to tread."
Over the weekend, there was a brief discussion of contrarian thinking and investment. I will buy when market sentiment is very negative as will many who come to this blog. There is a huge difference in that kind of contrarian behavior and that being displayed by the knife catchers of today's market. To believe that a market will suddenly change directions when fundamentals do not support prices and momentum is strongly downward is not contrarian thinking, it is just plain foolishness. When our housing market really does bottom out, market sentiment will be very bearish. Nobody will be drinking the kool aid and believe in rapid price appreciation and people who buy homes will be looked on as being foolish. Of course, when fundamentals of price and rent are in alignment, the purchase will not be foolish, it will be financially prudent not because of rapid appreciation but because it saves money versus renting. Right now, buyers really are foolish, but public opinion doesn't realize this yet. Once public opinion embraces the foolishness of buying real estate, we will be near the bottom. Until then, expect to see each property that leads the market lower to attract multiple offers and enter escrow quickly. As Forrest Gump noted, "Stupid is as stupid does."
I never tire of HELOC abuse stories. They are so human. Joseph Campbell said "Money is congealed energy." Everyone wants to be powerful and have no limits to their spending. This is the fantasy of being rich; although, the rich didn't get rich by spending, they did it by saving. This fact is ignored by those who merely wish to spend all they want and feel rich. This basic human instinct is enriching the credit card companies as the average consumer bleeds interest every month to the credit leeches. I must admit, my schadenfreude gets a fix whenever I see the lenders who enable this behavior taking a big hit.
When I first began going to blogs like this one to discuss the real estate bubble, I was amazed that people really believed the spending they were witnessing was money earned through wage income. I guess OC residents are so adept at pretending that they fool even themselves. The Emperor has no clothes. People really do not make that much money in Irvine or Orange County. Many of them in the early 00s took the money out of their house and spent it. Perhaps they did feel like they were earning it as they were brilliant enough to buy a house in a bull market. Isn't that earning it? As everyone who did this is about to find out: no it's not. Debt is not wealth, appreciation is not income, and credit is not saving.
Prices are sinking like stones, and we are all done for. It it time to panic?
People will not panic this year. This will be the last year of denial. Only the weakest of speculators have been flooded from the market at this point, and there are many, many more who will be hopelessly underwater and drowning in debt as time goes on. Most of the buying this year has been by foolish knife-catchers who still believe in the fallacies of kool aid intoxication and bought now that they are no longer "priced out." (Of course, now they are "priced in" forever...) There is still the widespread belief among the general public that house prices will return to the peak in a couple of years and everything will be like it was during the bubble rally. That is not going to happen. This fall and winter, prices will make another big drop just as they did last fall and winter. That drop will put fear in the hearts of everyone who owns speculative real estate (which means almost everyone who bought since 2002.) By next year, we will see real fear and possibly some capitulatory selling. Remember, the speculators we have profiled to date have only been the trickle of water that breaks the dam. This problem is much larger than what we have seen to date.
There is a funny mathematical truth few understand: drawdowns are asymmetrical. If prices fall 50%, it takes more than a 50% increase to get them back up to the peak. In fact, after a 50% drop, prices must go up 100% to get back to where they started. Even now, with prices down 20%, prices have to go up 25% to get back to the peak. The deeper the price drop gets, the harder it will be for prices to recover. This is also why timing the market is important. (I will post on this concept in more detail at a future date.)
Today's featured property was purchased in 2004, and now it is selling for significantly less than its purchase price as REO.
Do you remember our recent discussion on Financing in a Declining Market? This REO is going to obliterate the neighborhood comps. Any property the lender considers comparable to this one will not get good financing (it doesn't matter what we might think is comparable, it only matters what the lender thinks.) Remember our optimistic seller one block over on Sweetan Street? Any lender is almost certainly going to consider today's featured property to be a comparable, and with a $400,000 lower asking price, anyone looking to buy the property on Sweetan Street is going to have to come up with almost $500,000 cash to close the deal (Those sellers are pwned.) This is the first real jaw-dropping price buster we have seen here in Irvine. It is happening everywhere else, and now it is happening here as well.
What would be the ultimate post we could do at the Irvine Housing Blog? We have been getting a great deal of attention lately for our posts on HELOC abuse, and our post on Monday showing the $500,000 loss was also very well received. This is only one way you can top what we have done to date: combine the two. Today's featured property is the new pinnacle. We are raising the bar. Today, we have a property where the owner took out over $1,000,000 in a series of small refinances and general HELOC abuse, and now the lender who has taken back the property is looking at a $650,000 loss.
It does make me wonder... How can I get a lender to give me $1,000,000 that I don't have to pay back?
Have you become numb to the losses we see here at the Irvine Housing Blog? The dollar amounts we are talking about are almost too large to comprehend. Monday's property is going to be an over $500,000 loss. Today's is $140,000, and it is a tiny condo. It can be hard to relate to the size of these numbers, and even harder to relate when it is a big corporation losing most of the money. These losses will continue to mount. If the lenders had to do a mark-to-market on all their loans based on the value of the underlying collateral, our entire financial system might collapse. It might anyway. I guess it is a good thing that we have runaway consumer price inflation, or the monetary deflation of all these bank losses would be a real problem.
Cheap is relative. Compared to pricing at the peak, the prices of houses in Irvine right now are cheap. Of course, they will get cheaper, but today's property caught my attention because I did not get an overwhelming feeling of revulsion at the high price. That is real progress. I am not sure what attracted me to this property. Perhaps it is like ZZ Top's Cheap Sunglasses.
We are the Irvine Housing Blog, and I rarely profile properties outside of Irvine, but today's property is in the Irvine school district, and although it is in Tustin, it is certainly Irvine adjacent.
