What were the guys over at IndyMac smokin'? I recently spoke with two developers who have looked at the IndyMac portfolio of large loans. They both said it was nearly impossible to value because it was such an eclectic mix of properties with appraisals of dubious quality. There is a great post at Appraisers Forum on the nonsense over at IndyMac. In residential home lending, IndyMac had positioned itself as the leader in Alt-A loans.
Tanta at Calculated Risk has a great discussion in her post Reflections on Alt-A. Her basic premise is that Alt-A was never a good business plan. Alt-A loans were generally stated-income and low-doc loans given to people with high FICO scores. The theory was that people who could be responsible with normal debts could do just as well with enormous debts. It isn't working out too well, particularly for IndyMac.
One of the intriguing ideas from her post is that Subprime will return, albeit in a different form. There has been much discussion about how people who have gone through foreclosure will get back into the housing market. Subprime was originally intended to take people with poor FICO scores that had good income and savings and give them bridge financing until they could repair their FICO scores and refinance into conventional loans. This business model will probably return in a few years as there will be many people in this category. However, Alt-A is likely dead, and it will not be resurrected. Stated-Income, High CLTV, and low or no-doc loans will probably not resurface no matter how good a persons FICO score is simply because people will default on these loans not matter how responsible their past history.
So where does that leave Irvine's housing market? Without Alt-A, people will not be able to get the loans necessary to support today's still-inflated prices. Buyers will actually need to qualify for loans based on their real income, and they don't make that much money. And since many previously Alt-A borrowers have defaulted and are now Subprime, and since Subprime is currently defunct, the buyer pool in Irvine has gotten much, much smaller.
Today's featured property is a simple story of speculative greed, Alt-A financing and the aftermath of years of irresponsible lending. The buyer used 100% financing and defaulted when prices didn't go up. IndyMac foreclosed on its first mortgage and wiped out the second. They are now trying to sell the house to recover the value of their first mortgage, and they are over market. The only mystery remaining is how much of their first mortgage they stand to lose.
Today's rollback is truly impressive, not because it is a great property or a great deal, but because the discount is so severe. The low end of the market is searching for the bottom, and it hasn't found it yet. What is also interesting about this property is its cost per square foot. At $174/SF, it is the least expensive place in Irvine. This might be expected on a large property over 3,000 SF, but when you see a price like that on a small condo, it is signaling more declines in the market. Smaller units almost always carry a higher price tag on a per square foot basis. From a construction cost perspective this makes sense because the smaller units still have the expensive bathroom and kitchen space and very little of the inexpensive filler.
The low end of the market must find a bottom before the market can stabilize. Without price stabilization there, the move-up market is non-existent, and the substitution effect will eventually pull down the larger, more desirable properties. Someone looking for a two bedroom place might take a smaller property if the price differential is great enough. Is that second bedroom really worth paying double for? Today's featured property is probably the least desirable property in Irvine. It is old, small, ugly and in need up renovation (although it is a livable rental.) All premiums can be measured off units at the bottom. Properties in Brio may be superior, but would you pay 80% more ($360,000) for a smaller unit there? (2701 Ladrillo Aisle, Irvine, CA 92606) People looking at 1 bedroom properties will not likely pay an 80% premium no matter how much nicer the property might be. As you can see this will put further price pressures on units in Brio, and this will reverberate through the entire chain of move ups. High-end property prices will not hold up with continued price erosion at the bottom of the market. The high end may continue to be populated by a few knife catchers, but as the substitution effect really kicks in, volume will decline further, and the imbalance of supply and demand will create a fragile market. REOs that find the few remaining buyers will finally overwhelm the feeble price support, and the next leg down will begin. Look for it this fall and winter.
Perhaps the best illustration of the problem with the housing market is the simplest one. Speculators with access to 100% financing did not have to worry about losing money, so they went out and bought every property available and bid prices up to very high levels. Now that prices are falling, they are simply walking away and letting the lender absorb the loss. The big lesson lenders are learning is that 100% financing brings in more business, it just isn't the kind of business you want. The new housing bailout bill passed by Congress and signed by the President has a provision in it eliminating downpayment assistance programs. From this day forward everyone will need a downpayment. With all the losses lenders are absorbing due to the defaults of 100% financing purchases and refinances, you will not see them bringing those programs back any time soon.
When I first started putting downpayment requirements on posts, people were incredulous. I was repeatedly told 20% downpayments will never be required again. Zero down financing was here to stay. Perhaps it will rise to 5% or maybe 10%, but 20% is from a bygone era. Well, go try to get a loan from anyone other than the FHA and see what they tell you. There will always be programs allowing you to put less than 20% down, but good luck qualifying for one of them. From this day forward -- until we build the next bubble -- a minimum of 3% down through the FHA will be the primary avenue of first-time buyers. Everyone else better have 20% down, or you will not be buying.
One of the overlooked features of the bottom of the market is the difficulty in qualifying for a loan. Prices drop because buyers cannot get loans. When prices look relatively cheap, very few people will qualify for loans to take advantage of the low prices. That is why prices are low. If everyone could qualify for a loan, they would bid prices up like we saw in the bubble rally. The future of Irvine's housing market is going to be a lot of loans at the conforming limit -- currently $417,000 -- plus whatever downpayment people have saved. The median will probably be supported at around $430,000 because that is the conforming limit plus 3%. If you have saved 20% or more, you will be one of the few buyers who can bid higher, and you will likely find some outstanding deals at the bottom. Those $900,000 homes at the peak will be going for $500,000 for the conforming limit borrower with 20% down.
The behavior of HELOC abusing owners during The Great Housing Bubble was tragic. They believed the fantasies of the religion of real estate, drank the kool aid, and now they are losing their homes. The classic Greek tragedy a good person experiences a reversal of fortune most often due to the decisions and mistakes they made along the way. The tragic outcome for many homeowners was not caused by some unforeseeable, random event, but rather it is the direct result of the decisions they made and the actions they took because they subscribed to the fallacies of the religion of real estate. A good tragedy or morality play leaves the audience with mixed emotions. Part of you feels sorrow for the pain and suffering the character must endure, and part of you feels they character is getting what they deserve. It brings up feelings of schadenfreude and a sense of thankfulness that you did not suffer the same fate.
You can see this mixture of emotions in the comments on the blog which often exhibit both sides of this false dichotomy. Life is seldom black and white, and the tragic outcome for homeowners caught up in The Great Housing Bubble is no different. The full range of these emotions are normal and appropriate given the events we are witnessing. Hopefully, everyone who explores these issues and the outcomes that results from the behavior sees the mistakes these people made and does not repeat them in their own life. If that occurs, the I will feel my work at the Irvine Housing Blog has been worthwhile.
Today's featured property is another HELOC abuser who lost his home. Let's explore how he did it.
Isn't everyone in Shady Canyon rich? Are there pretenders in Irvine's bastion of wealth? It certainly looks that way. When I wrote Southern California's Cultural Pathology, I discussed the idea that debt is wealth. People seem to truly believe that possession of an expensive object through taking on huge debts makes them wealthy. In reality, it makes them extremely indebted. Nobody has ever added to their net worth by using 100% financing. Sure, if properties appreciate, they can gain wealth through the use of leverage, but if they don't... who cares, you can pass the losses on to some stupid lender/investor.
Today's featured property was owned by a HELOC abusing pretender. He leveraged himself into a Shady Canyon home, took out all the equity as it appreciated, and now the lender is holding the bag -- again.
Wikipedia defines faith as "a belief in the trustworthiness of an idea that has not been proven." Religious faith is a collection of beliefs based on ideas which are neither testable or provable. If you accept the core beliefs of a religion on faith, you generally get a feeling of peace and well being that serves to reinforce the "correctness" of the acceptance of faith. Most religions build on these core beliefs and assemble a series of ancillary beliefs for guiding human behavior known as religious dogma. California has a major cultural "religion" that cuts across traditional denominational lines -- the religion of real estate.
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the "higher power" of market forces -- real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn't matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn't matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "Why Christianity Must Change or Die" in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California's religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California's Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.
Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.
Figuratively, today's featured property is a church (just like all other houses in California.) The fact that it is located on Church Street is testament to the faith the buyer had in its continuing appreciation. Based on the resale history, there was reason to believe prices would always go up. Our faithful owner borrowed 100% of the money necessary to worship here.
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.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "
