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.
Would you like to get stranded on Alicante Isle? (I know it is spelled Aisle and it means something else, but just go with it.) People buying properties as flips during the down cycle are betting on the return of the market. There is no shortage of ignorant prognostications of the bottom, and if flippers are foolish enough to believe them, then they deserve to become bagholders. If flippers and lenders became the bagholders for the decline, Karma would be delivering its comeuppance. Flippers hope to get in and out of a property quickly, and like the passengers on the US Minnow who thought they were going on a 3 hour tour, getting off the island will likely take much longer than planned. They end up stranded in a condo searching desperately for a way to get out. The market will eventually rescue them. The castaways of Gilligan's Island were only trapped for 4 years until the series was mercifully cancelled. The flipper who gets trapped in today's featured property will likely be there much longer.
Did you see the recent CNN article on Irvine, Welcome to subprime's ghost town? How about the post at Calculated Risk on the See-through buildings - reminiscent of the '80s. The Business Week article The Other Orange County about the boom town gone bust? We are becoming the center of attention as the housing bubble deflates because the activities here were largely responsible for inflating it. Are we reaping what we sowed? The rest of the nation seems to think so...
Today's featured property was featured before back in November of 2007. It is back now as REO. Last year it was offered as a short sale for $529,000. Anyone who thought about buying that one will be happy they didn't. Now it is for sale for $459,900.
Don't buy now. Just say no. Don't let your downpayment wash away with the declining market. As Boys II Men say "We'll make the biggest mistake of our lives. Don't do it baby"
Today's featured property is a major comp killer establishing a new low water mark in the Watermarke development. They developers of this property are geniuses. They started a high-end apartment complex just as the bubble was taking off, and being opportunistic, they decided to convert the properties to condos, and they made a fortune off the frenzied buying of the Great Housing Bubble. The property was purchased on May 18, 2005 for $367,500. It was flipped on July 3, 2006 for $435,000 right at the peak. The 2006 purchaser used 100% financing (big surprise,) with a $348,000 first and a $78,000 second. The property went REO on January 23, 2008 for $324,900. It appears as if the loans were originated by IndyMac. It was purchased by Deutsche Bank National Trust Company, and the Federal National Mortgage Association (Fannie Mae.) This is the first property I have seen where Fannie Mae has been on the hook. Fannie Mae is one of the Government Sponsored Entities (GSEs) that makes its money by insuring mortgages to facilitate transactions in the secondary mortgage market. Although the GSEs are explicitly not backed by the Federal Government, investors behave as if they are, and if they keep seeing huge losses like the one today, the Federal Government may step in to rescue these companies. If there is going to be a federal bailout, it will probably be caused by the collapse of one of the GSEs. Did you realize your tax dollars are implicitly backing the secondary mortgage market? They are...
* * * GREAT 1 BED / 1 BA CONDO WITH 1 CAR PARKING SPACE! FEATURES:
Great rear end condo , balcony in living room, hardwood floors, granite
counter tops in kitchen, upgraded cabinetry, stainless steel
appliances, this is a must see!!! HURRY or MISS this great DEAL
Hurry, you don't want to miss your chance to be trapped in a 635 sqaure foot apartment for the next several years...
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This unit is being offered for 40% off its peak purchase price. Let that sink in a moment... 40% off in Irvine... Who would have thought that was possible? Oh yeah, we would have...
I must admit, I did not think we would be seeing such large discounts so quickly, but then again, this property will probably fall further -- who wants to own a tiny, one-bedroom apartment? An investor might, but a cashflow investor would want to see a positive cashflow, and considering the $290 a month dues, this property probably needs to fall to $125,000 to be a true cashflow investment.
If this property sells for its asking price (some knife-catcher will think this is a bargain) the total loss will be $187,780. That is the lender loss on a 635 SF condo. When we start seeing losses that large on properties that small, what will the losses on the larger properties look like? I hope Fannie Mae has some significant loss provisions set aside, or we will end up paying for it in the bailout.
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Wait Don't wait for the water Wait Don't wait for the water
We don't even talk anymore And we don't even know what we argue about Don't even say I love you no more 'cause saying how we feel is no longer allowed Some people will work things out And some just don't know how to change
Chorus: Let's don't wait till the water runs dry We might watch our whole lives pass us by Let's don't wait till the water runs dry We'll make the biggest mistake of our lives Don't do it baby
Now they can see the tears in our eyes But we deny the pain that lies deep in our hearts Well maybe that's a pain we can't hide 'cause everybody knows that we're both torn apart Why do we hurt each other Why do we push love away
Wait
