Do you get the impression from the behavior of speculators and HELOC abusers that it isn't their problem? I do. Today's featured property was bought in 2005, the equity was quickly extracted right up to the peak, and now that prices are dropping, the speculator is simply walking away. It isn't his problem anymore, it is the problem of Residential Mortgage and Investment, Inc. or whatever CDO the loan was packaged into.
Day after day, we document lenders taking huge losses. It is not the kind of thing that promotes a loosening of credit and increasing prices. Yet there are still people trying to flip houses (a post for another day, perhaps.) WTF? Do people have so little understanding of credit markets that they believe lenders are suddenly going to go back to the practices of the bubble? Faced with daily huge losses causing unprecedented price declines, lenders will become more restrictive of credit -- much more. Either that or they will go bankrupt (I am still waiting on Countrywide, IndyMac, Downey and WAMU.) Prices will fall to the point where people can afford to buy houses with a conservative percentage of their income because lenders will require it. The days of DTIs in excess of 28% may return again someday, but not until that becomes the standard for quite a while. Lenders will retreat to this level because they know people can really afford that. That will become the standard until people stop defaulting. People are going to continue to default until prices stop declining and they stabilize at affordable levels. That is just the way credit markets work.
Many people fueled the market rally with a frenzy of fear buying. Fear
of being priced out of the market, and fear of missing the great
profits to be made through home ownership. Those who did not participate by wanted to
became the stereotypical "bitter renters." These
people were bitter because they believed the nonsense of kool aid
intoxication, and they believed that they missed their chance. Of course, over the last year,
many of these people got their chance and became knife catchers.
Today's featured song encapsulates the feelings people had toward
houses and those who owned them -- they were so high above them. The
bitter renters were jealous and felt unworthy. Little did they know...
Dr. Housing Bubble has an ongoing series he calls "Real Homes of Genius."
He profiles really awful properties in bad neighborhoods going for
ridiculous prices. There is an intuitive revulsion from seeing these
properties and the prices attached. It does not take a sophisticated
financial analysis to recognize the housing bubble when viewing these
properties. We don't have any run down properties of that sort in
Irvine, but I remember having the same revulsion when I would
see 1 bedroom condos going for over $400,000. I don't care how used to
bubble prices you get, when you see tiny condos going for $400,000, the
mind simply cannot grasp it. These prices were just wrong. No amount of
kool aid could drown out the doubts about the prices of these units. Of
course, the people who bought these units almost exclusively used 100%
financing, so it didn't really matter what they paid, and they did not
care. It wasn't their money. An Option ARM with a 1% teaser rate made
owning one of these cheaper than renting, and in due time, it would be
selling for millions. Even if it didn't, any losses would be someone
else's problem -- which is where we are now. Today's featured property is a simple 100% financing deal gone bad. It is the collapse of prices at the low end of the market like this one that are serving as a drag on market prices, and they will continue to do so until we reach the bottom.
In today's market conditions, there are 4 types of market participants: 1. Renters, 2. Owners who bought before 2002 and did not abuse home equity lines of credit (HELOCs.) 3. Owners who bought after 2002, and 4. Owners who abused HELOCs. Obviously, when prices drop precipitously as they have over the last year, renters are the happiest of the group. Owners who bought before 2002 and did not abuse home equity lines of credit may be bummed that their illusory wealth is disappearing, but they will go on with life much as before. They have no particular reason to be stressed. Owners that bought after 2002 will probably go underwater, and the closer the purchase was to 2006, the further underwater they will fall. Owners who abused HELOCS have put themselves in the same situation as late buyers by increasing their mortgage balances mostly through foolish consumer spending. These last two groups will experience a great deal of stress once the veneer of
denial is stripped from them by the continuing decline in prices.
Stop for a moment and contemplate how large a group of people it is that purchased after 2002 and/or abused HELOCs. Given the degree of kool aid intoxication we all witnessed during the Great Housing Bubble, it is obvious that this describes many, many homeowners. The numerous posts I have done on HELOC abuse are a testament to the scope and scale of the problem. The behavior of these people is not the exception, it is the rule. How many of you know friends or family that fall in this group? Or perhaps the question should be how many of you do not know friends or family that fall into this group? I hope they are preparing themselves financially and emotionally for what is to come. It will not be a good time.
But there's one thing I know The blues they send to meet me won't defeat me It won't be long till happiness steps up to greet me
Today's featured property is a high-end Irvine property rolling back below its 2004 purchase price.
I get surprisingly little hate mail. Some of the pieces I have received came after HELOC abuse posts. On one of them, I had several women from a support group relay a sob story to me attempting to justify the serial HELOC abuse of their friend. I replied that a group pity-party that enabled and justified their friend's behavior was not doing her any favors. They were not impressed. So today's featured song is dedicated to me -- it comes from all the realtors, HELOC abusers, disgruntled homeowners, and anyone else who does not fully appreciate the public service we are providing here at the Irvine Housing Blog.
Today's featured property is another pretender who made themselves look rich by spending the equity from their home in a spiral of ever-increasing debt. I wonder how much HELOC money is under that tree?
When I first moved to Irvine, I lived in Oak Creek. It is still one of my favorite neighborhoods. My wife has given me her parameters for what she desires in a home, and today's featured property perfectly fits her description (now if I could just afford it...) It is in Oak Creek near the elementary school, it has a large yard, it is an open plan, the wood is a medium tone, and the surfaces are a medium tone granite, there is a downstairs den/bedroom, and the home itself is spacious. When prices get to the affordability range, this is the kind of property I will be bidding on.
Today's featured property is a story of of the Ponzi Scheme / Musical Chairs aspect of the real estate bubble coming to an end. The owner of this property is the one without a chair. I suspect she wishes the music would not have stopped playing.
Northwood II is speculator central. I have heard that the builder was requiring owners to have downpayments and good credit to purchase in this development. Perhaps they knew we were near a peak of the bubble and didn't want to face lawsuits when prices crashed. There are many homes for sale in this neighborhood, and most of the properties are distressed. Some knife catcher will step up and buy this one -- at least the lenders hope so. They are already looking at close to a half a million dollar loss.
Do you ever stop to ponder the massive losses the lenders are absorbing? It is difficult to get to worked up over the losses from faceless corporations who conjure money out of thin air, but these loss figures are simply staggering. I am amazed none of our major banks has declared bankruptcy yet.
Today's featured property is a beautiful, high-end domicile. When the price gets down to $650,000, it will be a good buy. I wonder if someone will step up and take the next $300,000 loss? I think I will wait.
This market desperately needs more knife catchers. There are just too many properties that need to be sold and too small a number of people to buy them. I suppose we aren't helping matters any at the IHB .
I hope everyone is getting a laugh out of the daily posts here. The carnage we are witnessing -- and will continue to witness -- isn't funny for the people losing money. Residential real estate bubbles are very painful when they deflate. I vacillate between sadness and laughter reviewing these properties all the time. You have to be able to laugh at the grim happenings in life. Life is too short to be bummed out all the time.
Today's featured property is another speculator who is getting flushed out of the housing market. Not to worry though, he has extracted all the equity and is passing the loss on to the lender.
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In today's market conditions, there are 4 types of market participants: 1. Renters, 2. Owners who bought before 2002 and did not abuse home equity lines of credit (HELOCs.) 3. Owners who bought after 2002, and 4. Owners who abused HELOCs. Obviously, when prices drop precipitously as they have over the last year, renters are the happiest of the group. Owners who bought before 2002 and did not abuse home equity lines of credit may be bummed that their illusory wealth is disappearing, but they will go on with life much as before. They have no particular reason to be stressed. Owners that bought after 2002 will probably go underwater, and the closer the purchase was to 2006, the further underwater they will fall. Owners who abused HELOCS have put themselves in the same situation as late buyers by increasing their mortgage balances mostly through foolish consumer spending. These last two groups will experience a great deal of stress once the veneer of
denial is stripped from them by the continuing decline in prices.
Send In The Clowns
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