Over a third of a million dollars for a claustrophobic condo with over $200 HOA dues. This one’s goin down over 50% (eventually).

The “happy days are here again” croud are fighting a losing battle. We are now paying for the false recovery after 2001, also called the housing bubble. Great comments IR. Keep preachin’.

Perhaps the $700B bail-out is necessary ... although it does seem to be something of a “rush job” with “grave consequences” promised if it is not quickly passed.  Hmmmmm ... where have I heard this before?  The run-up to the Iraq war? Naaaaah.

In any case, if it is passed it should include a dilutive interest (i.e. stock or warrants) passing to the US government from any institution that chooses to participate.  Also, I don’t have a problem with limiting executive compensation at any institution that participates in this bail-out ... these executives are the very folks who helped create this mess.

The current proposal (which I understand runs a whopping three pages) is short on details, but gives the Secretary of the Treasury basically a “blank check” for $700B with no oversight or even review.  Why am I uneasy about this?

We should also require participating financial company execs and members of congress to subscribe to a daily read of IHB…had some been paying attention a couple years ago maybe much pain would have been avoided!

Great song choice! I can’t believe you managed to hold back from using this song for so long, but it’s definitely appropriate.

It’s not a condo. 

It’s a “CONDEAU”!

72K! and you are “IN” “DEWD”

I was a big fan of The Fixx in the 80s. I must have listened to Reach the Beach a hundred times.

At the minimum, this one is going back to nominal 2002 price of $287k.

I’ve heard that song dozens of times, yet never had any idea what the lyrics were…

Why bother to get out of the car when you know that the chances of this selling anytime soon are small? It’s just like all the other housing out there without much to distinguish it.

I LOVE the FIXX!  Great song…

This condo STILL seems overpriced at $360K.

Job losses are continuing.  I have a good friend with a VERY good paying job at a financial institution.  I thought she was exempt from downturn because she has a specialized skill set and a huge network of contacts in the business.  She´s probably making $150K minimum - or was.

Anyone up for a little alley way living ?

I agree with George… It’s going back to 2002 prices (at the very least).

Job losses may be continuing, but median incomes are increasing if you believe the junk “American Community Survey” that is pumping up the numbers (http://www.modbee.com/local/story/408350.html) without conducting a proper Census.

It’s a good smokescreen to hide the inflation.  Spin up a good lie and claim that incomes are on the rise.

The median Scottsdale, AZ income jumped about 15K between 2006 and 2007.  I haven’t found anyone yet claiming a 15K pay raise between 2006 and 2007.

It’s all those people taking on a second job part-time to make up for the lose of a wage-earner (the house).

Henry Paulson was out yapping again this morning. He says he wants oversight, but it is the job of congress to figure it out.

How is that going to work? The lobbyists for the car makers and student loan companies are already out with their knives looking to cut a piece of this pie.

At this point I am not sure what is worse, this bailout or letting the sh%t hit the fan we see who ends up with a dirty shirt.

Nice thought. But the money was so good that was all that mattered.

I was in IT at New Century. I remember telling my co-workers this will end someday and they looked at me like I was a moron.

Actually the REOs in my neighborhood are gone in days, maybe weeks. They price them 10% - 20% below market and they are sold pretty pictures or not.

Photo from the outside on a REO only 2 weeks old?

I wonder if the real reason is either the inside is TRASHED or if they’re having legal issues getting the old tenants actually out (though the law is on the bank’s side, I’ve heard a few stories of people squatting after they were foreclosed on)

The bulls on the forums are all pumped up about the pumped up numbers.  They did not bother to actually read the fine print on the information they were championing.  Classic confirmation bias (and laziness).

Same as the sub-prime, the $700B rescue is designed to fail. It is 100% political movement, period.

The credit crisis has been at least a year, Paulson has purposed so many solutions and none of them work, this is because there is no solution to “fix” it.

Now $700B with just three piece of pages - he might had a proposal with 1000 pages long time ago, but he knew this is no going to work.

Wake up, Democrats and American Please, you have been cheated on Iraq war,2001 tax cut, 2004 sub-prime, American has been refin once, and our children will be financial now (we own $12 trillion to the world), all for the sake of Oil, Texas, Wall St and Bush 3rd term.

This plan made purely for Bush 3rd term

Awesome picture, AZDave (although I don’t appreciate my hand hovering over Ahnold’s package).

With regard to researching the numbers, I guess it would not have occured to me to reach out to an article from the esteemed Modesto Bee—- an article which speaks specifically of the income numbers reported for THAT area—- to validate the OC numbers. But I guess if all you can find to support your theory is the Modesto Bee, than so be it. For me, if the fine folks at the Census thought it was good enough for them, its good enough for me.

Honestly, I really don’t care that much, and don’t want to argue with you about it. Personally, I’m rooting for prices to come down because I still rent.  I’m just trying to be realistic here….and telling myself that nobody around here makes more the $50k and the median price will probably be $200k in a couple of years is an exercise in futility.

It’s not a bad community, but street parking really sucks for your guests there.  I’ve had to park all the way by the pool on numerous occasions.

What good fortune for governments that the people do not think.
Adolf Hitler

I bought “Reach the Beach” and 650 other CD’s for $75 a couple of months ago.  The seller was some leasing agent turned stay at home mom in Talega.

I love my ipod and itunes.  Micro Center loves me because they continue to sell me new larger hard drives.

IR,

Do you ever see any distressed properties in Shady Canyon? I was walking around there this weekend and I was stunned by the opulence of the houses there. I wonder what the mediam income of the people living in Shady Canyon must be?

Dano

My business partners wife worked in IT at New Century when the party was just kicking into gear. He used to tell me stories about how they would finance anyone, in other words, any lead that came in on the internet was automatically qualified for a loan.

Her name was Derong

Spitting image! 

Really though, I think you’ve gotta give some ground AZ.  You’ve been calling pricedrops of 50% and more in Irvine for the last few years.  We’ve certainly seem some good drops, but those houses you were so sure would sell for 100k are still going for 400…  What happened?

Is the armageddon just coming next year now?

Actually, the 2001 tax cut was a benefit for me.

Fortunately, I got rid of all my RE holdings since last year (mind you…I actually paid more than 20% down payment on all the condos/homes, unlike some of the bastards listed on this blog by IR).

But I agree, we need Obama. Let’s re-regulate the living crap out of this country (and I’m a registered Repuke even though I’m more of a libertarian…Ron Paul type).

I’m not gonna panic until your theme song for the day is

Bound for the Floor

by Local H

What good is confidence?

Huh, looks like they already have an offer in.  I wonder if they’re taking 287k…

IrvineRenter, I have a minor difference of opinion regarding one comment you made: << The losses by lenders also lead to a depletion of their capital reserves which leaves them less money to lend. This leads to a massive credit crunch and widespread monetary deflation as the money created by lenders when they originated the loans disappears into the ethers. >>

Pure monetary inflation arises when the Central Bank (the Fed) creates more money out of thin air, which they do to the tune of a few percent a year. But when credit is created, which is possible by our fractional reserve banking system (see wikipedia for detailed commentary on the multiplier effect that results), there is effectively a ‘temporary’ increase in the money supply as well. However, in theory, if and when the loan is paid back in full, that credit is extinguished. Hence, the borrower has effectively advanced his future income stream into the present so he may consume a good now (buy a house with credit instead of cash, and pay interest for that luxury). But net-net, when all is said and done, there is no monetary inflation resulting.

Now, back to when the loan is first made by the bank, the credit is perceived by the system as ‘real money,’ and is used by the homebuyer to pay the builder, who pays the construction crew, etc etc.. This NEWLY CREATED money is now out in the system. IF the debt is never repaid, then this ‘temporary’ monetary inflation via the credit system (and fractional reserve banking mechanism) becomes permanent.

So I do not understand the comment that the action of wiping out the loan rather than paying it from a future income stream is, in and of itself, ‘deflationary,’ when by my interpretation it is the exact opposite. Just like the Fed creating new money (whether by a printing press or by getting the congress to approve the massive issuance of new debt, to be paid by the taxpayers’ future income streams….) to purchase bad debts and (as we all know will happen), eventually just wiping out a large fraction (when they sell to someone else later for pennies on the dollar… the whole purpose of the proposed bailout scheme…): this amount is a permanent inflation of the money supply. Now, I suppose if the taxpayers ever really fully paid off all the gov’t debt, this monetary inflation would be pulled back in and extinguished… but for all intents and purposes, this debt will forever be rolled over, as far as we can see.

Now, is there deflation occurring in this process? Sure, the asset values are deflating, and as banks contract credit (wiping out credit lines, calling in loans, not rolling over loans, not to mention not making new loans) this asset deflation could accelerate as it did in the 30’s as people and businesses liquidate hard assets to get dollars to use to repay debts and simply survive day to day. But, when a loan is not repaid, and the extended credit becomes a permanent part of the money supply, that is not deflation but actually inflation.

If you or someone can argue otherwise, I’m very interested.

Thanks again for your blog, I truly enjoy it.

RichW

I see your point, the way I thought about in simple terms was like you said, when loans were made the last few years they were causing inflation (in a sense ) since so many people had money handed to them

now that loans are written off, it is the reverse, kind like a vacuum, causing banks to fail, the ones left standing will make you bend over before lending any money

By the way
  http://calculatedrisk.blogspot.com/2008/09/wells-fargo-30-year-jumbo-mortgage.html

Continuing the thought above: I suppose that to be more correct, one should observe that the inflationary effect *actually* occurs at the time of credit creation, as that is when the ‘new money’ is pushed out into the system and begins circulating. So, the usual contraction of the money supply that results from repayment of debt is the ‘deflationary event’ that typically occurs over a long period of time for an amortizing loan (which completely extinguishes the full amount of money initially created). A fine point to make is to realize that the multiplier effect (see again the wiki link re: fractional reserve banking, it is well explained there) will result (in the limit) in up to 5x the original amount of deposited money (that was leveraged into making the first loan via credit creation in addition to the original loan amount) being put into the system. So while the original loan will normally be extinguished over the fullness of time, the multiplier-money that also gets added to the system may persist longer, and is an independent entity from the original loan.

Your particular comment that a bank writing off a loan was effectively a deflationary event may be true, to the effect that a bank’s balance sheet will have offsetting profits from assets (other loans) that are generating income, and the bank can remain solvent and not rely on FDIC money to make depositors (the liabilities on the bank balance sheet) ‘whole,’ with the result that there is a reduction in the ability to lend due to the taking of the loss.

I guess that my comment is that if the government steps in to create new money to give to the bank to ‘make it whole’ for the loss, and then that government (Fed) simply erases the bad debt, then that act simply makes permanent the original inflationary effect of the original credit creation, as there is no reduction the ability of bank to lend since the bank experienced no loss.

Hope this was not too long-winded, just trying to be precise in my language here.

I make no claims to be a professional economist, either! I just read and thought a lot about it over the years.

Same goes for my neighborhood, Walter.  Pictures are meaningless, because if it’s a three or four bedroom, buyers are immediately interested, interior be damned.  While I hope (and need) prices to come down more, there are enough interested buyers for starter homes here to continue supporting the price that entry level homes have reach this past season.  I’m now waiting to see what happens next spring.

great article

http://www.ocregister.com/articles/loans-people-house-2167891-bad-home

“Based on his reading of the market, the average family in Orange County can only afford a $300,000 home, which is where the market will go when it returns to sanity.”

Finally some truth spoken at OCR.

RichW,

You have obviously given this a lot of thought.

“I suppose that to be more correct, one should observe that the inflationary effect *actually* occurs at the time of credit creation, as that is when the ‘new money’ is pushed out into the system and begins circulating.”

Yes, this is true. In theory, this money goes toward the creation of something with added value, so even after the loan is repaid, an asset exists with greater aggregate value than the cost of the inputs. Therefore the FED grows the supply of “real” money each year to reflect the value added from asset creation.

Now, in the case of loans made against falling real estate values, when a loan is not repaid, and when the asset declines in value, the bank must take a loss. The losses were the “made up” money created through fractional reserve lending, but the write off is made against “real” money through balance sheet adjustments. This is the deflationary effect, and since real money is subject to the multiplier effect of fractional reserved lending, it has a huge impact on our financial system.

I think we are saying the same thing regarding the negative multiplier effect, when a bank itself takes a writeoff from a bad debt and thus has less capital to lever against to make new loans (hence the ‘deflationary’ component, aka the credit contraction).

Your other comment about justification for growth of the money supply, and comment that even after the loan is repaid, an asset exists. I observe that this occurs only through the application of labor over time - our labor (exchanged for an thus equivalent to money), over time (as we earn money and are able to repay loans made to finance current consumption aka home purchases), has been traded for someone else’s labor in creating the home. So in non-finance terms, the home exists because we traded our labor for someone else’s labor to create it. The fact that we used fractional reserve lending to facilitate lending money for the current purchase, with our future labor (earning stream) as a promissory note, is not really part of the equation.

However, I have always thought the Fed justified inflating the money supply because it reflected a larger population, equivalently a larger labor pool. Although, the original amount of money only needs to move faster through the system (higher ‘velocity of money’) - one could argue that there is NO need to inflate the money supply, other than to accommodate government deficit spending. It is ‘easy’ to get away with a ‘little’ inflation….

But I suppose Bernanke and Paulson were/are terrified of having to simply ‘print more money’ without authority from congress to back it with the issuance of debt obligations. Because simply ‘printing money’ at a rate more than the usual 3-5% per year will tend to frighten foreign buyers and holders of our debt, as they will have no visibility into the degree of inflation - and fearing we will only repay them with highly devalued dollars, they will cease to roll over much less purchase new debt. So Ben and Paul go to Congress, hat in hand, and suffer the (justified) slings and arrows - though they have a lot of nerve not to have proposed oversight or future compensation to taxpayers for the trillions that will be needed in the end… (end of rant).

I saw that post at CR - we are getting close to 10% for jumbos! That’s one way to price in a little risk (risk of mispricing of the asset being used as collateral), since it really reduces the leverage one can use when overpaying.

25 -

You have to wait.  We still have a ways to go.

I don’t think I have been here more than a little over a year.

I’ll be more than willing to give ground when we get there.

There is a different reason for deflation in the current environment: selling performing assets.  There were a ton of companies heavily leveraged who purchased everything from municipal bonds to MBS.  Usually they borrowed short and purchased assets with longer durations.

There are a number of these leveraged investments unwinding.  The money borrowed to invest is repaid without default.  However, lots of people are getting rid of such assets.  Even with no defaults anywhere, the price of the assets slowly drops.

That was a great rant. Come back and do it again.

I imagine there are many academics dusting off their old copies of Hyman Minsky’s writings. He described this phenomenon in the 60s. Most thought it could never happen with our modern financial systems.

I was a developer at New Century. I joined the company (after struggling for a couple of years thanks to graduating in cs into a dot com bubble bust).

I was so glad to have a job! And then I asked my friend what the company did, and he said “subprime loans” and my response was, “Is that a good idea?”

I figured the higher ups knew what they were doing. Sure enough - it’s not like being SOX-compliant helped us from turning out like Enron.

And even when everything went down, I had no idea why. Head in the sand - that’s not me anymore!

Walter! I think I know you! =O Well we met a couple times at lunch at the Spectrum I think…

I’ve also heard of Derong, but she left before I joined.