Generation Pwned

Sep 25th, 2008  
by IrvineRenter  in Real Estate Owned

Generation -- Simple Plan

Generation Y began buying starter homes in earnest during the Great Housing Bubble. Generation X is just now coming into their prime earning years, and many of them bought move-up homes at inflated bubble prices. The Baby Boomers took their equity and bought multiple properties during the bubble. They all have one thing in common: they are all part of Generation Pwned. Pwned has many definitions, but it generally refers to a state of being defeated and helpless. People who paid bubble prices or HELOCed themselves into a massive debt are pwned by their houses and the housing market. I first wrote about this in America’s Debtor Prisons. Unfortunately, I know several families who this describes. All are overburdened with debt, and they were counting on increasing income and increasing home prices to finance their lifestyles and their family's future. It isn't going to turn out well for them.

Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) and to qualify for the workout, the homeowner must give up half their future appreciation -- if there is any. Most would be better off walking away. Anyone paying 38% of their gross income (that is gross not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition. Rapid house price appreciation leading to a HELOC dependant lifestyle is not going to happen any time soon -- if ever. Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve. They are truly pwned.

Those that participated in the housing bubble (bought late or borrowed much) will end up breaking down into two groups: those that are pwned, and those that lost their houses. The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can't decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.

Today's featured property is in the "borrowed much" category of housing bubble participants. These people did not make the mistake of buying at peak prices. In fact, they bought at the bottom of the last cycle. However, they too drank the kool aid, and now they have lost their home and their wealth. Another casualty of the Great Housing Bubble.

Asking Price: $459,900

Income Requirement: $114,975

Downpayment Needed: $91,980

Monthly Equity Burn: $3,852

Purchase Price: $183,000

Purchase Date: 2/6/1998

Address: 131 Islington, Irvine, CA 92620

Beds: 3
Baths: 2
Sq. Ft.: 2,000
$/Sq. Ft.: $230
Lot Size: 2,100 Sq. Ft.
Property Type: Condominium
Style: Contemporary
Year Built: 2000
Stories: 2 Levels
Floor: 1
Area: Northwood
County: Orange
MLS#: S548626
Source: SoCalMLS
Status: Active
On Redfin: 1 day
New Listing (24 hours)

This property in Irvine features 3 bedrooms and 2 bathrooms, in a quiet gated community. This one is priced to sell and will not last long, submit your offer today!!

When we the taxpayers foot the bill for the excesses of the bubble, we are bailing out the lenders who enabled the behavior below:

  • The house was purchased on 2/6/1998 for $183,000. There was a $173,500 first mortgage and a $9,500 downpayment.
  • On 8/21/2002 they refinanced the first mortgage for $165,500. They actually paid down their debt.
  • On 3/12/2003 they opened a HELOC for $50,000, just in case... Their first taste of kool aid.
  • On 2/13/2004 they opened a HELOC for $226,000. The kool aid is flowing now.
  • On 10/22/2004 they opened an Option ARM for $492,000.
  • On 5/2/2005 they opened a HELOC for $75,100.
  • On 10/21/2005 they opened a HELOC for $126,000.
  • On 9/28/2006 they opened a HELOC for $150,000.
  • Total debt on the property, $642,000 plus accumulated negative amortization.
  • Total mortgage equity withdrawal, $468,500 including their tiny downpayment.

Basically, these people put $9,500 into the property and made $459,000 in 8 years.

Do you wonder if they realized they were pwned? I suspect they did not. Each refinance probably did not increase their payment, and although their HELOC debt was growing, they had plenty of cash to make the payments. They also probably believed their house value would increase forever and the debts would be paid off when they sold. Of course, they were pwned the moment they took out the Option ARM, just like everyone else. All Option ARM holders are pwned. Some of them know it, and some of them don't, but they are all going to lose their homes eventually.

If this property sells for its asking price, and if a 6% commission is paid, the US taxpayer is going to lose $209,694.

Maybe we are the ones who are pwned...

.

I'm sick of all this waiting
And people telling me
what I should be
What if I'm not so crazy
Maybe you're the one
that's wrong, not me
So what you gonna do,
what you gonna say
When we're standing on top
and do it our way
You say we got no future
You're living in the past
So listen up, that's my generation

(hey ho, let's go!)
It's going down tonight
(hey ho, let's go!)
We're gonna do it til we die
(hey ho, let's go!)
'Cause I, I, I got no
reason to apologize
That's my generation

I don't need to say I'm sorry
I do what everybody wants to do
It's not so complicated
'Cause I know you want
the same thing, too
So what you gonna do,
what you gonna say
When we're standing on top
and do it our way
You say we got no future
You're living in the past
So listen up, that's my generation


Generation -- Simple Plan


Astute Observations

Astute Observation by Agent#777
2008-09-25 05:52 AM

So in 4 years or so, these people were able to siphon off almost twice what I have acquired in 27 years of playing responsibly.
If I could sell my ~800 credit rating for 250K and get to keep the cash, I would do it. Somehow I imagine they don’t have too much left to show for it though…

Astute Observation by Texas Triffid Ranch
2008-09-25 05:57 AM

IrvineRenter, the folks over at Portland Housing Blog brought up a very interesting point about HELOC loans being used to finance small businesses too shaky or flaky for standard business loans.  I realize we talk a lot about HELOC recipients blowing the money on vacations and pergraniteel, but does anyone have anything approximating hard numbers on how many stripped their house values in order to subsidize a clothing store or bookstore that would never have survived on their own?

Astute Observation by IrvineRenter
2008-09-25 06:21 AM

There is no data on this phenomenon that I am aware of. It was particularly common in South OC where many homeowners were private contractors or consultants who owned their own business. Several of the properties I have profiled were failed business owners. It is certainly easier to HELOC the house than it is to get a loan from the Small Business Administration or a commercial bank. I have been planning a post on the economic fallout for small business caused by the elimination of HELOC money. It will be one of the factors that contributes to the recession and causes the recovery to be slow. It is the early 90s in California all over again.

Astute Observation by Larrygg
2008-09-25 06:44 AM

My father was no financial genius but the one point he always drove across was never, never, ever use your primary home to finance a business. Our neighbors did just that back in the 60’s and the business failed and they were basically poor for the entire time I knew them. Of course back then people had to own up to their financial obligations unlike now when they can walk away and let the government and taxpayers pay for their mistakes.

Astute Observation by Rocker
2008-09-25 07:41 AM

My pessimism in the future of the US economy increased many times after watching CNBC’s The Big Idea show. They have a new section called Success Intervention, where experts advice owners of small businesses on the brink of collapse because of the economic hard times. Guess what is the source of the working capital for almost all of them? Correct, home refinancing.

The housing bubble empowered some entrepreneurs to materialize their dreams refinancing their homes, plus the power of the delusional optimism of mainstream positive thinking, multiply all of that many many times by all the associated problems of a deflating credit bubble, and we have the formula for a deep recession.

My anxiety is this: if you take add all the consumption because of people were remodeling their homes plus all the economic activity because new small businesses were popping up here and there, and take out all of that from the economy, what’s the impact? what’s the domino effect?

Watch this:

Martin Family’s Success Intervention


This NY Times Op-Ed piece puts in words my current thinking:

The Power of Negative Thinking

Astute Observation by Goober Pyle
2008-09-25 08:54 AM

My boss (side job) is currently paying me from a HELOC. I guess I’d better start looking for a new place to moonlight.

Astute Observation by cepbigguy
2008-09-25 11:20 AM

I have firsthand knowledge of using your house to finance a business . Four years ago I started a small business with 20k cash & a 20k HELOC it was great for a couple of years but by June of 2007 business was so terrible that I closed shop after I had pumped another 30k into it in the last 9 months using credit cards. I could have taken more money against the house to continue but I prudently chose not to . I am still paying the HELOC and can still ( barely ) pay the mortgage . I would be homeless now if I had refinanced or taken a larger HELOC.

Astute Observation by Texas Triffid Ranch
2008-09-25 11:32 AM

Early Nineties in California, again?  That’s the worst indictment you could ever give me.  Back in 1991, I was working as a freelance writer for a magazine in LA, and the publisher started nagging me about moving out there so I could become part of the staff.  When I asked if he was offering me a job, he fumfuhed and said that no, he wasn’t hiring me for a paying position, but he could find someone with whom I could stay until I found a real job.  I then took the time to research both the job market and the real estate market in Southern California, and ran away screaming.

Astute Observation by Chris
2008-09-25 12:05 PM

Hey at least you had a job back then. I was still in UCLA and graduated in ‘92 with no freaking job (well, Macys did wanna hire me….at $10/hr. Geez, hmm…let me see, an engineering degree working at Macys…how lovely…NOT!)

I ended up working for less than $8/hour selling keyboards, hard drives, PC monitors, etc, back then.

A great degree from a prestigious university indeed.

Astute Observation by Major Schadenfreude
2008-09-25 12:59 PM

Hillarious Chris!  I graduated from UCLA with an engineering degree in 91.  I remember working for a temp agency doing filing jobs.

Man, talk about a jaded, sarcastic, angry young man…

Astute Observation by Major Schadenfreude
2008-09-25 01:01 PM

Oh, and let’s not forget about moving back home with the parents.  Oh boy!

Astute Observation by Chris
2008-09-25 02:38 PM

Yeah, it was known as Boulder(sp?) Hall (and lucky Samueli got his name tagged on the new engineering building for donating $$$ out of his frat house…er…I meant Broadcom). Yep, did all that moving back to parents place too, if I might add as well.

Yep, I was also jaded, sarcastic and angry. Got over it right after Netscape and the dotcom boom during the mid-90s while in Silly-con Valley (not that I participated in Netscape but I did try a few start-ups without success before my current company). The mid-90s was a great way to jack up an engineer’s salary, especially in Silly-con Valley.

The bomb right afterwards didn’t hurt me quite as much as ‘92 since I’ve learned to live well below my means because of ‘92. Fortunately, I still have the salary leftover from the dotcom boom grin

Astute Observation by Soapboxpolitico
2008-09-25 10:04 PM

NO KIDDING! Graduated in ‘90 with a degree in Architecture.
Best job I could get was $8/hr doing entry level renderings for a design firm. Angry, disillusioned, generally hating life ... Indeed!

Astute Observation by pixel
2008-09-27 12:07 PM

UCLA and prestigious? heh

Astute Observation by Dave
2008-09-27 01:29 PM

pixel:

The Ivy League by and largely sniffs at
dirtying it’s hands at engineering.

Too prosaic, too… middle class.

No money in engineering, no Nobel prizes,
no reason for “prestigious” universities
to waste precious campus real estate on
such practical pursuits.

On the other hand, in some engineering
fields (e.g., Civil), UCLA is very much
a top school.  It’s not Berkeley of
course (heh), but still a very, very
good school.

Astute Observation by Soapboxpolitico
2008-09-25 10:15 PM

Hi Kids! I’m back! 
It’s been a few weeks. I’ve been monitoring the site periodically but haven’t had the energy to comment.  I’ve been working VERY hard on my zen breathing techniques before I pop an aneurism or something from anger at all the recent headlines. These days I get so angry about these bailouts I don’t know whether to s*!t or go blind. But that’s a story for another day.

My next door neighbor owns part of an LLP that franchises a sports bar concept he perfected in the south and midwest. He’s now moved his operations to So.Cal. in an effort to expand into the west. Long story short, he’s had several franchise deals fall thru over the last few months because his prospects can’t get financed for the start-up fees. Most have 700+ FICO’s and anywhere between 20 and 30% of the franchise and they still cannot get a small biz loan. Many have even tried putting their houses into the deal and still they can’t get financed.  He tells me a year ago none of these prospects would’ve had a problem. Tight money market indeed!! 

We’re headed for a VERY bumpy ride and what angers me most is honest, hardworking, conscientious taxpayers like myself and my neighbor are going to be the one’s left holding this pile of crap.  I didn’t benefit from this run-up but boy, oh boy the White House is sure gonna demand I kick in to save this crap. Whoops ... their goes the blood pressure again!  :-(

Astute Observation by AZDavidPhx
2008-09-25 06:02 AM

The problem is that most of these people are not going see themselves as “failures” - they are going to think of themselves as “victims” who were “taken for a ride” by the evil executives.  Moral dilemma solved, suddenly they can sleep at night again.

Astute Observation by IrvineRenter
2008-09-25 06:23 AM

Yes, you are probably right. I was giving too much credit for people taking personal responsibility.

Astute Observation by AZDavidPhx
2008-09-25 08:10 AM

I do agree with you though that they are going to experience a lot of nostalgia for the “good ole days” when they were able to live the good life without having to earn the money the hard way.

Their false sense of security will be gone and life will be a lot more stressful than before.

I just don’t see the “accepting responsibility” part of it ever happening.  Plus, we all know that the politicians will coddle the average Joe and hand them the “greedy corporate” sacrificial scapegoat with the attached promise to fix the problem and “make all of their wildest dreams come true” to capture votes.

Same old song and dance which leads me to digress here - 

It is never going to be truly fixed until enough people get tired of the 2-party Diet Coke vs. Diet Pepsi Mickey Mouse Democracy system in this country.  The way that it works right now is keep out “true reformers” and all the current players have a key interest in keeping it that way.  What is needed is a voting system where people can vote for as many candidates as they want rather than the crock “1 vote use it or lose it” game.  For example, if Ron Paul comes in to run against McCain and Obama - let Americans rank each candidate on a 1 to 3.  The candidate with the highest rank at the end takes the presidency.  The third party comes into the game and does not split the vote of either side.  It’s a level playing field for all.  This would allow true reformers to participate and voters would not feel like their vote is wasted unless they vote for Diet Coke or Diet Pepsi.  That, to me, seems much more Democratic.  What we have right now is a big “illusion”.  Think about it if you bother to vote in this upcoming election.

Astute Observation by Agent#777
2008-09-25 10:39 AM

I will David - but I do plan to “throw my vote away” on Dr Paul.

Astute Observation by 26w100k+
2008-09-25 02:22 PM

“It is never going to be truly fixed until enough people get tired of the 2-party Diet Coke vs. Diet Pepsi Mickey Mouse Democracy system in this country.”

That is an awesome quote.  Sadly, so true…

Astute Observation by Woodbury Renter
2008-09-25 06:39 AM

I can’t even turn on the TV.  If I see one more pathetic pontificating politician or CNN talking head say that the plan must help those facing foreclosure I will throw up.  Doesn’t anyone in major media have the integrity to report on the details of these “hundreds of thousands” of good Americans who are facing foreclosure?  How about anyone who lied on their application be barred from the program.

The only solution that will work is to execute the foreclosures and allow these ridiculously overinfated asset prices to return to fundamentals.  I don’t care how much short term pain we will endure.  It is better than a long, slow strangling financed by the diligent.

Astute Observation by AZDavidPhx
2008-09-25 08:33 AM

The over-leveraged homeowners are dead ducks.  The politicians talk a good talk, but they are not stupid.  They know that the people getting foreclosed on are mostly victims of their own greed/stupidity.  They understand that people are “for the most part” stupid and ignorant and they understand that mortgage hustlers profited off of the average ignoramus. 

Sure, there are some cronies scratching each others backs, but for the most part - The politicians care about their own careers.  None of them want to be on duty when the economy freezes up and we enter a depression.  It will be the end of their livelihood and “feeling important”.  Therefore, just use the tax payer money to keep the markets propped up a little longer and “hope” that the problem will magically fix itself.  They know that people have short memories and that most cannot even contemplate what 700 billion dollars is.  They will forget about the bailout a lot quicker than they will forget about “who ruined the country”.

The strategy is to push the problem off for another day, or to put it into the language of the average Joe “toss the hot potato to someone else”.
 
Let someone else lose their career over it.

Astute Observation by phil
2008-09-25 12:00 PM

I’ve given a lot of thought to this and my conclusion is that renters and first time home buyers are not the voting block politicians care about.  Do they care about the 9-15% who got in over their heads?  I say not so much, but I do believe they care a lot about the 70% of the public who are home owners.  And in their opinion, propping up home prices is something the average homeowner probably wouldn’t mind since it means more money for them (assuming it worked).  And heck, if it doesn’t work, they get points for trying!

So when you see the politicians up there saying “we have to stabilize home prices” (aka prop up home prices), they are not talking to you and I, they are addressing all the home owners out there.

Astute Observation by Kelja
2008-09-25 07:28 AM

What a dump - and only 450K something! Don’t worry, congress, the prez, the candidates, treasury and the Fed are riding to the rescue and going to spend 700Billion to save us all.

That’s the ticket: more debt for the indebted!

Call me pissed!

Astute Observation by Jimmy Dean
2008-09-25 07:42 AM

Am I missing something?

If someone steals $60 from Target, they’re probably going to get at least charged.

But people are ripping off banks and the US taxpayers for hundreds of thousands at a time, and they are walking away.

Steal a dollar, you’re a thief.  Steal a couple hundred thousand, you’re a homeowner living the American dream.

I guess I’m missing something.  Why don’t the banks get some contingency lawyers to sue these HELOC abusers on a contingency basis? Like 30% of whatever they recover.  Maybe most of these people has no money left to recover.

Astute Observation by RestHorse
2008-09-25 07:46 AM

Speaking of that, why aren’t they bringing charges like this against people that made up income statements to get mortgages? I’ve heard of mortgage brokers who were making up numerous income statements in the normal course of their business.

http://www.ocregister.com/articles/brannan-felony-orange-2169321-nissan-vehicles

Astute Observation by SnowKat
2008-09-25 08:29 AM

I heard from many brokers that they often did not even require people to bring any kind of identification, income statements, etc.  Especially if the people were ‘friends’ of theirs.

Astute Observation by George8
2008-09-25 08:40 AM

Because there are so many of them. It is the same mentality derived from “too big to fail”.

The real culprits are actually the elite group of national political and business leaders.

History repeats itself - the fall of Roman Empire all over.

This time, it is the fall of American Empire. It is unfolding in our very own eyes.

Astute Observation by Schadendude
2008-09-25 08:32 AM

“Kill a few people, and you’re a murderer. Kill a few million, and you’re a conquerer… go figure.”

-John Lithgow in Cliffhanger

Capitalism is much like evolution.  ‘Creative destruction’ are the predators, necessary to cull the herd and ensure the health of the prey species’ gene pool.  When you remove the predators from an ecosystem and prey species are allowed to populate unchecked, they will eventually consume all the natural resources around them and starve, grow sick and die. 
Evolution doesn’t work without survival of the fittest.  Neither does capitalism. 

Anyone happen to hear Barack talking about his plans for the ‘World education fund and the World health fund’ ??

Welcome to the NWO comrades.

Astute Observation by SnowKat
2008-09-25 08:33 AM

“Steal a dollar, you’re a thief.  Steal a couple hundred thousand, you’re a homeowner living the American dream.”

LOL!  That’s a good one Jimmy Dean !
  LOL

Astute Observation by Alan
2008-09-25 09:40 AM

Close: “... steal a couple of hundred million and you’re a financial innovator living the American dream”.

The home pwners of today’s post were trying to get some of what was dangling before their eyes, but way out of their actual financial reach.

Astute Observation by Walter
2008-09-25 08:54 AM

“Am I missing something?”

I would say the situation is closer to you go into Target, a friendly Target associate fills your pocket or purse with all kinds of nice things, walks you to the door and says “Have a nice day!”

Is this stealing? Hell if I know. I was in the mortgage industry (in IT). These people had the money handed to them by the people collecting the commissions.

So who did the stealing?

Astute Observation by Laura Louzader
2008-09-25 01:04 PM

Steal a dollar and you’re a thief….. steal a few Billion dollars, and you’re a Master of the Universe living in a $45 Million house in the Hamptons and sailing on a 500’ yacht, for whom our politicians and policy chiefs will bend over.

Astute Observation by SnowKat
2008-09-25 08:26 AM

From the Portland Housing Blog today-
  Makes me want to vomit… 

Most of us have followed this debacle from the beginning. Here is what some of our clueless government ‘experts’ said a year ago.

Federal Reserve Board Chairman Ben Bernanke – June 2007

We will follow developments in the subprime market closely. However, fundamental factors including solid growth in incomes and relatively low mortgage rates should ultimately support the demand for housing. At this point the troubles in the subprime sector seem unlikely to spill over to the broader economy or the financial system.

U.S Treasury Secretary & former Goldman Sachs C.E.O. Henry Paulson – July 2007

I believe this is going to be largely contained; I don’t think this poses a serious risk to the overall economy because we have a diverse healthy economy. This is partly due to lax lending standards and excesses and they have a way of correcting themselves.

Still President George W. Bush – September 2007

I see the fundamentals of our nation’s economy are still strong. Inflation is down. Job markets are steady and strong. Corporate profits appear to be strong. Exports are up. There is no question that there is some unsettling times in the housing market and credits associated with the housing market. I’m optimistic about our economy.

http://www.portlandhousing.blogspot.com/

Astute Observation by AZDavidPhx
2008-09-25 08:40 AM

You honestly have to wonder - who is really running the country?  The people in charge appear to be extremely clueless, what is more likely “lying intellectually dishonest bums”.

Astute Observation by Jeff
2008-09-25 10:46 AM

David, I understand what you’re saying- but the last thing we need is someone “running” the country.  Nobody is supposed the run the country or run the economy, we’re supposed to be free.  Remember how we used to malign the former Soviet Union when its central planners tried to determine wages, prices, production levels, etc.? Yet most Americans think the president should “run” the economy, and that the Fed should in effect determine the cost of money.  Our current woes are not the result of “market failures” or greed, they are the direct result of government intervention in the economy to benefit certain constituencies.  Lying bums they are, that’s for sure.

Astute Observation by ventouxbob
2008-09-25 10:47 AM

The govt is run by the bankers and the fed.
-the military industrial complex
-the pedatory credit industry.
-Large monopoly corporations

Astute Observation by roqnrob
2008-09-25 02:31 PM

wink not necessarily in that order…the corporations rule the world

Astute Observation by Mike7
2008-09-25 05:20 PM

Yup, and thats why I’m trying to build mine.

Astute Observation by Walter
2008-09-25 09:00 AM

You don’t get into office or say in office by coming out and telling the truth. Bernanke and Paulson might be smart enough to know the risks that were on the horizon, but they need to “calm the masses” if they want to stay plugged in to the the power system.

Astute Observation by SnowKat
2008-09-25 09:10 AM

Walter-
That is exactly what makes me want to vomit…

Astute Observation by cepbigguy
2008-09-25 11:38 AM

Their lips were moving so you know they were lying, just as they are now. The bailout is theft in my opinion and the only reason to rush in is to get the money and run. The markets (housing & stock) need to correct & this bailout only delays correction till after the election when these guys will be gone.

Astute Observation by Mutha
2008-09-25 08:40 AM

Is anybody else’s head spinning over the news?  I guess I’m not really sure how this pending ‘crisis’ affects me personally.  A small-medium sized sum of cash saved in CD’s, renting in Irvine while we save up more cash.  401K’s for retirement, etc.

Will prices of everything go through the roof??

Will home prices really level or start to go up again??? (how!)

How about rentals?

Astute Observation by AZDavidPhx
2008-09-25 09:04 AM

It all depends on your local economy.  If every other homeowner is a real-estate agent, mortgage broker, house flipper, house builder, etc then it’s likely that the recession is going to lead to a significant numbers of layoffs and lost incomes which will trickle down to the furniture stores, home depots, Walmarts, Targets, etc, etc.

If you have enough job losses, all of a sudden, you have 10 ex-big-shot finance people desperate to find work.  All of a sudden, 1 of them will be willing to swallow their pride and work for less than the others who are “holding out for their market value”.  The result, a declining median income which will lead to further depression of the housing market and also downward pressure on rent prices as well.

We just moved into a new apartment 1 month ago that is twice the size of our old apartment, in a better area of Scottsdale, and we are paying exactly the same because of the competition of failed condos in the area and they were desperate to find renters to recoup some of their losses that they offered some nice specials.  We are paying under 900.00 a month.  I can’t complain.

Keep renting for awhile.  Look for good deals too.  Don’t let the landlord run your rent up at the end of your lease.

Astute Observation by Schadendude
2008-09-25 01:18 PM

Well, here’s how it’s likely to go down:

Short term deflation, long term hyperinflation.

We’ve already seen deflation in the housing market because there is no demand at today’s prices, and many buyers who would otherwise buy at today’s prices are waiting for tomorrow’s lower prices… classic deflationary spiral. 
This will happen in many other elastic markets as well (discretionary spending).

In the long run, I believe we will experience hyperinflation and interest rates will skyrocket, further constraining capital which of course will exasterbate our problems. 

The prognosis is not good Mutha.

Astute Observation by Sherry Wang
2008-09-25 09:04 AM

This is how we can fix with less than $700B but got the result fast.  Start with $100B, buy bad mortgage asset at deep discount, hire people on unemployment construction workersto fix them up (save on umemployment), put the house to sell and hire unemployeed Realtor (at deep discount) to sell them (save more on unemployment), while they are on market to sell (will take some time to sell) rent them to people on government support (in lieu of wellfare payment) and make trashing the place a federal crime (Tresspassing on federal property), sell to people who cannot afford a loan elsewhere, and allow applying the $7500 tax refund (wasn’t that already in effect) as down payment and make default on the loan a federal crime (you mess with Fed’s money, you are due in federal court).  And the profit goes back to the pot and replenish the $100B funds.  We don’t need $700B, the right solution could have fixed the problem much cheaper.

And government has no money for SS payment, right, how about giving that out in vouchers and let our senior citizens rent theses homes with their vouchers.  The government can’t afford to take bad assets without a way to manage them.  If any SS receiptants trash the places or does not pay rent, take it out from their future benefit.  We again save 2 problems in one.

Then, reduce capital gain for people who buys homes now and hold it for over 5 years.  That eliminate the flippers and encourage R/E investment.  And then allow same owner occupied rate on mortgages as for investors.  Investors are the only buyers with 20% down payment the banks felt comfortable lending $ to, but the current restrictions (Fannie Mae) disallow such purchase.  Then government can allow withdraw of 401K $ without penalty to buy homes.  Critics will say these actions hurt tax base, well, what tax base?  We have no tax base now, and the $700 B in talk is yours and mine money.  Do these things wont’ cost Fed money, but will inject some live to the current economy. (I have been saying these for months and sent these comments to about 50 out of 100 senators, but no one listened).  People in power, please do something.  I challenge anyone to pick problems on my suggestions.  Maybe they are not perfect, but these will work.  Or at least better than handing blank $700B check.

Astute Observation by AZDavidPhx
2008-09-25 09:13 AM

We could also eliminate the mortgage interest tax write-off that so many of our neighbors use to justify their home-ownership economics.  That will help bring some more coins into the coffers.

Astute Observation by SeattleDave
2008-09-25 09:45 AM

Perhaps eliminating the mortgage deduction is a little excessive.  However, some rational limits would definitely be called for.  You can eliminate the benefits for the rich, who shouldn’t need government help, and retain the benefits for those at the lower end of the income scale.  Some suggestions:

1)  Restrict the deduction to owner occupied housing only.  No more deductions for second (or third) homes, or deductions for yachts, Winnebagos, and other toys.

2)  Lower the maximum mortgage amount (currently $1Mil, I believe) to something like the median loan amount in the local market, similar to what they do with maximum loan amounts under Freddie/Fannie.

3)  Allow the first year write-off to be carried forward and used as part of the down payment.  The mortgage deduction does not help purchase a home, it only helps pay for it after you have purchased it.  A major impediment to purchase is the down payment, and this would allow the buyer to forgo the first years deduction (thousands of dollars) and use it to purchase the home.

I think these proposals are much more do-able, would retain the deduction for all but the high income groups, and would bring significant revenue into the treasury.  Most of the dollar amount of the deduction is taken by the upper income group.

Astute Observation by AZDavidPhx
2008-09-25 10:21 AM

I suppose my problem with the deduction in general is that it encourages people to overpay for their housing. 

It leads potential buyers to rationalize their over-borrowing by concluding that some of the extra expenditure will be sent back by the government at tax time.

If the deduction were not available then people would have to figure that into how much house they can afford and if the market has to lower house prices to satisfy that then so be it.

The mortgage interest deduction interferes with the market.  It adds hype to home-ownership and encourages the “greater fool” behavior.

It’s also highly unfair to renters whose tax money is used to subsidize the interest that other people are paying for their home loans.  Why is my tax money being used to help someone else pay for their house?  Is this not a redistribution of wealth?  Why is it in my best interest that everyone else has a mortgage on a house that I need to chip in and help out on?  I just don’t get it.

Astute Observation by SeattleDave
2008-09-25 11:03 AM

AZ…

I don’t necessarily disagree with you concerning the mortgage interest deduction.  But I did note that something along the lines that I proposed is “do-able”.  I can certainly see Congress restricting the deduction, especially if the restrictions are at the top of the income distribution, and that because of that, it raises large amounts of revenue.  I can almost guarantee that they will NOT eliminate the mortgage interest deduction entirely.

As a renter myself, I could not agree with you more concerning the logic of paying tax dollars that other people use to put a roof over their heads, but is not available to me.

Astute Observation by AZDavidPhx
2008-09-25 11:43 AM

I agree.  The mortgage interest deduction won’t be going anywhere (at least until after the election).

Astute Observation by eastcoaster
2008-09-25 12:03 PM

SeattleDave
Re your comment: “I can certainly see Congress restricting the deduction, especially if the restrictions are at the top of the income distribution”. These limitations are already in place for taxpayers whose adjusted gross income is over $156K (for 2007). Schedule A deductions and personal exemptions are reduced. Also many of the tax credits are reduced or eliminated.

Astute Observation by SeattleDave
2008-09-25 12:33 PM

Eastcoster…

I am unfamiliar with any restrictions on the mortgage interest deduction.  Are you refering to the effects of the alternative minimum tax of deductions in general?  If so, I would remind you that Congress has acted every year to minimize the effects of the AMT so as not to cause the restrictions you describe.

Astute Observation by eastcoaster
2008-09-25 01:53 PM

SeattleDave

Sorry, let me re-state. There is not specifically a restriction on mortgage interest. The limitation is on your Itemized Deductions on Schedule A. This is where the mortgage interest and property tax deduction appear. From the IRS website:
” 2008
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2008, this amount is increased to $159,950 ($79,975 if married filing separately). Beginning in 2008, the amount by which these itemized deductions are reduced is only of the amount of the reduction that otherwise would have applied.”

Astute Observation by eastcoaster
2008-09-25 02:01 PM

This has nothing to do with AMT

Astute Observation by SeattleDave
2008-09-25 04:49 PM

Eastcoaster…

The IRS statement you provided says you “may” lose part of your deduction above an income of $160K adjusted gross income.  “May” allows for a lot of wiggle room.  And $160K is a lot of money (relatively speaking), which puts you in the top 5% of the income distribution.

Restricting the deduction to owner occupied housing and using a more realistic mortgage loan limit (say $400K instead of $1Mil.) would scale back the deduction far more than the current system.  Most people don’t have vacation homes, so why are they subsidized?  Most people don’t have Million Dollar Mortgages, so why are they subsidized?

Another option would be to replace the deduction entirely with a tax credit.  This was actually proposed by the commission appointed by Bush after the 2004 election to look into reforming the tax code.

Astute Observation by eastcoaster
2008-09-25 05:19 PM

SeattleDave

In over 20 yrs I have yet to see a client wiggle out of the limitation if their income was above the set amount. In some parts of the country & in some industries, it’s not hard for a ‘dink’ couple with some investment income (interest/dividends) to supersede that amount.

I do agree with you on the second home comment. Owners should not be able to include deductions for vacation homes, motor homes, large boats, etc. Only first/ owner occupied homes should qualify.

Astute Observation by ventouxbob
2008-09-25 10:43 AM

That is a really compelling idea. is there away to send that up the pipe?

Astute Observation by David
2008-09-25 09:15 AM

The listed square feet area for this house is wrong.  It should be aout 1,400 sq. ft not 2,000 sq.ft.  Is it possible that the realtor purposely made the mistake.  Are there enough investors from out of areas that are interested in Irvine to buy properties based on sq.ft price without checking them?

Astute Observation by ockurt
2008-09-25 02:20 PM

I was wondering why the price seemed so reasonable for this one.  If it was actually 2,000 sq. ft. it wouldn’t be a bad deal, IMO.

I don’t know if the r/e agents do it on purpose or not…me thinks they’re just morons and put about as much effort into their profession as they do with everything else in life.

Astute Observation by Orcian
2008-09-25 09:27 AM

From last Thursday’s Irvine World News: “Since prices are so reasonable right now, I encourage my clients, friends, and family members to keep buying more real estate.  It is the Time to Buy!”  Fran Lugo, Remax Premier Realty. 

Remind me NEVER to buy a home from Remax, as I know this theme was spoken by their agents during the bubble, and now many who bought the lie now realize they were suckered, thanks to agents like Fran.  Not just Remax, but they’re the worst, I think.

A friend of mine bought a home using Remax back in 2002, and her Remax realtor suggested that she flip it to make a quick $25K (in other words, the agent wanted a quick commission). A quick buck without having to do much.  This mess all started with greed.

Astute Observation by Mutha
2008-09-25 09:40 AM

THIS is why I’m confuzzled and sick!  The irresponsibility and greed of a few are going to bring the economy of an entire nation to it’s knees??  Say it ain’t so.  Tell me that there are deeper reasons for this than a national epidemic of “SoCal’s cultural pathology”

blech.

Astute Observation by AZDavidPhx
2008-09-25 11:53 AM

The real-estate agents are hustlers for sure and anti-capitalists with their monopoly of the MLS.

Their modus operandi is on the way out.  When their monopoly is eventually stripped from them you will get some actual free-market competition going and kiss the ridiculous 6% commissions goodbye.

Astute Observation by ockurt
2008-09-25 02:10 PM

I think I mentioned this here a while back, but my wife and I looked at this condo handled by Fran Lugo.  She claimed to have “offers on the table” but months later, the condo still sits.

As someone once told me, “all realtors are slime, it just depends on what degree of slime they are”.

Astute Observation by anonymous
2008-09-25 09:40 AM

I was born in the first year of generation, so I am the oldest in that generation. I don’t know any of my friends who have bought houses. Maybe that’s b/c I live in CA but I think you are making some big assumptions saying Generation Y borrowed over its heads. Although that statement would be true if you are referring to student loans.

Astute Observation by IrvineRenter
2008-09-25 09:56 AM

Statistics show that Generation Y is deeply in debt. Many have big student loans, credit card bills, and many bought zero down houses during the bubble.

Astute Observation by Hormiguero
2008-09-25 01:22 PM

yes, and there has been almost no focus in the media about how this bailout is yet another ton of bricks dropped on the kids born in the 70s and 80s courtesy of the baby boomers.

just what we needed, another trillion or so in federal debt to go with the tens of trillions in medicare entitlements and the few trillion from our totally useless overseas experiments in spreading democracy.  all to make sure that houses don’t (god forbid) come into line with incomes and rental costs.  thanks, boomers.

Astute Observation by Soapboxpolitico
2008-09-25 10:48 PM

You hit it right on the head.  This is why I almost choke with rage when I hear the very term “baby boomer”.

Thanks a lot you greedy, selfish, self-centered, narcissistic bastards.  You sure got yours didn’t you?  Thank you bankrupting our system, corrupting our environment and mortgaging my and my children’s future. 

But hey, don’t take it personally when we GenXr’s get control and cut you out. That’s a promise, not a threat.

Astute Observation by NVS
2008-09-26 10:29 AM

Let’s see, the baby boomer generation is from 1946 through 1964.  That makes the oldest baby boomer 62.  You don’t think there are people older than this running (and have been running) the country?  Like your grandparents? By the way, those are the same adjectives we use to describe your generation. Oh, and add lack of spirituality and money driven, ruthless pigs.

Astute Observation by Make Love Not War
2008-09-26 12:01 PM

Okay, we were anti war (apparently you’re not), holistic, started environmental awareness—and oh, yeah, gave birth to you buttheads.

Is it too late for a retroactive abortion?

Astute Observation by Dano
2008-09-25 09:49 AM

I love the “artistic” photos of this unit. Maybe they can include something in B/W too. If there was an old wrinkled woman in a shawl staring at a modern appliance it would sell this unit for sure..

Dano

Astute Observation by Joe Bob
2008-09-25 10:19 AM

I think it’s in the interest of a lot of wealthy and influential people to lay as much of this crisis at the feet of the borrowers as possible. But really, it defies credulity. Con artists and well-intentioned but stupid borrowers brought the biggest mortgage lenders and investment houses in the country to their knees? No, the only way that happens is through systematic fraud and institutionalized unethical business practices.

I would highly recommend an article in the current issue of the Columbia Journalism Review: <a >Boiler Room</a>. For every story about someone taking more equity out of their house than they could repay in two lifetimes, there are several like this:

…[an]eighty-six-year-old Brooklyn man diagnosed with dementia decided it was a good idea to refinance his 5.95 percent, thirty-year, fixed-rate loan with an option ARM…
A sixty-four-year-old widow with payments of $300 a month on a thirty-year, fixed-rate loan is put in a 3/27 interest-only loan with a fixed rate for only the first three years of the loan.

Also from the CJR article: When Countrywide was sued by the IL and FL Attorneys General it was revealed that 60% of the borrowers they sold subprime hybrid ARMs didn’t qualify for the fully indexed rate, even though the rate would inevitably go up. So please, don’t lose sight of who the real crooks are here.

Astute Observation by ConsiderAgain
2008-09-25 10:30 AM

“They all have one thing in common: they are all part of Generation Pwned. “

Thanks IR, that one made me laugh.  smile

Astute Observation by Costanza
2008-09-25 10:48 AM

Dirty Harry: “A man’s got to know his limitations.”

Astute Observation by phil
2008-09-25 12:06 PM

Perhaps this has already been answered, but do we know what percentage of homes in Irvine use the Option ARM?  Or at least what percentage of Irvine loans made in 2004 and beyond were Option ARM?

I agree with the assessment made by many here that Irvine prices will drop in earnest starting in 2009 when the Option ARMs start blowing up.  But are there really enough of them to push prices down quickly?

Astute Observation by Mooser
2008-09-25 12:20 PM

And once again, same as it ever was, I never “got it” and didn’t participate in the pastimes of my generation. And once again, I will be, already am, a social pariah, the man who has nothing to say when my colleagues display the fantastic edifices of obligations they erected for themselves. “Who do you know” has been replaced by “who do you owe”. And when debt is your only food, you are what you owe.
And that makes me a big nothing.

Astute Observation by Just a Lurker
2008-09-25 12:34 PM

Let them crash and burn!

Use the $700,000,000,000.00 to lend to other businesses (as working capital).  Be an alternative lender to strong businesses to keep things going.

Any rescue plan for wall street will not cure the root cause: company making lots of bad loans. 

Having more money to make more bad loans is illogical.

Astute Observation by Mysticdog
2008-09-25 01:41 PM

Get off your high horses, people, a lot of these home owners were victimized. I got to see the pitch first hand.

We bought a house in 1996 on a VA program loan. Refinanced it to a lower interest rate in 1998. In 2004, a mortgage dealer called and said the VA was now allowing them to offer refinancing as low as 4.5%. Wow, sure I want to hear about it.

So a woman came by, full of wonderful numbers about the VA approved ARM. It was great! We could reduce our payments over 40%, or take a bunch of money out against our principle and still be paying 20% less. 3 years fixed. A maximum of 9.5% (which we were assured could never ever happen, look how low interest rates are!)

Well, I’m no accountant, but I am a scientist and program manager and know what to look for in numbers and systems. I saw a bunch of questionable issues, and started asking the questions. It quickly became apparent the broker was new to the system, but she had just refinanced with it herself and was very excited about all the money she was saving. She really thought she was passing on a great deal. But she couldn’t answer some of the questions I had about how the resets worked, and didn’t know the historical data of Primeinterest rates and how uncommonly low they were.

So she’d call her boss/trainer, and he’d straighten her out, and it was as bad as I feared. But she held out shaky hope until about the third time I had her call her boss about the timing and costs of resets. Then she literally went from a lovely hispanic tan to white. And shaking. I let her go at that point, becfause she really couldn’t concentrate anymore anyway, and I had all I needed to know, too.

Now, the VA ARM was a LOT kinder than a lot of the ARM terms I’ve since seen, and this was a woman who had been taken in herself. I’m a really smart guy and was able to get through it safely, with the help of an honest broker.

Imagine what all of those people with no financial, accounting or even logical thinking skills faced when put up against dishonest brokers just trying to score their commissions?

And why should they think the good thing they are seeing is too good to be true, when every day there are stories about people scoring big deals from real estate and living the good life in spite of not working nearly as hard as the middle class people these things were targeting? Why shouldn’t a person say “Finally! Me, Joe Lunchbox, gets in on the gravytrain everyone else seems to have been riding!”

Yeah, there were people gaming the system, but they were mostly rich assholes to start with. There will always be a few gaming the system, but they should not be considered the rule, much like how the number of actual “welfare queens” are amazingly few considering how much people bitched about them in the 80’s.

Astute Observation by Schadendude
2008-09-25 02:23 PM

“There’s a sucker born every minute…”

“If it sounds too good to be true, it probably is…”

“There’s no such thing as a free lunch…”


Should I go on ?  It doesn’t take a genius to understand these common cliches.  I will admit though, the bulls were getting close to wearing me down also, and I have a fair grip on how this stuff works.  In the end, the fundamentals will always win…  It’s well… fundamental.

Astute Observation by Sooo...now what?
2008-09-25 05:48 PM

I almost drank the kool aid.  Almost, but got freaked out by the numbers and ran away.  Thank goodness.  But, now what?  I was responsible and didn’t get in over my head…yet from the looks of things, I’m going to get screwed anyway.  I have been working hard, paying off my student loans - thinking if I work hard and save money I’ll be able to afford a nice house and raise a family.  Now, it looks like my money is going to be worthless with inflation (right?) and I have no idea how to protect myself.  I don’t even know where to begin to educate myself -there’s always a contradiction to any advice. 
My college education was a joke! “You can do anything with a liberal arts degree”...yeah…get lost in the shuffle of all the crap going down! Bottom line, I’m freaked out and have no idea what to do personally to prepare for the next 20 years. Lucky me.  My husband’s business isn’t going great and my other family members are all looking for work - professional jobs, too.  No housing related anything.
IR, I’ve started reading your blog and honestly, it scares me.  I want to stick my head in the ground and pretend none of this is happening.  AND I DIDN’T EVEN DRINK THE Kool Aid!!!

Astute Observation by Major Schadenfreude
2008-09-25 06:45 PM

Well, for starters you can contact your elected officials and voice your displeasure over the Great Bailout Bill which is being proposed.

A LOT of people are doing this and I believe it is making a difference.  Do it tonight.

Astute Observation by former_irvine_resident
2008-09-25 07:19 PM

Yes, Mish has been very active in this arena the past few days.  He is getting ready to launch a new campaign.  I’ve already sent over 3,000 faxes to Washington the past 3 days.  Many of my friends have done so as well (but not quite so many - I have a server farm and a beefy fax server at my disposal).

From what it sounds like, we are definitely getting their attention.  Jump in and join - the more we do the better our chances of avoiding the bailout or at least the bad parts of it.

Here’s Mish:

http://globaleconomicanalysis.blogspot.com/

Astute Observation by nefron
2008-09-25 07:50 PM

THANK YOU Schadenfreude.  That is exactly what we ALL need to do, which is what I said yesterday on the blog.  Do we really have to whine and worry and think that we have no control? We ELECT these bozos.  Yell your heads off.  I heard some sort of ‘expert’ interviewed last night who basically said, look, I’m an economist, and it could be we’re heading for big trouble, but it is not clear yet.  Paulsen and Bernanke are trying to scare the pants off of us, but it’s not clear that we need this enormous debt.  I’m glad the Republicans in the house (and i’m a democrat) have stood up to these used-car salesmen tactics of Bush and his buddies.

Okay, rant over.  Oh wait, not yet…

One more thing - MY pet issue.  We CAN help ourselves.  WE need to be responsible for ourselves.  Forget these brainless politicians.  You have to LEAD them, not FOLLOW them.  Let’s boost our economy ourselves and BUY AMERICAN when we need to buy something.  Forget consumerism for its own sake, but jeez, save your jobs, save your neighbor’s job, and buy American goods.  And put some money in the bank.  THAT’s how the post WW II generation made a great country for all of us to grow up in.  We CAN do something to help ourselves!  (...okay, I’ll go back to my seat now….)

Astute Observation by Dave
2008-09-25 08:53 PM

A man would be a fool to hire employees in a state like California.  As an employer you become responsible without having any authority.  The EDD even brags about how they extract garnishment from “deadbeat dads” from employers. 

I did start a C Corp in CA 2.5 years ago.  Part of why I dissolved it was an unwillingness to assume responsibility for a man’s child support payments.  The way I read it, if my employee doesn’t pay, me as his employer is liable.  With the divorce rate running at 50%, I decided to return to being a sole proprietor and dissolved the corporation.  Now I outsource to Eastern European subcontractors instead.  Much safer.  Their wives can’t sue me.

These kinds of laws make small business ventures unprofitable, and worse, uninteresting.

Astute Observation by IrvineRenter
2008-09-25 09:51 PM

“IR, I’ve started reading your blog and honestly, it scares me.  I want to stick my head in the ground and pretend none of this is happening.  AND I DIDN’T EVEN DRINK THE Kool Aid!!! “

I know how you feel. I was just telling someone today that there are times I wish I had never learned so much about this issue because it just causes me stress. There are times I long for the bliss of ignorance. Some people I know think I am bearish and pessimistic. I am not. I am realistic in a time of unprecedented bearishness and pessimism.

Astute Observation by alan
2008-09-25 07:26 PM

wow… 

JP Morgan in buying WaMu projects peak to bottom CA real estate to fall 48 - 58% depending on how severe the recession is.

That means that JP Morgan projects this property will fall to somewhere between $260 - 320K.

We are still in the 3rd inning.

Astute Observation by Dave
2008-09-25 08:46 PM

JPM could be optimistic. 

Just a year or two of ill-timed weather, like a bad drought well within natural variation, and house prices could go even lower in places where water is scarce.

Southern California forgets it’s really a desert pretending to be the south of France. 

Long term, oil is not the issue.  Water is the issue.  And Irvine ain’t got none.  Of either. 

I’ve said it here before, and I believe I will keep saying it: house prices are going to $140/sf in Irvine.  Maybe lower.

Astute Observation by Dave
2008-09-27 01:33 PM

I take it back.  I take it all back.

Congress is going to kick this party off again,
starting tomorrow afternoon at the latest!

Buy now before it’s too late!  You will be priced
out, permanently!

Astute Observation by ochomehunter
2008-09-25 10:00 PM

You better believe this game being played by the FED and Treassury. I
am sure everyone understands CDS (Credit default swaps) market which
is bigger than $150 trilion and is unregulated in private markets.
BSC was forced upon JPM because BSC was liable for $910 billion CDS
warrants out of which JPM insured/owned 15%, meaning instant wipeout
of JPM has BSC gone through BK.  Now to LEH, FED let it fail because
its CDS warrants were about $50 billion so no big deal.  now come to
AIG, this is the super volcano with CDS warrants in excess of $2
trillion, go figure who is holding the bag now, correct, Treassury bia
$85 billion loan. Now comes WM, I am sure JPM has CDS investments/
liabilities on WM and hence WM was forced to JPM.

This CDS market is a game of cat and mouse that is being placed by the
FED/Treassury, trying to hide the truth from people. This is why you
are hearing that cost to insure debts is rising astronimically on most
banks/brokers and this will leave them unprofitable, then downgrade
follows, then follows need to raise cash.  I am sure $700 billion when
released in the markets will evaporate like gas fumes.  Be aware, JPM
is sitting on the biggest pile of CDS monster as of now.

Astute Observation by smurf
2008-09-26 12:56 AM

IR, can you expand on the Fed and the Lehman bankruptcy story that you posted in the CR comments? We want to know!!!

Astute Observation by Headless Unicorn Guy
2008-09-29 11:57 AM

Here comes Santa Claus,
Here comes Santa Claus,
Right down Bailout Lane!
Fannie Mae and Freddy Mac
A-pullin’ on the reins!
Gummint gravy train pullin’ in,
All is Happy and Bright!
Dream of condos to flip flip flip
‘Cause Santa Claus Comes Tonight!

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