Losing My Religion
Losing My Religion -- REM
Wikipedia defines faith as "a belief in the trustworthiness of an idea that has not been proven." Religious faith is a collection of beliefs based on ideas which are neither testable or provable. If you accept the core beliefs of a religion on faith, you generally get a feeling of peace and well being that serves to reinforce the "correctness" of the acceptance of faith. Most religions build on these core beliefs and assemble a series of ancillary beliefs for guiding human behavior known as religious dogma. California has a major cultural "religion" that cuts across traditional denominational lines -- the religion of real estate.
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the "higher power" of market forces -- real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn't matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn't matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "Why Christianity Must Change or Die" in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California's religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California's Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.
Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.
Figuratively, today's featured property is a church (just like all other houses in California.) The fact that it is located on Church Street is testament to the faith the buyer had in its continuing appreciation. Based on the resale history, there was reason to believe prices would always go up. Our faithful owner borrowed 100% of the money necessary to worship here.
Asking Price: $649,900
Income Requirement: $162,475
Downpayment Needed: $129,980
Monthly Equity Burn: $5,415
Purchase Price: $815,000
Purchase Date: 1/30/2007
Address: 157 Church Place, Irvine, CA 92602
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,000 |
| $/Sq. Ft.: | $325 |
| Lot Size: | - |
| Property Type: | Single Family Residence |
| Style: | Other |
| Year Built: | 1998 |
| Stories: | 2 Levels |
| Area: | West Irvine |
| County: | Orange |
| MLS#: | P647342 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
It is interesting that 100% financing was still available in 2007. This is a reason the collapse was delayed until the credit crunch really took hold in August of 2007. The sales history shows a number of speculators making good money off this property. Now the bank gets to be the bagholder for the first big drop in value.
Sales History
| Dec 30, 1998 | $290,000 | |
| Dec 07, 2001 | $388,000 | |
| Jun 25, 2004 | $735,000 | |
| Jan 30, 2007 | $815,000 | |
| Jun 13, 2008 | $715,138 |
Each day when I estimate the loss to the lender (notice they are generally the ones losing money,) I base my calculation on the original loan amount. The actual loss to the lender is usually much higher because while the property was going through foreclosure and leading up to its eventual sale, the lender was not receiving any payments, and this loss of revenue was being added to the loan balance on the lender's books. When this lender foreclosed, they paid $715,138 at auction despite the fact that the first mortgage was originally $652,000 (the second was a total loss.) The additional $63,138 represents the outstanding loan balance on the first mortgage on the date of auction. Some of this might be negative amortization, but the majority will be missed payments and servicing fees. I will continue to calculate losses the way I have been in the past, but I want everyone to realize that the real losses may be considerably more.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $204,094 (plus the $63,138 in lost interest and fees.)
Californian's may never lose their religion when it comes to real estate, but I suspect in the future the lenders will be a bit more weary when it comes to providing the baptismal kool aid.
.
Oh, life is bigger
It's bigger than you
And you are not me
The lengths that I will go to
The distance in your eyes
Oh no, I've said too much
I set it up
(chorus)
That's me in the corner
That's me in the spotlight, I'm
Losing my religion
Trying to keep up with you
And I don't know if I can do it
Oh no, I've said too much
I haven't said enough
I thought that I heard you laughing
I thought that I heard you sing
I think I thought I saw you try
Every whisper
Of every waking hour I'm
Choosing my confessions
Trying to keep an eye on you
Like a hurt lost and blinded fool, fool
Oh no, I've said too much
I set it up
Consider this
Consider this
The hint of the century
Consider this
The slip that brought me
To my knees failed
What if all these fantasies
Come flailing around
Now I've said too much
I thought that I heard you laughing
I thought that I heard you sing
I think I thought I saw you try
But that was just a dream
That was just a dream
(repeat chorus)
But that was just a dream
Try, cry, why try?
That was just a dream
Just a dream, just a dream
Dream
Losing My Religion -- REM
Astute Observation by buster
I want to be that 2001 owner!!
If only I could’ve been approved for a loan that size back then - I too could’ve realized almost 100% appreciation in 2 1/2 years.
There may be some winners out there in all this. If that 2001 owner took the money and put it in ivestments and rented. He/she’d be sitting on quite a retirement fund now.
I surely didn’t drink any Kool-aid and can safely sit out this round of hand-wringing, but I’d sure like to have 350K in the bank too.
Once you start down the dark path, forever will it dominate your destiny, consume you it will.
—Yoda
I like the post today.
Specifically the point about equity being confused with house-price appreciation.
You hear this quite frequently in the media where the talking bimbo states “billions in equity have been lossed”. I suppose that the Real-Estate sponsors of the NEWS networks prefer that double-speak to the more appropriate Ponzi-speak “billions of dollars in monopoly money”
I would notice that the additional loss would be more, but I am not clear of we are on the same page of what that would be. I don’t understand how the bank would record a “loss of revenue”, although they would have reduced revenue inherit with a borrower no longer paying.
The actual loss I see would be any liabilities that accrue while the bank owns it (on taxes, it would include anything the borrower did not pay too - Mello Roos also?), and the cost of interest for the amount of capital reserve needed to back that loan. If we are talking 7% reserve and you have a 800k loan, then it would be like the interest on a 56k loan for you and me. Couple that with a 2.25% fed funds rate, and you have $105/month. The other losses kick in when the property is completely closed out.
Are these the losses that we agree upon?
Lenders are mostly functioning as intermediaries in today’s market who service loans. The CDO or other investor is the one who is actually recognizing a loss. They are expecting a steady income stream, and they will act as if they are receiving this income stream whether or not the cash actually arrives. Any time they get less cash than their “income” they will book the income as a receivable. This is the core of the problem with Option ARMs. Lenders and investors everywhere were booking phantom income in the same manner. They do not recognize a loss until the loan is closed out and the property disposed of in a foreclosure. Each month they fail to receive payment, they book more income and increase their receivables. When they finally unload the property, they take a very large loss. In theory, they are supposed to adjust the value of these receivables to account for the likelihood of getting the money. Given their forecasting abilities, I question the accuracy of such adjustments.
Thanks for the insight into the financial engineering and accounting of Option ARMs. Their place in the lexicon of financial products is now secure, like Junk Bond back in the 80s.
This is an accounting issue. If you are adding the missed payments to the loan balance, then the asset that you are holding (the loan) has increased in value. On the balance sheet, if your assets are increasing, then you need to have income to account for that. You have to account for the eventuality that the deferred interest will be repaid and that always implies an increase in assets on the balance sheet and therefore always requires an equivalent amount of income.
The problem of the Option ARM is that they were given to people whose primary source of income is a paycheck. They were meant for the self-employed or people with lots of investment income. Even then, the whole idea that you couldn’t “prove” your income is a bunch of BS. If your not reporting your true income to the IRS why should you be trusted to repay your loan.
Oops, not enough coffee yet. Mixed up option ARM with no-doc loan issues.
Sorry.
You’re not the only one mixing them up. How many option ARMs do you think were sold with full documentation? I’d guess less than 10%...
Why do you assume that self-employed people don’t report their income to the IRS? I am self-employed and have to do my taxes like everyone else.
The difficulty for people like me to get a loan is we have to show more paperwork than employees. What I find ironic about my situation is that in 2005 when I moved into my Irvine apartment, I had to show more documentation and proof of income than most home buyers! The rental company needed bank statements, tax returns, etc. Obviously the rental company wasn’t playing with funny money like the lenders.
“...in 2005 when I moved into my Irvine apartment, I had to show more documentation and proof of income than most home buyers!“
That is pretty funny and sadly true! Not to get too personal here, but did you have a prime FICO in 2005? I would think a prime score and tax returns would be sufficient.
It doesn’t surprise me, actually. In my experience, more than a few landlords have the slogan “your job is your credit!“ Heck, when I was young, despite having a good FICO, when I didn’t have proof of income having just moved to DC, I was required to get my parents to cosign the lease!
This Mr. Mortgage video talks about CINA and phantom income. It’s a good one. Here ya go:
http://www.youtube.com/watch?v=QjY8xVewrPg
When a property goes into default, who is on the hook for the property taxes and the association fees until the property is sold off?
I believe property taxes and HOA fees will get their claims at the next closing table.
It probable will not happen in Irvine, but in case if the property sits on the market for prolonged period of time, the property tax agency can force a so called “tax lien” sale to recover the taxes and penalties.
In Florida, HOA fees are simply a lien like anything else, as far as I know in my lack of a law degree. HOAs can foreclose on that lien, but if you are behind a 1st and a 2nd, what is the use? The lien would be wiped away in the foreclosure of the 1st or 2nd (or a 3rd, which I have only seen a couple times). I bought a house at the courthouse steps, but we did not pay for the past due HOA fees, just for the rest of the year.
Taxes have priority, and so tax lien sales could get mighty interesting in the next few years if the banks are not paying the taxes, and don’t start foreclosing in a more timely manner.
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Hear expert advice from guest speaker Rob Bernabe, former president of E*Trade Morgage, and 25-year industry veteran, on how to avoid a mortgage crisis, what to do if your in financial trouble, steps to take to get a mortgage, etc.
I find today’s post incredibly timely.
I am continually fascinated as many here continually see homes previously sold/listed at $1,000,000 to be bargains at $650,000 or $450,000. Why? A paramount rule of negotiating is to NOT let another party set an anchoring price. Many here fail to realize that the prior numbers are ultimately irrelevant.
IMHO, the amount to focus on is land fair market value plus materials and labor construction cost. That arguably is dead bottom (which I acknowledge that OC will probably never get too)
Everyone here assumes that the populace will be fully employed with available credit when prices fall. Yet, when the bottom occurs there will be a myriad in negative economic factors in play, most importanly, unemployment and job instability.
Further, as discussed in today’s IR entry, the “religion” or real estate as wealth building mindset will have vanished replaced with something else.
Right now in Chicago, investors are buying single family homes striclty for rentals to - guess - former homeowners. These investors are focusing on GRMs and cap rates, not prior values.
The similarities of this to the dot com bubble are frightening. The bottom is always substantially lower than the amount paid by the early bottom fishers - whose purchase is always driven by . . .. you guessed it .... prior trading price
Sorry to disappoint you, Steve, but the cost of land and construction is NOT the bottom ... it is irrelevant in certain overbuilt areas.
What is relevant is what a property rents for, or how it cash flows. I believe this site has correctly pointed out that when a property’s price is low enough that it can be bought and financed for less than rent, OR can be bought by an investor and rented profitably based on a decent return on the purchase price, THAT will be the bottom.
It is VERY possible to buy improved real estate for well under the cost of construction, EVEN factoring a ZERO land cost/value! (Probably not in Irvine, granted—but there are plenty of other neighborhoods in Ohio and Michigan where this is true.) I, humbly, have done this myself in FL and GA with larger commercial properties ... all by itself buying at less than construction cost with zero land value doesn’t count for much unless you’ve got a plan to ramp up cash flow….
Look at it this way—
It is VERY possible to buy improved real estate for well under the cost of construction,
Oh yea sure. I suppose next you are going to tell me that my car is worth less now than when I bought it. <HORSE LAUGHTER>
AZDavid, using your car analogy, what I am telling you is not only is your car worth almost nothing, it may be worth LESS than the retail value of the gas left in it’s tank….
Funny - a coworker of mine was offered as trade-in value for his 10 year old SUV less than the amount he’d just paid to fill the tank.
Smart. Throw the car away and resell the gas in it for a profit!
Today in Riverside county, land has no development value. Developers are buying finished lots from builders and banks for less than replacement cost. Basically, the lot is worth less than the cost to create it, therefor, land has no value at all. The people who are buying land today are doing it based on its option value. The land may be worth something again in the future, so they are buying today in hopes of making money 3 to 5 years from now.
Could always farm it again, like this…
http://www.ft.com/cms/s/0/38ea2364-5508-11dd-ae9c-000077b07658.html
It’s true. In other countries, property tax DECREASES based on the fact that the value of improvement to the land went DOWN, not UP.
This is the only country that I know (unless you can point me to other states besides CA that I’m aware of that actually decreases property tax y-o-y) that actually assesses property value upwards.
Totally freaking stupid if you were to tell me.
Totally stupid too for K-12 free education for all (including illegals)...that’s where most of the prop tax goes to, unfortunately.
Chris,
Not sure about your assessment statement but your last line is blatantly ignorant. The basis of a solid democracy is an educated population. People have to possess a minimal level of understanding to make informed decisions about how to govern themselves. We’ve determined that a highschool education is that level.
If you don’t want to pay for that through your taxes, then go find a nice monarchy, theorarchy or communist country in which to live. They’d be happy to have more ignorant people to rule. Our educational system is the most important investment in the future of a strong and free democracy that we can make.
FH
I agree..it’s *somewhat* ignorant. However, when someone has to fund education for those that jumped the borders along with their parents, that someone would probably mention that statement as well.
The keyword above is *probably*. Of course, to each his own (opinion).
BTW, by saying the phrase “blatantly ignorant”, you sir have just slapped yourself in the face silly.
I didn’t realize that Japan was a “nice monarchy, theorarchy, or communist country”.
http://en.wikipedia.org/wiki/Elementary_schools_in_Japan
Replace Japan with Taiwan as well buddy.
Very true. The commercial real estate company I work for (in Irvine) makes a point of buying properties that are valued significantly below replacement cost, and that will still be valued at below replacement cost at disposition. It’s part of our business plan. By doing so, you will never see an increase in direct competition to your property (a developer would have to charge significantly higher rents just to break even in new construction).
Let the current market speculators snap up as many properties as they can hold.
It’s their money that is being lost to soften the deflation of the bubble. Be glad that these patriots are out their sacrificing for the rest of us.
Their myopic mindset is betting that housing prices are going to re-inflate in another couple of years so they are willing to take a temporary loss in the short term.
What is ultimately going to happen is that by the 5th or 6th year, they are going to get tired of paying a mortgage whose monthly payment is higher than what they can rent it for.
By the time the 5th or 6th year rolls around and their pie in the sky fantasies have not come to fruition they will be looking to dump the property. At first they will try to price it higher than they paid, but eventually they will capitulate and find the market significantly lower.
They are going to end up losers (although they will never admit it). It’s inevitable.
I couldn’t agree more AZDavid.
We will be seeing foreclosures for a long time. This is why I’m worried prices will drop far below rental values.
I bought my condo in 2001..and now I’m trying to pay it off asap.
FINSUP and AZDavidPhx
I agree on both counts. FYI, I was reluctant to state in an open forum that OC property could actually sell for less than land and construction cost for rear of a blog beat down.
“Dead Calm” is what i feel now. Everywhere, EXCEPT for oil rich Texas (Its going crazy there now with oil lease bonus money flowing from speculation), there is such a morbid feeling in this country as we relinquish our superpower status day by day.
I live in the midwest. I was at a huge new Bass Pro fishing store in a large new commercial development this weekend and all the stores were empty but for sales clerks.
“...all the stores were empty but for sales clerks…“
The anecdotal stories about the local retail economy here in Irvine area are the opposite. You will wait at least an hour at any large restaurant at the Fri/Sat dinner time.
Walk The District, Marketplace, Spectrum, or South Coast Plaza on the weekends and there is no lack of consumers.
Au contraire! I know someone who works at Fashion Island and they say it’s dead. One store is having an 85% off sale and still no sales. There may be lots of people, but are they buying or just browsing?
Maybe it’s just the summer doldrums. We’ll have to see what the coming holiday shopping season brings.
“Walk The District, Marketplace, Spectrum, or South Coast Plaza on the weekends and there is no lack of consumers”
And why do you think that is…
My theory, because there’s nothing else to do in SoCal but shop. That’s the sport and rec around here. Most other places in the country, on a summer weekend, families are out at the lake, going camping, fishing, hiking whatever. Here, unless you want to fight the beach traffic to commune with all of Santa Ana, there are no outdoor activites. You can drive 4 hours each way to go somewhere, but that ruins the whole weekend, not counting the $200 in gas you will spend to get there. Shopping, movies, nails, and people magazine are the low cost entertaiment chioces for OC residents.
Westparker—- that has got to be a fake handle and you live somewhere else, or if you do live here you are some sort of 800 lb shut-in.
Have you ever walked around your own neighborhood? Do you see the B-Ball games at EVERY park? Swim meets? Softball, Tennis, and Soccer at Bill Barber? Or how about just the picnics at every park? Have you ever tried to have a party at a park? You have to arrive at like 8am to secure yourself a table. Or maybe you don’t have any friends?
Have you ever read the Irvine World News or that Community Activity book delivered to your house every 3 months? My gawd, dude—- there is everything from free concerts in the parks (by no less than the Pacific Symphony) to movie nights at the community POOL. Hiking? Dude, there are hiking outings (and camping) for every walk of life at Boomer Canyon. Fishing? Have you noticed that rather large body of water +/- 8 miles from Westpark? And that is just the FREE or CHEAP stuff. I won’t even get started on the Amusement Parks within 30 minutes, because that costs $$.
Hate all you want on the price of homes, but please, brother—- come up with something better than there is nothing to do but shop. Geez, I can’t believe I just wasted 5 minutes of my life responding to such an idiotic statement as “there is nothing to do in SoCal”. I should know better, and just leave this Irvine Housing Blog to the vistors from elsewhere…It seems that’s the vast majority of the posters anyway….
I learned from a friend of mine who had an almost 2 hour commute for his job that the best way to handle all the traffic on the 5 & 405 was to light up a fatty. He said it made traffic time bearable and he partook daily. I think he was pretty lit at work.
So that’s two more things to do in SoCal: sit in traffic and smoke the ganj.
Actually, I saw the fields & parks, but they were empty during the day. Didn’t figure it out until I finally woke up early on a weekend morning and went for a bike ride - finally figured it out, that stuff all gets used in the morning and late in the evening when it’s cooler out…
I disagree with the hour wait assertion for the Irvine area.
I was at The District last Saturday and we walked into Bluewater Grill and got a prime table at about 6:30 p.m. with no waiting whatsoever.
The restaurant was not empty, but there was no wait to be seated.
Likewise at the Z Tejas at South Coast Plaza the week before.
My Husband works for a large Toyota dealership. He is the parts manager and he said it has been dead. On Friday he counted a total of 5 customers during a 10 hour shift. FIVE people, that’s it. Service is still humming along. I guess people are maintaining their cars instead of buying new ones but they are not doing all the upgrades like during the boom years.
“...I was at The District last Saturday and we walked into Bluewater Grill and got a prime table at about 6:30 p.m. with no waiting whatsoever…“
Hmm, both those spots are on our “regular dinner list” (Bluewater has Longboard Lager on tap!). I’m not surprised you didn’t wait at Z Tejas, but Bluewater is surprising. Try Lucille’s in The District this weekend and report back…
mmmmmmm Lucilles…..
It is also not the same in South County either. I was at the Aliso center a couple weeks ago for dinner on a Saturday night at 6:30 pm. We were seated immediately at Macaroni Grill. No way this ever happens a year or two ago.
I always thought those stores were a very bad business concept!