Salton ** Update 1 **

Big price reduction to start the new year. The price dropped from $560,000 to $495,000. Prices are plunging…

Christmas time is here again
Christmas time is here again
Christmas time is here again
Christmas time is here again

Ain’t been round since you know when
Christmas time is here again
O-U-T spells “out”

Christmas Time is Here Again — The Beatles

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24 Salton Garage

24 Salton Front 24 Salton Kitchen

New Asking Price: $495,000

Old Asking Price: $560,000IrvineRenter

Income Requirement: $140,000

Downpayment Needed: $112,000

Purchase Price: $605,000

Purchase Date: 4/27/2006

Address: 24 Salton #63, Irvine, CA 92602

First Mortgage $484,000
Second Mortgage $121,000
Downpayment $0Rollback

Beds: 2
Baths: 2
Sq. Ft.: 1,400
$/Sq. Ft.: $400
Lot Size: –
Type: Condominium
Style: Mediterranean
Year Built: 2002
Stories: Two Levels
Area: Northpark
County: Orange
MLS#: U7004832
Status: Active
On Redfin: 22 days

From Redfin, “Upgraded home with new marble flooring and travertine bathrooms is turnkey. Beatiful balcony. Top rated school district. Great school district.”

We have another nominee for the worst picture on the MLS…

When you read the word “turnkey,” do you read “turkey?” I do.

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Today’s property is a typical profile of an FB. She bought right at the peak with 100% financing. We can speculate why — real estate always goes up, etc., but the main reason is because she could. Some lender provided 100% financing and allowed her to obtain the property, so she bought it. Now she is at least 10% underwater, and more likely 20% by the time a knife-catcher is found. If she gets her asking price, the lender stands to lose $78,600.

Yesterday, we had a great discussion on the morality of short sales. I believe we set the record for the most comments on a blog post. There was a wide variety of opinions, and no consensus was reached. Regardless of what anyone thinks about the morality of short sales, we are likely to see a great many of them over the next several years. Each short sale will represent one less potential buyer in the marketplace due to ruined credit, and one more loss for a lender which will serve to tighten credit even further. Both factors will push prices even lower which will in turn create more short sales and foreclosures: a classic downward spiral.

Our real estate finance market is broken. It is so full of fraud, corruption, and unstable loan products, they only way forward is to blow up the system and let the chaos clear out the garbage. I have said it many times on this blog — 20% down, 28% DTI and 30-year conventional mortgages will be the norm. It is the only mortgage product known to produce stable housing markets where people do not default in large numbers. All the innovation and experimentation in the mortgage industry has proven a dismal failure. The problems we are seeing in the markets were self created. There was no outside event, no “unexpected” downturn in the economy, no surprise for anyone who cared to look and see the signs. The credit crunch is not like a random asteroid strike, it is the entirely foreseeable outcome of the activities of the industry itself. Just like the Great Housing Bubble is a direct result of the fallacious beliefs fostered by the real estate industrial complex and acted upon by the masses, the mortgage fiasco is the direct result of the foolish actions and unstable loan products peddled by the lending industry. They are about to reap what they sow, and the harvest will have more chaff than wheat.

121 thoughts on “Salton ** Update 1 **

  1. Gray

    “Beatiful balcony”
    I can understand the sellers are frustrated, but regularly beating the balcony isn’t a smart way to vent the anger…
    Or is the agent referring to a balcony customized with a soundsystem, stocked with Beatles classics?
    😀
    —–

  2. covered

    That was a great discussion yesterday. I was amazed at the civility of it for a blog thread. I got in too late to throw in my .02, but I would answer the question with a few questions. Did the borrower knowingly lie on their application (as in ‘Liar Loan’?) If they did, they may not be quite as “off the hook” as they think they are. Does the FB “fudge” on their income tax return and still think it’s ok? As the noted legal scholar William Prosser once said, “Even a dog knows the difference between being tripped over and intentionally kicked.”

    “Our real estate finance market is broken. It is so full of fraud, corruption, and unstable loan products, they only way forward is to blow up the system and let the chaos clear out the garbage.” _IR

    Solidly hitting the nail on the head. Wall Street and the Feds along with their media enablers are still in full denial about this. As late as this Tuesday, some moron from Forbes magazine was on cnbc stridently telling the always excellent Herb Greenberg his home in Rancho Santa Fe (N. San Diego, high-end) had not lost any value in the past year. Needless to say, Greenberg made toast of the guy but the point is that main streamers still adamantly will not admit we have a credit seizure going on in our banking system that isn’t going away. A very smart bond trader told me yesterday that the next inevitable meltdown will be the credit card companies. His radar is locked on the Mr. Big of that sector, American Express. You know, the ones who came up with the brilliant idea of letting people pay their mortgages on plastic this year.

    As for this current listing…think the agent likes the schools?

  3. Gray

    Uh, this is a nice 1700 sqft bungalow built in the 70s, but it sure doesn’t look like a millionaire’s residence. It doesn’t come with a pool, a Sauna, a tennis court or at least a gym. And the lot sure isn’t too small, but is certainly doesn’t have a million-dollar-view. Actually, it looks like it doesn’t have any view at all. All in all, this is just a typical middle class home. Why tf should anybody believe that it’s worth a cool million? How much Kool Aid do you have to drink to get into such a state of wishful thinking?
    Those flippers really deserve the loss they will have to take. There should be a law against such stupidity…

  4. Carl

    I’m with you Gray… I sold a 2000 sq foot upgraded home in the same neighborhood last fall for less money than they are asking… and I made a killing.

    Don’t you love the subtle photographs? The sports car in the garage, the photos of the adjacent park that make it look like the place has a big year…

    You saw the lot isn’t small… sure you can get smaller, but the photos of the park make it look like the lot is HUGE.

  5. shhhhh

    “… 20% down, 28% DTI and 30-year conventional mortgages will be the norm.”

    This is going to be a shock to Generation Y, aka the entitlement gang.

    I predict Berkeley protests in the near future when this does become the norm because, as you know, they are entitled to buy a house without working for it, even without rich parents.

  6. shhhhh

    Is the agent referring to that wrought iron thing on the side of the house? Can’t be.

    If it’s so ‘beatiful,’ why isn’t it featured in a photo? Oh, wait. Showing boxes in the garage is more of an eye-catcher.

  7. Mark

    I would not bet that in the future you will see the 20% down, and 28% DTI.

    I think that it is important to remember that the top people at many brokerages made MOUNTAINS of money. Even if their companies go under they still made out like bandits.

    Those type of people will find a way to capitalize on greed in the future.

    Once they money starts to flow, Fear of Loss will get everyone else on board.

  8. cadaigo

    IHB

    You may want to watch Shady Canyon. Word is there are a lot of short sales being negotiated right now. 50 Vernal Springs finally went into escrow after a mil $ drop in price. I am very curious to see what they got for it. If anyone finds out please pass it on.
    Sorry, I know this was off subject.

  9. AZDavidPhx

    What are you talking about –

    They put in granite counter tops and a stainless steal fridge and microwave.

    And some cabinets in the garage (CUSTOM!)!

    That’s totally worth an extra 150K.

  10. slacker kate

    i think that’s technically a balconet, since there’s no structure cantilevered out that you can stand on

  11. AZDavidPhx

    One thing that I have consistently noticed in almost all of these houses for sale is the token flat screen / plasma screen / whatever non-CRT television the local Best Buy happened to be vomiting out that week. It’s about as cliche as the “granite” counters and stainless steel microwaves. It’s as though the first thing all these new home owners do is run up the street to Best Buy to score a “fancy” TV to go with their new house.

    Every time I look at one of these listings I feel like I am the only one in the world who still owns a regular CRT TV. I could afford one of these new TVs but the standard definition looks so terrible on them that I can’t make myself do it.

    I’m assuming that a lot of these get bought on more credit too.

  12. Mr Vincent

    “I have said it many times on this blog — 20% down, 28% DTI and 30-year conventional mortgages will be the norm. It is the only mortgage product known to produce stable housing markets where people do not default in large numbers. All the innovation and experimentation in the mortgage industry has proven a dismal failure.”

    Thank you! I have been trying to pound the table on 15 and 30 yr fixed rate mortgages on the blogs for two years now. There were many younger people who support the housing bubble theory, but who think that certain ARM loans are ok.

    Hogwash! I bought my first house when I was 18 and every house I bought after that was purchased using a 30 yr fixed rate mortgage. My first house became a rental for 10 yrs and was sold in 2004.

    Anyone who buys and plans to just keep the place for a few years should NOT be buying.

    Dont let the mortgage brokers and/or real estate agents post their fuzzy math crap on these blogs about what type of financing you should use. Stick with the classic 15 or 30 yr fixed rate. Take it from someone who started in real estate in 1978.

  13. AZDavidPhx

    Yes, the agent is really into the school district. I think his house description macro got stuck and generated an extra permuation. Did a double click instead of a single click (I hate when that happens!)

  14. AZDavidPhx

    How about the love-seat with the back facing the TV. Hope you have eyes in the back of your head if you want to see whats on.

  15. arms and legs

    Arms are ok. When interest rates climb above 15% to match the inflation we will see, then it will be ok to take out an arm. Why anyone would take out an arm when interest rates were at an historical low is beyond me.

    It is also beyond my comprehension why so many banks were willing to lend a half million dollars with no money down. Were so many supposedly smart people really that stupid?

  16. AZDavidPhx

    Photo of a sports car that was most likely bought with the help of “cash out” refinance before the big pop.

  17. doug r

    Most of those middle of the line “HDTV”s are only 1366 x 768 anyway-half as many pixels as true HD at 1920 x 1080. So you get to be an early adopter, paying thousands of dollars for a lousy interlaced picture.
    I saw a 1080p unit at Costco a couple of days ago marked down to $999. 🙂
    A nice cheap TV in my nice cheap place-sometime around 2012 I figure…

  18. ipoplaya

    They are going to have a hard time at that price, especially with two others of the same model on the market and not selling at lower prices:

    http://www.redfin.com/stingray/do/printable-listing?listing-id=883566

    http://www.redfin.com/stingray/do/printable-listing?listing-id=1179562

    The cheapest one, @ $525K, actually looks like the nicest of the properties.

    IR – The lame-o realtor was simply trying to show that the garage floor had been coated. Not sure why she was using a camera phone to do the pics though…

  19. Mr Vincent

    “Arms are ok”

    I really should just give up.

    I mean really, why should I care so much about other peoples finances?

    Maybe its because I retired at 45 with enough money to last several lifetimes and I am just trying to give something back.

    Oh well.

  20. No_Such_Reality

    In the rest of the country, that’s a starter home.

    Here it isn’t. A starter home is a condo or townhome. That’s not really a move up home, it is only a 3/2 and small.

    It must be a move down home. You know, the 4 or 5 bedroom mcmansion mom & dad sell and move to after all the kids are out of college.

    Love the big yard, that is rare for Irvine.

    At $300/sf that puts it at $500K. Less and it is lower, but $500 sounds good as it’ll put it right at the top of the conforming loan limit when someone bellies up $100K to put down.

  21. Law_Student

    ARMs worked for me, but they don’t work for everyone.
    Bought my first home in 1999 with 100% financing on an ARM.
    Refinanced into a 30 year fixed 2 years later.

    Bought the second home in 2002 – ARM #2.
    Rented out the first one.
    Sold the first one in 2004 to a flipper and paid off most of the second home. Low % 30 year fixed loan on the new home.

    First flipper resold it for an extra $100k six months later to another flipper.
    The second greedy bastard got stuck with it.
    It has been up for sale for 2 1/2 years now.
    Now he would be lucky to sell it for what I sold it for in 2004, which was probably $50k under market at that time.
    If he took out an ARM to buy this property in 2004, he is screwed.

    I think I just got lucky with the timing (I don’t think I am particularly smart when it comes to finance), but it goes to show that an ARM can work. I could not have bought my first home without one.

  22. William Jones

    $600K for TWO BEDROOMS? Has the world gone mad? I have lived through a lot in my time…but if someone had told me that I would see the day when someone would pay $600K for a TWO BEDROOM dwelling I would have laughed.

  23. arm

    I never had an ARM but my father tried to talk me into it.

    But, he had a twist to it. You’d buy the house you could afford with a 30 year fix. Then you would get the best ARM you could (not focused on teaser rates but on the caps and limits on rate increases). Get the ARM loan with the lower monthly payments. But then, and this was the catch, you’d make monthly payments as if you had the fixed loan. I.e., take the difference between the fixed payments and the arm payments and use it to reduce your loan balance. He did it succesfully and paid off his home very quickly. Takes discipline.

    Did the math on a spreadsheet and it seemed like it could work – but then I chickened out. I bought in 2000 so I might have come out ahead if I would’ve followed the plan.

  24. Diana K

    “I could not have bought my first home without one.”

    & if you were just 6 years later, you’d be one of the millions who are going to go through FC before all this is over.

    If you can’t buy without an ARM, then you shouldn’t buy.

    Unless you want to count on being very, very, very lucky.

  25. AZDavidPhx

    In other words, it can work as long as you are not the one holding the bag at the end.

    Putting 500,000 dollars down on a hand of black jack “can” work too.

    🙂

  26. flyovercountry

    The first people in on a pyramid scheme make out ok on it too. But that doesn’t make it a sound investment.

    ARMs can make sense if you know what you are doing, and have the right circumstances. But that doesn’t include hoping that you can refi before it adjusts IMHO.

    If you have an ARM who’s reset schedule matches how long you expect to be in the house, and if you can afford the worst case rate adjustment, then yeah, that can make sense.

  27. Mark in Pa

    Why are you so astonished by the price increase? It has granite counters and stainless appliances. It also looks like a new bathroom vanity and sink. Looks like a steal and it’s under a million. Now if I can find a lender willing to give me a stated income, zero down teaser rate option ARM first mortgage with a 20% second I’d jump on it.

  28. girlbear

    “Do you read “turkey” when they say “turnkey”?

    Yes! I do too! Happy is the life of a dsylectic.

    Thanks for the laugh this morning, IR.

  29. Shannon

    I can’t think of any reason why a 2 bedroom anything is ever OK. Even if you don’t have kids, you would want a computer room and a guest room plus your own room. I would never buy a 2 bedroom unless it was a house with a large yard with room to add an additional room. Just doesn’t make any sense.

  30. AZDavidPhx

    When they stage these TV’s in these homes that were built in 1970’s it reminds me of how OLD the place is. Not sure if that is a good thing.

  31. Mr Vincent

    Law_student says:
    “I could not have bought my first home without one.”

    Diana K says:
    “& if you were just 6 years later, you’d be one of the millions who are going to go through FC before all this is over.

    If you can’t buy without an ARM, then you shouldn’t buy.

    Unless you want to count on being very, very, very lucky. ”

    Thank you Diana, you understand.

    There is hope left in the world.

  32. Mr Vincent

    AZDavidPhx says:

    “In other words, it can work (ARM Loans) as long as you are not the one holding the bag at the end.

    Putting 500,000 dollars down on a hand of black jack ‘can’ work too.”

    Bingo! Well said!

  33. flyovercountry

    RE: 20% down, 28% DTI, 30 year.

    One of the big advantages of the 20% down is that it takes a home buyer a while to accumulate that. You get serious about buying a house, start saving hard, and research what the heck this homebuying thing is all about. You have time to understand the difference between an ARM and a fixed rate mortage. You read up on pre-payment penalties. You see what mortgate rates are for different loan types and can crunch the numbers.

    If you rush out and get a 100% LTV loan, odds are you don’t have time to learn what you are doing. Some people who are way upside down on their mortgages probably spent more time researching their plasma TV and granite counter tops than they did understanding mortgages.

  34. ipoplaya

    Ever considered that you could have been even richer Mr. Vincent if you would have used ARMs strategically? Would love to see that calc…

    You sold a place in 2004 that had been a rental for 10 years right. During the time between 1994-2004 mortgage rates trended downward while property values trended up, making any refi a snap all other things being equal. If you’d have been in ARMs the whole time, you’d probably have been paying much less in interest each month and making more cashflow on your rental.

    For sure if you would have bought in 1994 with a 30-year in the 8% range, you were passing up on a lot of profit not using ARMs. Mortgage rates have trended down since the early 80’s as a matter of fact, from an average in the 12-15% range to historical lows over recent years. If you were in fixed mortgages paying a premium over ARMs that whole time, I submit that you are much less wealthy than you could have been. Now a refi during the last housing recession would have been problematic, but then again mortgage rates dropped 2-3 points over that period…

    Fixed mortgages don’t help you accumulate wealth, they mitigate risk. The same guy who bought/sold/rented at the same times as you might very well have come out much farther ahead.

  35. Mr Vincent

    ipoplaya

    Sorry for the confusion – My first house that I was referring to was actually bought in 1978. I used it as my primary res for more than 10 years before converting it to a rental. The interest rate on the 30 yr fixed rate mortgage was 9%.

    Guess what happened to interest rates after 1978 – they went up to what, about 16%. I would have been hammered and foreclosed on if I had gotten and ARM loan in 1978.

    But anyway, thats not really my main point in my inital post. Its really about fixing your costs and having peace of mind. If you fix your house payment, its one less thing to worry about. Meanwhile wages continue to go up over someones career and the house payment eventually becomes pocket change.

    And, lets say interest rates do come down dramatically. Well, then refinancing into another 30 yr fixed rate might make sense if the rates did drop enough.

    I dont know about others, but I certainly did not want to wake up every morning and worry about which direction interest rates were trending when it comes to my home.

    In Cali, you have an opportunity to fix a majority of your housing costs due to prop 13 and utilizing a fixed rate mortgage.

  36. Purplehaze

    IR,

    I think there is a lot of misinformation out in the market. I believe that a lot of knife catchers can be saved if there were to read this blog and IF they are the types who want to read and understand why this bubble happened and WHY the mess will not get fixed in 6 months’ time. Not everybody can be saved. Cutting to the chase, are there ways we can make this blog more popular so that people looking to buy in Irvine and Orange County can make better decisions?

    Regards,

    PH

  37. IrvineRenter

    “The lame-o realtor was simply trying to show that the garage floor had been coated.”

    I know, but it is the things they don’t intend to show and the overall impression the photograph makes that makes it so awful.

  38. IrvineRenter

    In my very first post, I mentioned I hoped to save as many people as I can from financial oblivion by telling it like it is. It is sad that everyone cannot be saved. You can only lead a horse to water. At this point, I think everyone who surfs the web and looks for houses in Irvine knows about us. We get almost 3000 visitors a day, so the information is widely known.

  39. tonye

    That’s a Plan 1.

    They are nuts.

    A nicely redone Plan 1, in an inside lot, should not fetch over 400 per sq foot.

    The problem with a home like this is that the lot is worth far more than the house. In the Broadmoor, people can put up second stories. Hence it’s idiotic to “fix up” a small home because the market for small homes is the “tear down” market.

    That is, buy the small 3b/2ba home and tear it down so that you can put up a 5b/4ba home. That’s the ticket.

    I think these people made a terrible mistake, both in their timing and in their choice of neighborhood. The only way to get top price around here is to sell a rebuilt home. Anything else is too small for the lot and is a candidate for tear downs.

    That said, this home has a nice location. But other than that it’s not worth over $600K in this market. Granite or not.

  40. Carl

    NSR,

    The yard is NOT big… the photos are off the community park that is adjacent… so in reality you have neighborhood teens drinking on Sat. night right by your window… hehe.

    I would buy this house today for $500k for a couple of reasons:

    Great neighborhood (as in really nice place to live)
    Short commute to Irvine Business Center / UCI
    Granite Countertops (okay that last one was a joke)

    Given I would buy it at $500k, I imagine it will be somewhat more than that when we hit bottom.

  41. tonye

    Carl, the Sierras historically charge a bit more. I think it’s the HOA. They don’t have to contend with Paul Jones.

  42. buster

    ARMs are the smart move. Get one with a Teaser rate if you can. Don’t worry, the Government will come in and convert it into a fixed for you, and you get to keep the teaser rate.

  43. buster

    Let the sheeple be sheeple. I like this blog. If people get smart and informed, they’ll stop trying to flip houses in the middle of a housing meltdown. Then where will I get my 9:30am entertainment whilst on coffee break?

  44. SawItComing

    “This is going to be a shock to Generation Y, aka the entitlement gang. ”

    Although I agree with your statement, I think the title of entitlement gang is even more fitting for the boomers. Let’s not forget the people who bought houses working only 40 hours with one income and didn’t bother to save for retirement. Heck 2/3rds of boomers will never pay off their mortgages. Yes the entitlement gang of today learned from the best…their parents. I don’t know about the rest of you but I am so sick and tired of hearing older people whine about how the government owes them a good retirement with paid medical. As an employer, every two weeks I am disgusted to see that our FICA/Medicare deposits are nearly equal to the federal withholdings. There is a world of hurt coming at us in the form of taxes to support the shortsighted.

  45. macndub

    I have said it many times on this blog — 20% down, 28% DTI and 30-year conventional mortgages will be the norm. It is the only mortgage product known to produce stable housing markets where people do not default in large numbers.

    IrvineRenter, I admire your posts very much, but this statement is just not true. 30 year fixed rates are unheard of in any country other than the United States, where the GSEs Fannie and Freddie can borrow at Treasury to accept these non-market loan products.

    In Canada, what you call an ARM is actually called a fixed rate mortgage. You can’t really lock in for more than 5 years (7 years at an obscene premium), and at the end of those 5 years, you’re back in the market. And no early payoff is possible. It’s okay, though, because, as you know from the shape of the yield curve, the long run rewards those who can accept pure variable pricing on their borrowing.

    What we call a variable rate mortgage doesn’t even exist in the U.S.: my rate can adjust every month, as does my payment. As a result, my mortage premium is reliably about 100 bps over the 3-month treasury, which can’t be beat.

    Canada’s housing market is stable, and is not in a bubble even now, although it is overbought because of one financial innovation that will hopefully die painfully: the 40-year amortization. Overall, though, the Canadian housing market is pretty midwestern as far as returns and volatility go.

    The important issue is suitability, not whether the rate is fixed or variable. Amortizing mortgages are important. 20% downpayment is important. Suitability is important. 30 year fixed rate: not so much. That 30 year rate lock in, and the early payoff option, are paid for by higher rates by all borrowers, and government guarantee costs for Fannie and Freddie.

  46. mmg

    that’s what happens when you have Drive throuhg mtg lending. as easy as buying a burger, maybe easier because you dont have to come up with cash :mrgreen:

  47. AZDavidPhx

    Why does it make sense for the average person to pay a low interest rate for a few years and then have the price adjust way high unless they are speculating the market? It makes no sense whatsoever. If they can’t afford the regular payment then what makes them think they will be able to afford an even bigger payment in a few years? (faultly/stupid logic?)

    These people know they cannot afford the payment when it resets, but they are speculating that the house will earn enough income for them to refinance back into an affordable payment later. Complete speculation.

    The way that you earn wealth in your house is buy PAYING IT OFF. You do the work, not the house.

    This concept is totally flipped. People think that all they need to do is “get in” (by hook or by crook) and wait for the houseprice fairy to wave the magic wand and then bail.

    A lot of people benefited from this scam, but now that party is over, I don’t think that all of these sellers losing their shirts would think that ARMs are worth the risk.

    To anyone on this blog who wants to encourage the use of ARMs, I suggest that you put your money where your mouth is and pony-up an ARM for a house in today’s market and check back in with us in 2010 to let us know how everything went.

  48. Terry

    I have a CRT and a flat screen. I can pick up the flat screen. For the CRT I have to get a guy to come do it. Flat screens are really nice for women living alone. Don’t assume it’s always about the “status symbold” of the flat screen.
    Terry

  49. AZDavidPhx

    OK, I know that I am not from CA and all, but this place is totally not worth 500K.

    Once you guys in California get out of detox from all these years of price inflation, you will realize that this home is not worth a penny more than 400K in a normal marker.

  50. AZDavidPhx

    Hi Terry –

    You’re right, I should have been more specific. What I had in mind were these big behemoth flat panels / widescreen tv’s that are staged into the photos so often in order to make the house look “high-tech”.

    Not so much the medium flat panel my dad has in his bedroom.

  51. IrvineRenter

    30-year fixed rate mortgages became the norm after WWII and provided for stable housing markets for over 50 years in the United States. Mortgage companies know this works. The GSEs came about to provide more liquidity in the loan market. The 30-year fixed had 25 years of history before GSEs came into existence.

    The main reason other loan types will be eliminated — at least for a while — is because all other loan types default in unacceptably large numbers. Lenders will retreat to what works in the aftermath of a disaster as large as this one.

  52. ipoplaya

    I’ll pony up AZ. I’m in an ARM now, at 3.75% thank you for the past four years (oh wowwy, I could have been paying 2 pts more for a 30-year fixed and my house would be worth exactly the same today but my stock portfolio would be worth much less), and will be in an ARM when I buy in 2008. Probably a 5/1 or maybe a 7/1 if I am feeling risk averse at the time…

    Why would I get an ARM you ask? Well, I think interest rates will be going down as recession hits and real estate tanks, so since I’ll be refinancing down anyway, might as well be paying less from the beginning. Additionally, my disposable income goes way up in two years and then again in four years as my out of pocket daycare costs go from approximately $2600 per month out of pocket down to $500-750 or so. With what I guess will be around $350K in equity I expect to have in my 2008 purchase, and more than enough income to qualify for any loan package on a $500K loan, I have zero fear about being able to refi at any time in the future.

    I’ll check back in 2010, which if things go the way I think they’ll go, I’ll probably then be considering whether to refi my ARM again or finally getting into a 30-year at sub 6%.

  53. macndub

    Why was this Freddie/Fannie liquidity needed in the late 60s/early 70s? Because the 30 year fixed rate, pre-payment option mortgage model was breaking because of changed economic circumstances, no? More to the point, how much interest rate volatility existed in the 25 years after WWII, and how many recessions did the U.S. suffer?

    International experience–not just Canada–indicates that 30 year fixed rates are not the norm, and are not required to prevent mortgage defaults. Or are you suggesting that Canadian mortgagees default at higher rates than the market risk premium can tolerate? Or that the experience of mature democracies around the world is irrelevant to the U.S. experience?

    Other loan types may well be eliminated in American in response to this disaster, but that’s a shame. If somebody is suitable for a variable rate and understands the risk, it’s unfortunate that they’d have to pay extra for a fixed-30-year rate that they don’t value.

  54. AZDavidPhx

    Sounds good.

    By 2010, your house will most likely be worth half what you think it is worth today.

    Stay away from HELOC!

  55. shhhhh

    Did this house get HELOC’d?

    This house was purchased so late in the game, the owner could be a member of that slimy gang that is taking advantage of the system … HELOC’ing,hiding the money and saying good-bye to their credit for 7 years.

    The housing version of Dine and Dash.

  56. Mr Vincent

    “By 2010, your house will most likely be worth half what you think it is worth today.”

    and, no-one knows where rates will be at that time. Even Alan Greenspan said something interesting resently. He said he thinks interest rates may very well be double digits.

    “Former Fed Chairman Alan Greenspan predicts in a new book out Monday that the Fed will have to raise interest rates to double-digit levels in coming years to thwart inflation. Greenspan, 81, says in The Age of Turbulence that the inflation-damping effect of globalization, which has led to lower wage pressures, inflation and interest rates worldwide, will recede. At some point, the flow of people into the workforce in developing countries such as China, which has seen a movement of workers from farms into factories, will slow, leading to stronger wage pressures and prices, he says. The impact will be global. And the shift “may be upon us sooner rather than later,” he says.”

    Again, if you have a fixed rate mortgage then you dont have to worry about things like this. Peace of mind.

    Dont let your mortgage float like a commodity. Save that for pork bellies.

  57. IrvineRenter

    “Because the 30 year fixed rate, pre-payment option mortgage model was breaking because of changed economic circumstances, no?”

    The primary reason was not problems with the 30-year fixed, it was due to liquidity. Each bank was only able to loan the capital it had available. With no way to sell their mortgages in a secondary market, once they had loaned all their money, they were done. This was preventing people from obtaining mortgages even when the loans were not risky.

    I do not know how other countries finance their mortgages or the impacts of such programs on the real estate markets of other countries. I do know that adjustable rate mortgages will not perform well during this downturn and will be subject to high default rates. We are already seeing this. The system may work in other countries, but it is demonstrably not working here.

    Adjustable rate mortgages are risky because the rate can adjust and make the payment unaffordable. There is a premium paid for fixed-rate mortgages to lock in the benefit of a fixed interest rate and stable payment.

    “If somebody is suitable for a variable rate and understands the risk, it’s unfortunate that they’d have to pay extra for a fixed-30-year rate that they don’t value.”

    This is the problem: very few truly understand the risk. I hope for the sake of all ARM holders that interest rates do not spike to 12% or higher due to the higher risk premiums and higher inflation rates we will be seeing in the future. If interest rates rise over the next several years (which I think is likely) everyone will get an education on the risks of ARMS.

  58. IrvineRenter

    IMO, now is the last chance for those with the equity and credit to refi into a low-rate fixed mortgage. Unless the FED wants permanently high inflation, they will raise rates again once the upcoming recession has abated. Also, risk premiums will rise because of the plethora of defaults caused by the collapse of the real estate market. The combination of higher FED rates, higher inflation rates, and higher risk premiums will drive mortgage interest rates higher.

  59. Diana K

    macndub,

    if you really think Canada does not have a housing problem, then you are highly disillusioned.

    try visiting several more websites. including thehousingbubbleblog.com, which is putting links to the Canadian & overseas market mor & more frequently as the GLOBAL liquidity issue takes hold.

    50% yearly appreciation is not normal.

    10% isn’t even in normal.

    Canada’s market is baout to come crashing down.

    Start researching ASAP.

  60. Diana K

    ipoplaya,

    the stupidest thing anyone can do is buy at rising rate when rates are at their historically lowest points.

    FACT – The lowest fixed mortgage rates in history have never gone below 5% (except if bought down at a premium like one can from NACA). & even anything under 7% was considered some of the lowest rates ever.

    why in the world would you choose a variable rate that can only go higher in the coming years to buy an asset you’ll keep through that time?

    the stupidest thing anyone can do is buy at rising rate when rates are at their historically lowest points.

  61. oc

    Surely some of the 3000 “unique hits” to this site have to be related to all the link back and Feedburner add ons your webmaster has slammed into this WordPress driven site. I wouldn’t let your ego get too big at this point.

  62. Stupid

    Agreed. I’m so tired of older people who, when you buy a house give advice like “Just live on one income, and put the other into the mortgage. We did that and paid off the house in 2 years.”.
    Sheesh.

  63. Stupid

    Hmm, everyone in Canada has the equivalent of an ARM and we are coming off a period of historially low interest rates.

    Coincident with the low rates, Canadian real estate has soared.

    But there is no bubble.

    Riiiiiight ….

  64. Stupid

    World’s Most OverPriced Real estate markets – LA #5, Vancouver #6
    http://www.forbes.com/2007/08/24/housing-overpriced-world-forbeslife-cx_mw_0824realestate_slide.html?thisSpeed=15000

    Los Angeles
    P/E: 31.25
    Last month we named Los Angeles as the least affordable housing market in America. Despite higher costs in San Francisco and Manhattan, L.A.’s overheated market was built up largely on speculators who subsequently exposed it to the credit problems now dogging the market. Top properties are still extremely expensive despite the price correction presently under way, which is expected to push down returns.

    Vancouver, Canada
    P/E: 28.61
    Vancouver has one of the lowest rental yield rates of any city measured, at 3.19%, despite high prices. Across Canada, despite the same tax system, the effective annualized return rate resulted in a much better P/E of 16.31. Owners need to be aware that such a large spread keeps the rental market strong and the market for sellers more stagnant. The pool of buyers remains relatively small as renters can get the same property at significantly less cost and invest the difference.

  65. Genius

    “It is the only mortgage product known to produce stable housing markets where people do not default in large numbers.”

    Cash would produce this as well. IMO lending as we know it today should have been outlawed. Not that I’m suggesting we do that now, we would likely not recover from the shock. I’m just sayin’…

    Even a $400k valuation for this house would be ridiculous. Maybe in a few years, after the massive inflation we’re going to experience, it will be reasonable. Wake the f up people.

    As far as this listing goes, why bother putting pictures up at all? They would have been better off not doing so.

  66. Genius

    I’m going to have to find new ways to entertain myself as well. Maybe I’ll go heckle some people in a peak oil forum, that kinda sounds like a good time.

  67. ipoplaya

    Diana, you may think rates in the short-term are rising, but I don’t think that is the case. I’d bet ya that jumbo 30-year fixed rates will be lower in Dec ’08 than they are today…

    The credit market problems have added a much larger risk premium to jumbos vs. the recent past. As the housing market works it’s way toward the bottom and/or bottoms, some of this additional risk premium will unwind as investors become more willing to buy loans or securities collaterized by those loans. Jumbos are a full point higher than their conventional counterparts at most places today. That will not always be the csae.

    With the way the economy is going and the chance of recession likely next year, there isn’t going to be any catalyst for rising interest rates unless inflation totally goes through the roof. If house prices drop as much as most think they are, especially here on this board, we will definitely be in a recession as consumer spending will seriously be curtailed. This economy can’t absorb a 25% decline in home equity without people doing some serious belt-tightening.

  68. ipoplaya

    I agree with you IR in terms of rising rates in the future, but I don’t see the inflation battle being waged until after housing prices declines have slowed considerably. I think the Fed will lower rates into and through a good part of next year at least. The next tightening cycle, and it may get very tight, will probably start in 2009 or 2010. Absent a massive effect due to risk premiums on mortgages, I can’t see how you can reconcile home prices falling 40-50% in the short-term with massive inflation and rising interest rates at the same time. Do you think that declines of that magnitude won’t have a massive negative effect on the economy?

  69. IrvineRenter

    “Do you think that declines of that magnitude won’t have a massive negative effect on the economy?”

    I think it will, particularly locally where so much of our economy was fueled by borrowed money.

    I think the FED rate will stay low only until inflation gets so bad they cry “uncle.” Unfortunately, I think this will happen sooner rather than later because the plummeting dollar caused by the lower interest rates.

    The FED rate is only part of the picture. Higher inflation will mean higher mortgage rates no matter what the FED rate is because lenders need to make a return after inflation. If inflation goes up to 6%, mortgage interest rates will need to climb to 10% to maintain a profitable spread. Further, the huge losses lenders are about to take will make risk premiums rise. Since these losses are going to be spread over several years, risk premiums will head higher for years not months. Basically, if you want to guess at the future of mortgage interest rates take the FED rate plus inflation plus the risk premium. We know two of the three are rising, and the FED rate will have to rise at some point.

    The only way mortgage interest rates won’t rise is if there is a severe global recession that prompts central banks around the world to drop their interest rates to match ours. This will stop the drop in the dollar and curb inflation. That in turn would allow the FED to keep rates low longer. There is nothing I can envision that will stop risk premiums from rising.

  70. macndub

    Across Canada, despite the same tax system, the effective annualized return rate resulted in a much better P/E of 16.31.

    Thank you for proving my point about no national housing bubble in Canada. P/E of 16 is rich, but I don’t know if it can be described as bubbly.

    Furthermore, Canadian income growth has been strong, unlike in the U.S., and while housing price increases may have overshot income growth in some areas, that isn’t true for all of Canada, as the Forbes article you quoted points out.

    My only point is this: while ARMs may generally be inappropriate in an American context, based on the reasons that IrvineRenter cites, I do not think that there is a clear logical link between the availability of ARMs and the U.S. housing bubble, as many places where ARMs are readily available are not bubbly. Tilting at ARMs distracts the focus from the egregious failure to ensure that brokers fulfilled their fiduciary duty to provide suitable mortgages for their clients.

    IrvineRenter points out that Fannie and Freddie evolved to create a securitization market for 30-year American mortgage loans, but, again, many countries have secondary mortgage markets that don’t demand government guarantees. Americans pay a lot, both in cash and in contingent claims, for the privilege of a 30-year fixed rate swap plus put option that is the “normal” loan. These are non-market terms: there is no chance that you can call up a banker and get such a security without a government guarantee.

  71. ipoplaya

    Wow IR, you could almost be making the case to buy now while mortgage rates are lower!

    Let’s say you need a $400K 30-year fixed mortgage right now, which you can get at around 6%. $24K in annual interest. That would be a place @ $500K now assuming 20% down… So at some point in the future, that house has fallen by 40%, down to $300K so you only need a mortgage of $200K. You’ve got yourself a great win there but wait, mortgage rates are up at 10%. You now have to pay $20K in annual interest on your $200K mortgage. All that waiting and only a $300 per month benefit produced? Seems hardly worth it.

    So it would seem, the best time to buy a house if you are renting would be when mortgage rates start this inflation-fueled, risk-pushed, rising cycle right? That very well might precede the bottom of this current downturn if I understand you correctly…

  72. FairEconomist

    Actually, yes, IR’s arguments suggest buying now – if you’re immune to principal risk. You might actually get lower payments by buying now – but if you have to sell, you’re going to eat it. That’s what I was telling my friends in 2003 when 30-years were 5% – good time to buy if you *know* you’re going to hold.

    BTW, I agree with you on ARMs. They really can make sense, especially since (theoretically) your expected payments over 30 years are less than with a 30-year since the lender’s risk is lower. The main issue with an ARM mortgage is to be sure you’re not in too deep, so that you can (a) handle the end of the teaser and (b) can handle the risk of a big jump in interest rates. So they’re good if you’ve got a relatively affordable house and can take some more risk. They’re bad if you’re stretching for a house.

  73. AZDavidPhx

    No way. Not even 280K.

    You guys are way too accustomed to these ridiculous prices.

    This is a condo (starter home).

    A normal market would command around 150K.

    Save up a workable down payment 30,000 (20%) and get a 30 year fixed for around 800.00 a month but don’t forget the extra (almost) 200.00 junk association dues which makes the out the door expenses about 1000.00 a month which is attainable without totally over-extending yourself.

  74. Diana K

    I totally disagree.

    If you want to buy & hold for several years, then the best strategy is to buy when rates are at their absolute highest.

    If there is nothing else that anyone has learned through this boom market since 2001, it’s that people when buying an asset only care about the monthly payment. Whether that’s through short-sightedness or ignorance or apathy, doesn’t matter. People pay attention to only how much they have to pay per month AT THE TIME THEY PURCHASE. & that determines how much of a home they can “afford”.

    Which leads to a very important fact: as rates go up, prices come down.

    If you buy a home after a few years of rates being in the teens, you are going to pay substantially less for that asset.

    & when rates come back down? then that is THE TIME TO REFI.

  75. skek

    Nobody living in a house like that should be driving a 911. That’s some seriously misplaced priorities.

  76. No_Such_Reality

    That same point came up on Piggington today.

    The answer simple. Prices are going to fall from $500K to $350K based on today’s interest rate environment. If rates rocket to 10%, they’ll fall even further to $240K.

    The reason is simple, affordability. The market is tanking because of affordability. At 6% interest, the market is going to get beaten. If rates move to 10%, the market will get beaten and then it’ll take another 30% off of the previous mark-downs.

  77. AZDavidPhx

    Yup. It’s all about the monthly payment right now.

    A lot of these people would plunk down a billion dollars on a condo if the mortgage hustler could come up with an exotic mortgage “product” to enable them to make the monthly.

    They hook people on the ARM with the “affordable” monthly payment and then encourage them to gamble that they will be able to refinance their way out of financial disaster later on.

    If these stupid ARMs were never maid available then the bubble could not have inflated to the extent that it did because people would have been priced out much sooner.

    ARM = speculation (gambling) no matter how you look at it. I don’t care if you “know what you are doing” or not. It’s gambling.

  78. skek

    3 Redbird also went into escrow at more than $1 million below the last sales price and the original list price (although I’ve also heard that it was entered as “in escrow” on the MLS in a, shall we say, “shady” manner). Shady Canyon is a disaster. Not surprising, since there was never any intrinsic value there anyway.

  79. Stupid

    You’d expect the ARM effect to be greatest where there are many people competing for scarce land (ex. cities). After all, the construction cost doesn’t vary with the availablilty of credit (well, at least not much -ex. spring for granite coutnertops). It’s the competition for land the ARM has a real effect upon.

    Also, it’s true, Canada has had a great boom period (it’s good to be a natural resource rich company when everyone’s building and manufacturing all around the world). however, if there is a hard landing in the US and possibly in other countries, the natural resource exporting country tends to take a big hit when people stop buying those resources. So like the Alberta oil bumper sticker said in the 70’s
    “Please G-d, give me another oil boom. I promise not to p-ss it all away this time…”

  80. ipoplaya

    Diana,

    Is your conclusion supported by any empirical evidence? I see a period of massively high interest rates in the early 80’s and see median home price increases year-over-year all throughout that period, some quite substantial, and for many years after that until the 1990 real estate recession:

    http://www.census.gov/const/pricerega.pdf

    In more recent history, I see interest rate peaks in 1994 and 2000, with corresponding large median home price increases in the years immediately following.

    Am I missing something here or does it appear that the opposite of what you portend is actually the case?

  81. Law_Student

    I was not suggesting that someone should buy a home today using an ARM.
    I don’t think anyone should buy a home today, period.
    But, this market will turn around someday, 3 or 4 years from now I am guessing. I happen to think it is going to fall fast and hard, partially due to one of the reasons it went up so fast: rapid communication and available knowledge.

    There is, believe it or not, a good time to buy a home. 1997 to 1999 sure looks good in the rear view mirror. Looking at 2010 to 2012 in the crystal ball for the next one. This time I can afford to use a 30 year fixed to mitigate risk. I have a lot more to lose now too.

    However, there are those who would rather take the risk and buy when they can, using an ARM.

    I think they should go for it when the prices come down enough, and the people who have been priced out of the market for the last ten years, watching their rent go up and still unable to buy, are the evidence as to why I believe this.

    California real estate has been like this since at least 1975 – as far back as I can remember it.

    Mr. Vincent, who bought in 1978, got in before the first rise in prices. In 1978, you could buy a home in Palos Verdes for $75k. When prices drop in the future, you might be able to buy one for $750k.

    $75k in 1978 is not like $750k today.
    I don’t know very many people earning $250k/yr today, but a lot of people made $25k a year in 1978.

    That means if you want to buy a home today, you will be taking on more risk than you took on in 1978.

    Some people around here think that house in Palos Verdes will be selling for $350k again someday. Don’t bet on it.

  82. lawyerliz

    I totally agree. I modified my loan to an arm in the early/mid 80s and the rate went down, down, down, without me having to spend time and effort re-fi-ing. Them times will come again, when interest rates skyrocket due to mistreated dollar.

    For now, unless you are going to move in 5 years, get a fixed rate.

  83. macndub

    Oh, boom is good and pissed away. Just like boom number one. And the Alaska highway boom before that…. No quibble there.

    Of course lower interest rates will, all things being equal, push prices up, and ARMS in a low interest environment will do just that. And the effect will be amplified where land is scarce. Most Canadian cities have extremely constrained land (despite the size of the country) simply because we don’t have a federal highways program that builds freeways all over the bloody place. Result: higher density and higher land costs.

    But ARMs are effective because they work for both borrowers and lenders, provided that everyone understands the rules. A Canadian style “fixed rate mortgage” (3 or 5 years fixed term) has far more variability that a U.S. ARM, because the U.S. ARM has ratchets and a put option, which the Canadian mortgage does not. But this doesn’t, in and of itself, lead to bubbles.

    The Canadian market has avoided U.S. excess primarily because the fat, happy, lazy banks here don’t need to hustle as hard for customers, and therefore don’t need to take as much risk at the retail branch level. Therefore, less innovation, less pressure to innovate, and fewer unsuitable mortgage products.

    That’s really the benefit of this kind of cross-country comparison: two similar cultures, but vastly different results. Why? I say that it’s more diligence on the suitability end, rather than ARMs, which are more prevalent in Canada than the U.S.

    Tomorrow I will talk about health care and mat leave policies (why do you think I left America?) but that will likely be on another blog….

  84. CapitalismWorks

    High Interest rates usually accompany (read always) high inflation. Houses are REAL ASSETS (read: they are positively correlated with inflation. That’s why we see increases in home prices along with high interest rates.

    FairEconomist is correct in his assessment.

    Diana, your point is correct, that you can refi a high rate but not out of a high price. The issue is that prices increase along with rates since both are positively correlated to inflation.

    Inflation inflation inflation. Just in case you forgot over the past 25 years of disinflation, is the great enemy.

  85. zornundo

    400k?? That’s 400k in a highly superinflated market, not to mention whatever people in California smoke/drink/snort/do for a living.

    I’d say 150k in a normal place.

  86. zornundo

    Egads…the interest charges on a 30 are so high. I’ll be looking at 20% down and a 15 year loan once I’ve saved the aforementioned 20% down.

  87. ipoplaya

    Well it’s good to see I’m not being a total troll today… There can indeed be made a case for buying into a rising inflation and interest rate environment, especially with a fixed rate or long-duration ARM, i.e. a 7 to 10 year. You hedge against inflationary pressures to your wallet by having your largest monthly expense inflation protected and let the economy drive up the price/value of the home you just purchased…

  88. IrvineRenter

    I would agree with Diana, you want to buy when interest rates are at the peak of the cycle, then you want to refinance when rates are lower.

    ipoplaya,

    The problem with the example you gave with the small payment differential is you forget the possibility of refinacning into a lower payment later. As Capitalism Works said, “you can refi a high rate but not out of a high price.”

    In short, buy when interest rates are high and refi when they are low.

    One note on inflation: You can have consumer price inflation and declining nominal home values. In fact, we are about to witness it over the next few years.

    You could make the argument that a rise in CPI which has the equivalent rent portion of its calculation represents a rise in real estate value, but since houses are currently prices about 80% over their rental equivalent value, nominal home prices will decline while the true underlying value is rising. When the two come back into harmony, house prices will stabilize at their real underlying value and begin again to appreciate.

    The bubble has broken the normal relationship between price inflation and rising house prices. In the words of one Nixon administration official “That statement is no longer operative.”

  89. Chris

    I think that $400k is directed at that 1700 sq ft SFH. $150k would be a steal for that 1700 sq ft SFH.

    But then again, these FBs are stealing/robbing the banks *legally*….oh well 🙂

  90. ipoplaya

    Yeah, I agree too, just trying to be devil’s advocate for funzies… Interest rates aside, it’s got to be best to buy when the amount one is borrowing is as little as possible. That would be the bottom of the cycle. The amount borrowed is a much more significant driver of the overall the interest expense, assuming one is holding for the long-term (which I will be on the next purchase) and interest rates fluctuate within historical norms.

    Now if only I could convince the wife to wait for bottom! 🙂

  91. Lost Cause

    Irvine is a freakish place. The notion of of a buildable lot is quaint there. All of the land is owned by the Irvine Company, and all the nieghborhoods are controlled by homeowners associations.

  92. cyberpunk

    My 37″ LCD weighs in at a hefty 40lbs. My old 36″ WEGA CRT weighed 220 lbs. A no-brainer really.

  93. Law_Student

    There are a few people trying to resell their lots.

    Its not too late!!!! Last Chance!!!!
    Get in now before you are priced out of the market!!!!

  94. awgee

    The commercial paper market is in shambles, getting worse, and the Fed is panicing. Credit default swaps are just starting to collapse. The Libor spread is widening. The Fed will continue to lower interest rates. The Fed does not have a choice and lowering the funds rate or the discount rate will not cause mortgage interest rates to fall. No one can predict what home prices will be in nominal dollars, but in real dollars, home prices will fall and keep falling. What you think is affordable now, will not be affordable in the future. Home prices will fall in real dollar terms, because even as they fall, they will become less affordable. Yes, they will become less affordable and less desireable and less expensive in real dollars.

  95. ipoplaya

    In terms of test scores yes, but Hicks has an overcrowding problem that I am hearing about more and more. Have definitely heard some parents grousing that Hicks isn’t all its cracked up to be. Everyone I know with kids at Pioneer says it is a fabulous school… Have never really heard a bad word about it except for some complaining about traffic going in and out.

  96. ugh

    My first comment here,

    “20% down and……….will be the new requirements”

    I don’t think so. J6P is too stupid to save money. Isn’t that what put him in this exotic mortgage mess in the first place?

    I call “Serfs” over 20% down any day.

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