The Price of Being Wrong

Nantucket Sleighride — Mountain

Don’t cry little Robin-Marie ’cause you know you’re losing your home…

It always makes me sad when I see these foreclosures and short sales with pictures from the children’s rooms. The disruption to family life caused by the Great Housing Bubble has only one precedent in the United States: The Great Depression. Hopefully, this family will be able to move into a comfortable rental rather than a tent city or Hooverville, but they will have to move. Basically, anyone who bought late in the bubble rally is underwater, and these homedebtors will fall into one of two categories: 1. Those who are forced from their homes (or choose to leave), and 2. Those who are trapped in their homes. It is difficult to determine who is worse off. Those who are forced from their homes will have ruined credit and difficulty in obtaining a home in the future. Those who are trapped in their homes have a complete lack of mobility to take promotions and crushing debt service payments that prevent them from doing anything else. All of these problems boil down to one bad decision: they bought a house during a wild financial mania.

Most people have no concept of the risks involved in investment.
This ignorance is reinforced by the kool-aid sales pitch of the
National Association of Realtors. Prices always go up. They are running
out of land. Buy now or be priced out forever. This self-serving
bull$hit is all too familiar (and repugnant) to the regulars on this
blog. People who bought into the bubble rally believed this nonsense,
and now that the foolishness of their decision is apparent, it is all
over except the crying.

For some people, the consequences will be limited. Those who used
100% financing and did not refinance have non-recourse debt, and they
will only face a ding to their credit rating. Those who refinanced have
recourse debt, and they will likely have to deal with debt collectors
before it is all over. Those who put some of their own money into the
transaction are facing a significant loss of equity, and it the case of
most properties we profile, a total loss. These are just the financial losses. The emotional losses can be even greater.

People develop emotional attachments to their homes. There is a wall in the bedroom where little Johnny’s height has been measured for the last several years. There is the patio with the children’s names etched into the concrete. There are the neighbors with whom people have shared cookouts. All of these little things create a sense of groundedness and a feeling of community. All of these things are lost in a foreclosure.

There are also the elements of ego involved. There are feelings of failure, particularly for those who feel the duty to provide for their families. There is the disappearance of illusions of wealth and status, and adjusting to a significant reduction in buying power is very stressful. We have had many foolish bulls post on this blog and others. Bulls have smugly commented on how renters have made “bad life choices.” The arrogance of some of the bulls is only surpassed by their ignorance. The embarrassment of being so completely wrong and the shame of losing face is very difficult for many to accept.

People who were wrong about the Great Housing Bubble paid a big price…

5 Nantucket Circle Front 5 Nantucket Circle Kitchen

Asking Price: $789,000IrvineRenter

Income Requirement: $197,250

Downpayment Needed: $157,800

Monthly Equity Burn: $6,575

Purchase Price: $948,500

Purchase Date: 1/24/2007

Address: 5 Nantucket, Irvine, CA 92620


Beds: 4
Baths: 3
Sq. Ft.: 2,711
$/Sq. Ft.: $291
Lot Size: 5,225

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Year Built: 1981
Stories: 2 Levels
View: Mountain
Area: Northwood
County: Orange
MLS#: P633617
Source: SoCalMLS
Status: Active
On Redfin: 20 days


What is a newer remodel? I suppose if it was remodelled in 1970, that wouldn’t count.

Nice that they put in pergraniteel.




Housing BubbleFirst, I would like to offer my kudos to the people who bought the property in April of 2002 for $520,000 and sold it to today’s seller for $948,500. The housing bubble seems to have worked out for them. The housing bubble has enriched many who bought and sold at the right times — assuming they are renting now. Today’s seller couldn’t have timed things any worse. The peak of the broader market was summer of 2006 in Irvine, but the high end appreciated into the winter of 2007. For properties like today’s January of 2007 was the absolute peak. Not long after these people bought, the market went over a cliff, and it continues to free fall. These people paid $948,500, and they put 10% down. That $94,850 is long gone. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $206,840 — an average loss by Irvine standards (Isn’t that amazing?) The sellers will lose their $94,850, and the lender will lose $111,990. I imagine these people are not thankful for the housing bubble.


Goodbye, little Robin-Marie
Don’t try following me
Don’t cry, little Robin-Marie
‘Cause you know I’m coming home soon

My ships’ leaving on a three-year tour
The next tide will take us from shore
Windlaced, gather in sail and spray
On a search for the mighty sperm whale

Fly your willow branches
Wrap your body round my soul
Lay down your reeds and drums on my soft sheets
There are years behind us reaching
To the place where hearts are beating
And I know you’re the last true love I’ll ever meet

Starbuck’s sharpening his harpoon
The black man’s playing his tune
An old salt’s sleeping his watch away
He’ll be drunk again before noon

Three years sailing on bended knee
We found no whales in the sea
Don’t cry, little Robin-Marie
‘Cause we’ll be in sight of land soon

Nantucket Sleighride
— Mountain

P.S. Check out Mr Mortgage April Foreclosure Report

86 thoughts on “The Price of Being Wrong


    $200K loss in a little over a year?


    1. cara

      wow. those are amazing pictures.

      Is it wrong of me to point out that obviously these folks weren’t all that adverse to throwing money away given the humongous television in the family room in addition to the normal size one that’s the focal point of the living room?

  2. Masterofdamoney


    Wow that foreclosure report is dire. Getting uglier every day in CA!!!

    When we see places like this one selling in the $400’s, you’ll know we’ve hit the bottom.

    Long way to go, baby!

    1. IrvineRenter

      That report really is an eye opener. I was on last night, and there are 465 properties in Irvine in some stage of foreclosure. The vast majority of these properties are not listed on the MLS. The stealth inventory of must-sell homes is going to flatten the market. I also saw that California is now foreclosing 1000 homes a day — a day! The market is being “carpet bombed” by foreclosures.

      1. BD

        Hey IR –

        An interesting question that we don’t seem to ever ask: What do you think this person’s (family’s) real budget was for home? In other words, what could they likely have really afforded? They chose (with the bank being a co-conspirator) to likely pay hundreds of thousands more than they really could afford. The interesting question to many of us is what ‘should’ they have been able to afford? I know it is probably impossible to tell but, I personally have always wondered when people that made a fraction of what I made were buying houses double what I could afford.

        Again, probably impossible to really tell but, I would be that most of the people “buying” $1M homes could only really afford $350K with a real loan. They chose to gamble big on the “I’ll just refinance or sell when my payments adjust”.

        ….just some thoughts.


  3. ipoplaya

    Not advertised as a short, but I assume it must be unless they are going to bring cash to close.

    I have a feeling they won’t have a problem getting an offer near list… They’ve probably already had one that the bank has yet to review. Shorts are a pain.

    1. buster

      Ipop – Aways comforting to have the bulls around. Objectively (meaning forget about what they paid, what their neighbors sold for in 2006, what it might be worth): Is this 27-year old Irvine tract home, stamped out like cookies from a cutter in the early 80s, worth over three quarters of a million US dollars? Think about it – over 3/4 MILLION?

      Not a chance. I know it, you know it and (more importantly) the lenders know it. This baby is headed back to the $500,000 range, and even that will be a stretch.

      1. No_such_reality

        I suspect IPOP is right. He commenting on the current market and not what the underlying value of the home is.

        In today’s market, while soft, there are still buyers. Buyers that see a 2700 sf home with a real yard (by Irvine standards) for under $300/sf when their near term memory tells them this would have been in the $400+/sf this time last year.

        In two to three years this may be a bit closer to $200/sf, maybe less but doubtful, and frankly, IMHO, competition at that point will be pretty fierce to grab homes that have potential and land.

    2. mmg

      ipop, how about we submit multiple offers, LOWBALL that is; 😆

      we have a looooong way to go, and the economy and gas prices are not helping much 🙁

  4. Rkp

    Just being underwater, even if its $200k, isn’t leading to people walking away from their homes. The greater reason is the adjustable financing.

    Both my parents and inlaws were under water through the mid 90s and while it felt bad, they never had to pick up and walk away as they were in a fixed mtg and could afford the payments.

    1. Perspective

      Exactly. The situation is grave for most recent buyers, not because they bought in a bubble, but because they bought much more house than they could afford.

      You should only buy a home you can afford (28/33% DTIs) and one you can reasonably expect to enjoy living in for a decade.

    2. tonye

      I supposed the problem is not necessarily an “adjustable” mortgage. Indeed, given how interest rates may be down in the near to mid term future, an adjustable may make sense for someone who doesn’t plan to be with the same mortgage for more than say, 10 years.

      The problem is those “neg-am”, “interest only”, “100%LT” toxic loans, all of them with teaser rates.

      And people who qualified only being able to make the teaser rate payment, not the fully qualified payment. Those folks were overbuying from day one. They weren’t thinking of buying a home to live in, but an asset they were gonna flip in three years.

      All of them at the same time!

      1. Perspective

        That’s why I think it’s too simplistic to say “the foreclosure problem is due to 100% LTVs.” It’s one factor of many. All of these risk factors were combined further inflating prices.

        I would be willing to bet, that the delinquency ratio for loans in which the only high-risk factor is 100% LTV is extremely low.

        1. Soapboxpolitico

          Let’s not forget a significant factor is simply LTV, not just 100% LTV. Because values are falling, those who were @ 100% LTV are now likely approaching 125% LTV or worse. This typically will trigger a recast on the ARM’s, O-ARMS and Interest-Only’s. That is the real hidden killer in all this mess.

          As the “carpet bombing” continues, values fall even further, pulling ever more people down the black hole … including folks who may have plunked down 5 or 10 percent or even 20% and who still signed teaser rate or other toxic loans. They might’ve had equity but it evaporated and to add insult to injury their loan will now recast because the LTV rose to a certain level.

      2. ConsiderAgain

        [i]They weren’t thinking of buying a home to live in, but an asset they were gonna flip in three years.[/i]

        And for that folly, the fools will be punished. And I have no sympathy for them either. Too bad for the innocent children.

        I guess being a good parent and placing your family’s well-being and future and security ahead of gambling on real estate is so yesterday.

        1. lendingmaestro

          ARMS are the problem. All the scenarios Tonye listed above involve ARMS. Obtaning a loan that carries a fixed interest rate for a duration that is SHORTER than the term is very risky.

          It’s very similar to reinvestment risk for bondholders that sell prior to maturity.

    3. Zardeenah

      I think another reason “underwater mortgages” are a more severe problem this time is that there were a lot of short term buyers. Not just flippers, but people that have jobs that require frequent moving, or who for one reason or another were just moving into an are for 1-2 years. With the emphasis on home ownership and a potential for profit, these people, who in the past may have rented, were buying. Now that the market has turned, they’re forced to sell when they have to move and can’t wait out the market. I think these short term buyers must have been big users of the Alt-A’s and ARMs, thinking they would sell before their loan adjusted. People who bought for the long term are probably uncomfortable but fine (if they bought within their means).

  5. mike in irvine

    IR should think about adding the term ‘Rollback High’.
    I met 3 families over the weekend who were looking for homes since 2004/5, they are tracking houses in the areas they like, houses which were at 900k in 05 are 750k now. They think its a good deal as they are conditioned for high prices. When they watch neighborhoods increase in value from 300k – 900k, they think they missed the bus at @500k, i suspect that 750 is a sweet deal for them. There are many people in irvine who share this thought.

    1. Hormiguero

      But enough of them to shore up the market at these levels? I doubt it.

      What gives this bear market claws is the self-reinforcing aspect, where the kind of real estate and finance jobs which supported these levels disappear along with the 300+ multiples.

      How many of these sideline buyers feel truly secure in their income? Not enough to step in and stanch the flow before the true vultures show up, in my opinion.

  6. irv

    Thanks for the sober post, IR. In the midst of all the real estate drama, there are actual families who are being affected. Granted, in some cases the parents brought this on themselves, but the kids are always innocent.

    1. SacRenter

      Agree – the kids are always innocent. However, their perception of good times vs bad is almost always dependent on their parents. Funny how we never talk about the impact to the kids of moving, changing schools, finding new friends, etc. when families change houses because they’re moving up the housing ladder.

      In general, I’d say kids are much more resilient than our over indulged culture expects them to be. Ask my kids which of the 4 houses they’ve lived in they liked best and they’d all tell you it was the tiny little apartment we lived in for 6 months after a cross country relocation. They loved the community pool and the cookies the office ladies gave them each day. We had no tv so we played tons of games together and they loved to have sleep overs in each others rooms.

      Point being? It’s up to the parents to handle the consequences of their own choices, good or bad, and to protect the kids from it. Handle the moves with grace and dignity. Enjoy the freedom of having less and make it an adventure for the whole family. People have survived much worse than having to move out of a million dollar house.

      1. Shannon

        Great Point. It isn’t the event it is how you react to the event. We rent but I get to work part time, 2 hrs a day, and the kids know we would have to give up a lot of fun activities if we bought a house. I have summers off with them and would not give that up for ANY house.

        Getting out from underneath a huge financial burden would actually create peace within this family. That is if they can see the silver lining.

      2. irv

        Good point, SacRenter. Often times, parents are so busy trying to impress the friends and neighbors with the exterior trappings of luxury that the kids are neglected. Once the image of affluence is stripped from them, maybe they will return to things of intrinsic value — like family and raising good kids.

        1. Formerbanker

          Couldn’t agree more with your points. And for those children who are old enough to have the experience of foreclosure ingrained as a traumatic one, my guess is that those children, when adults, will be MORE likely to act prudently to avoid financial mismanagement in their own lives. There is a silver lining for them…many adults take great pains to avoid mistakes they saw their parents make, be it overspending, absentee parentings, etc…

          1. Soapboxpolitico

            Let’s hope so. The absolute worst outcome in my mind is that these mistakes are made and the lessons aren’t learned. I fear these folks won’t learn their lesson and the kids won’t either. We are getting ever shorter memories in this country.

            Oh, and some wall street “genius” will “innovate” yet another ponzi/bubble/fraud “financial vehicle” which will serve to separate the fools from their money in the most efficient and bewildering manner possible.

            If we (as a society) turned American Idol off and picked-up the paper more often we’d maybe see this bull$hit coming earlier. All too many folks are willfully ignorant and easily fooled.

            Oh look! Something shiny!!! 😀

  7. Vlad K.

    Why is it that banks that are looking at major losses pay such high percentages to RE people when they could give them a few 100$ to make the phone calls and fill out the paperwork?
    Plenty of them out of work.

  8. mino2126

    irvinerenter….it might be interesting to see what property your analyzed a year ago and what the losses were then compared to now. I know the properties won’t exactly line up but when they do it could be fascinating.

    1. Emma Anne

      Agreed. It would be fascinating to revisit properties from posts a year or two ago (as you sort of did with the condo tower yesterday). For one thing, going back and reading the comments is quite an experience.

  9. Perspective

    “People who were wrong about the Great Housing Bubble paid a big price.”

    I would add, as I have before, that people also pay a very “big price” when they:

    1) Have a child or many children;
    2) Buy a new car;
    3) Marry the wrong person;
    4) Fail to complete college; etc.

    1. Genius

      It’s relative. I’ve paid a hefty price going on a date with the wrong person. Yikes.

    2. Iblis

      Not sure I would equate having children with a bad marriage or failing to finish college. The first is a sacrifice, meaning that you give up something you want for something you want even more. The latter 2 are just failures with no payoff whatsoever. The common denominator of cost is misleading without comparing the relative payoffs.

      1. Perspective

        I’m not equating the examples, just illustrating that you will make many decisions in life that have a very high dollar cost. Try your best not to make too many costly decisions, if your goal is to build wealth.

        Every individual has to perform the cost/benefit anlysis for their circumstances, likes, desires, goals, etc.

        e.g. If you bought a $600k Irvine home in 2005 that you could afford, and today it’s worth $400k, your net worth has taken a $200k hit. What’s the likelihood that home will be worth $600k in 2025? I think we can agree it’s more likely than not.

        If you also had a child in 2005, that child will cost you nearly $200k to raise to 18. What’s the likelihood that money will be returned to you?

        Was the home worth $600k in 2005? Depends on who you’re asking. Was the child worth $200k in 2005? I don’t know, depends on who you’re asking.

        1. tonye

          Only $200K?
          Only until 18?

          How about you add another $100K and extend that to 22 and college.

          Just a public one, that is. Add $200K more for a private one.

  10. js

    good to see you are once again cheering the downfall of people with small children.

    What a scumbag….good for you!

    1. IrvineRenter

      Welcome, we do not get nearly enough bitter homedebtors trolling the blog. Comments like yours are an endless source of amusement. Come back and see.

      1. r€nato

        I’m surprised you don’t get more bitter comments like those of js.

        (not at all saying they are justified, they are not…)

        1. hall

          I think we’ll see more of these kind of comments as the market turns fugly. Thanks to finding this this blog and other like it (CR) a year or so ago, I saw the writing on the wall and sold, just in the nick of time, I might add, or I might be one of the people making comments like the one from js.

          1. r€nato

            Then I think you owe IR a nice dinner for the free financial advice which saved your ass 😉

      2. TurtleRidgeRenter

        Weird. I thought you were doing the OPPOSITE of cheering on this particular debtor’s downfall. You made it clear that you feel sad every time you see the kids’ rooms in listings like this.

        1. IrvineRenter

          Some people see only what they want to see. I suspect the poster has a pre-conceived idea of what they will find on the IHB, and they find it, even if it is not there.

    2. Major Schadenfreude

      “…good to see you are once again cheering the downfall of people with small children.”

      …who behaved like small children when it came to purchasing their house.

      Nobody’s “happy” about the situation. If folks like you didn’t jump the gun and buy something you couldn’t afford, we would be in this mess.

    3. irv

      I think IR said the opposite of that, js.

      Folks here have previously asked how a homebuyer could be so stupid as to not understand the consequences of the 100% LTV neg-am loan at 40% DTI that he was signing up for — ladies and gentlemen, I give you the reading comprehension and analytical skills of js.

  11. clone12

    By your logic, Charles Manson himself cannot be sent to jail if he had little children in tow.

  12. lendingmaestro

    At almost 800k, this property is at the high end of affordability for a 200k income family. Realistically they should be closer to 225k-250k, which is still greater than 3x income.

    The property taxes on this puppy are 10g’s. AS someone who may be having children soon, I’d say paying 10k a year in taxes is bad parenting. You could be saving 10k a year for your children’s education.

      1. lendingmaestro

        Yes. That’s why I was trying to say 800k is the max house anyone one making 200k should buy.

        When I go to buy a home it will not be more than 3x my houshold income. Because of lower rates the past 5 years, the price vs income has been stretched to 4x income.

        If you are buying a home that is 4x your gross income, you better have a good downpayment and aggressive financing.

        1. Perspective

          Agreed. We bought in this Irvine bubble last year, but at just over 2.4x our income, and that felt like a stretch.

        2. rkp

          Everyone here looks at the income and then bases the max house price based on that income. I think the better approach is to say the maximum loan should be no greater than 3x household income. The difference in the approach is the downpayment.

          There are many buyers who have waited on the sidelines since 2003 and have accumulated substantial downpayments. Thats the case for my wife and I and I know many other people like us. We set aside my wife’s entire take home in our downpayment fund and lived off of my income for the last 5 years.

          I can see someone bringing $300K-$400K to the table on this kind of house and having a loan to income ratio of 3x. That kind of income means $130-$150K which is easy for a dual income couple.

          1. mmg

            I disagree rkp,
            while some one may do what you said, if there are many people with that kind of downpayment, took them years to save (esp if they are making 150k like you said),
            I believe they will be very picky about what they want to buy.

            definitely not a 25 yo tract home mcPOS at 750k. simply not enough people to fit your profile 🙂

          2. Mikee

            Don’t do it! Please do not consider putting 300K into one investment – even if it is a house. That is a lot of money not to diversify more. If your income is 150K, that represents 2 YEARS of income!! It probably took a long time to accumulate.
            I don’t know what your other investments are, but if you can take anything from this blog, take the knowledge that a house is not a fool-proof investment – you can lose it all and we’ve seen plenty of people here who have.
            I know a lot of folks here feel living debt-free in your house is comforting, but having 75% debt on a steady asset is not throwing away your money, especially if this is your first house and have 20 years to pay it off.
            I would never invest in a company that only used equity or 50% debt to buy investments. It shows to me that they aren’t using their capital appropriately.

    1. LC

      This house is still priced too high. But at least it is below $300 sq/ft. This is an older home probably needs a little deferred maintenance. The lot is small. This is 2005 pricing, and it may be below crazy stark raving mad levels, it is still well into bubble territory.

      Back to the bank! The bank has insurance. They couldn’t care less for little kids.

  13. Laura Louzader

    It’s easy to your child a room of her own filled with cute pink things, and it can be done much more cheaply than $948,000.

    As I said once before on this blog, the child does not know the difference between her room in this house, and her room in another house, or nice apartment. These folks won’t exactly be panhandling by the Wilson el stop or living under an overpass because they lost their house Granite kitchens and prestigious streets are perks of value only to grownups, or at least kids over age 5.

    The child would benefit a lot more from her parents’ love, and undivided attention to her sans the distraction of worrying how on earth ever they are going to pay the mortgage and still put food on the table

    She might also very much benefit from a parental example of financial sobriety and responsibility, and the introduction of the concept of living within your means by the sentance, “honey, we just can’t AFFORD it any more”.

    That way, it will be easier to say no to $10,000 prom weekends and $40,000 cars when she becomes a teen.

    We need to start teaching our kids about KNOWING YOUR LIMITS and TAKING RESPONSIBILITY. Unfortunately, we babyboomers are very poor example-setters because we never got a good grip on these two core concepts.

    1. William E. Jones


      I think you are right on the money (pardon the pun!). Children are resourceful when it comes to playing and enjoying things. However, if parents are bickering and stressed out about money, or if they are so busy working to afford that big house that they have no time to spend with the child, well, that’s a different matter.

      I grew up in a third world country and my playmates were poor, but they were happy. I am not idealizing the third world. Those children need better education, health care, food, and access to clean water. However, they don’t need more “stuff” in the American sense of the word.

      Parental attitude is everything. If parents losing a home in foreclosure act as though it is the worst thing that could ever happen, the child will pick up on that. If the parents focus on their togetherness as a family, find activities they can do together, and look for joy in simple things the child will not be traumatized.

      1. SacBoomer


        Gotta agree: The role of the adults is to, well, act like adults, & reasonably shield children from the emotional consequences of events that are beyond parental control (unemployment, illness) or things that are self-inflicted (buying a stucco box for nearly a million bucks). Handled maturely, this is an opportunity for a family to grow, mature, and most importantly, learn. It is up to the grownups to manage the emotional tone and content for their kid’s well-being.

  14. Blueberry Pie

    Does anybody know what the cost of materials to build a home from scratch is? Not the labor – just the materials? Let’s assume an 1,800 square foot home.

    1. IrvineRenter

      Production builders costs (including labor) run between $85 and $90 per square foot. Small contractors doing renovations can get twice as much.

  15. 7

    I just noticed that “Comments” was changed to “Astute Observations”

    I just want to make an astute observation that “Reply to this comment” be updated to “Reply to this astute observation” to make the astute observer feel more self-important.

    1. IrvineRenter

      I will see what we can do.

      I am glad you noticed. Most of the comments we receive here are “astute observations,” and I thought it important to recognize it as such.

      1. SacRenter

        I find myself taking myself way more seriously now that I’m leaving “astute observations” instead of just “comments”.

        The change brings a certain gravitas to this blog. We’re breathing rarefied air now, folks!!!!

        Can I confess that I’m sorta giddy over the thought that I’m an astute observer?

        Thanks, IR and team!

  16. syvanen

    Here’s a different renter story. Friend of mine, a independent business man, discovered in 2004 that his house had appreciated from 250K to 750K over the previous 5 years and decided it was absurd to live in such an expensive house. So he sold it and rented a comparable. The 600 K profit was invested back into his business. Now that is a conservative businessman.

    1. Perspective

      Likely a good decision, but deserves to be examined more closely, because that is certainly not a $600k profit as it seems at first blush:

      If he was married, $100k was subject to capital gains tax ($350k if not) at 15% in 2004 – Profit down to $585k.

      If he rented the equivalent of his home, he likely started paying roughly $3,000 monthly. If his mtg was near $250k at a reasonable rate for that period, his monthly mtg payment was roughly $1,500 (we’ll assume additional owning costs were balanced by the tax shift). So, paying $1,500 more monthly over the last four years “cost” him $72k, and continues as a larger expense.

      That house today, if worth $750k in 2004, is likely still worth $750k. So, to buy the same house today would cost him $750k. He’s had $585k earning a reasonable ROR hopefully (a personal business doesn’t typically do such) and it may have grown to $750k.

      But, if you subtract the additional rental cost of $72k, then he can’t even buy the house he sold. That doesn’t sound conservative. By these calculations, he needs another 10% drop in price off its 2004 price just to break-even.

    2. Perspective

      Math correction – the principal after capital gains would be $485k, not $585k!

      Assuming he enjoyed the home he lived in and that it met his future needs, this may have been a bad decision. He really needs the market to correct another 25%.

      Moral of the story, your home is not an investment. Try not to treat it or think of it as such.

      1. syvanen

        He recovered $750 k, since he was over 55 he could take out the one capital gain exemption so the tax would be about $50 k. Let’s say for sake of argument he placed it in a account earning 5.5% (actually he placed it in his own business)so he would have a return of $3,208 per month. His rent was $2,800 per month. Also no upkeep fees or property taxes. He wins renting. But IR makes this argument all the time much more convincingly than I do.

        1. Perspective

          The fact that he was in a home that he presumably liked with a mtg no greater than $250k, makes his case for selling unconvincing. I accept every fact in your argument, but it all leads to the final question – Can he buy the same house today and net a profit? I think that’s a hard case to make.

          Now, if he were renting in 2004, and decided not to buy, pocketing the difference between rent and the cost of financing/owning a $750k home, he’d be ahead today because the home’s price is flat from 2004 and expected to decline further.

  17. Quincy k


    It is my understanding that in CA, a bank must obtain a deficiency judgement as opposed to a foreclosure to have recourse. I also believe that there is a one year redemption period before the lender can legally resell the property after a deficiency judgement is obtained.

    Any legal clarification would be greatly appreciated for me as well as your readers.

    Also, 160 GRM is soooo nineties. We will not encounter an seven percent Fed Fund Rate anytime in the near future, therefore, historical GRM’s will be somewhat negated except for areas of abuse and overbuilding.

    We are where we are at because of a flagrant abuse of the fiat money system. A low interest rate environment is the only thing currently keeping the whole system intact.

    And that might not even save it.

    1. IrvineRenter

      Perhaps we can get an attorney to chime in on this one. I don’t know that the law is black and white in this instance.

      If they obtain a deficiency judgment, then they they certainly have the right to go after whatever assets the debtor may have (outside of ERISA protections for retirement accounts.) If they do not obtain a deficiency judgment, it is a bit less clear. I don’t believe it is an automatic forgiveness of debt. They are probably not able to file liens against other assets, but I believe they can sell the debt to someone who might hound the debtor all the way to a bankruptcy court or seek other judgments. Legal or not, I suspect we will see a lot of that happening over the next several years. If they will go after people for $10 on an old credit card, imagine what they will do for $100,000.

      As for the GRM, when interest rates were near 8% in the late 1990s, GRMs fell to near 145. My projection of a 160 GRM is based on today’s lower interest rates. If interest rates climb again, GRMs will decline further, something I think is likely. If we see FED funds rate approach 7%, mortgage interest rates will hit 10% or higher. GRMs will fall to 120 or so if that happens.

      1. Quincy k


        Mortgare rates will not hit 10 percent anytime in the near future(5+years). The System would not handle it and could possibly collapse. BSC was bought out in one day by JPM mandated by the Fed for fear of cascading-cross defaults with unknown circumstances. A total banking collapse. As for 145 GRM’s in SoCal, there were massive defense cutbacks, Rodney King riots, an earthquake following a mini-late 80’s bubble to facilitate that environment.

        It was the perfect storm. Historically speaking, I believe I saw a chart illustrating SoCal as 17 years times rent.

        For the record, if you were to go away to a deserted island for a year and return to a seven percent Fed Fund rate, SoCal would be a very violent environment if the System even survived at all.

        Actually, SoCal is about to become very violent regardless.

    2. Party Pooper

      there are only 4 states that are non-recourse on purchase loans, & CA is one of them. so lenders are not able to recover any financial loss from purchase loans. they can recover from refinances & do so by deficiency judgements.

  18. TheNumbersNeverLie

    As a new father of a 10 month old , I got teary eyed reading that stuff about the kids room and broken families etc…. Then I remembered I am a loser renter and I stopped sobbing.

    Is there a way we can take the children away from reckless, dangerous people such as the people profiled above? After all, if they are going to make this bad of financial decisions, can really trust them to raise kids? I don’t think so.

    1. Schadendude


      Though that sounds like a great idea, were would all the kids go, ’cause the numbers would be staggering.

      I agree with Quincy that we could certainly be on the precipice of something huge. The grand fascade of civility which is the OC does a great job of covering up our baser proclivities until the tide of fortune wipes it all out. When people get hungry enough, neckties will become weapons (and BMWs battering rams).

      Housing, Finance & ConsumerCredit Crash + Runaway Inflation + Recession + BabyBoomerBomb + Peak Oil = OneScarySituation

      I hope we’re wrong Quincy.

      1. Soapboxpolitico

        Let’s not forget the very real possibility that taxes will rise both at the state and fed levels and it’s damn near certain it won’t be Warren Buffett and Bill Gates carrying the load.

        I can see a couple of scenarios where So.Cal and possibly greater California goes right off the cliff, flags flying. It scares the crap outta me!!

      2. Mikee

        Doom and gloom is fun, but come on.
        More likely everyone will move back to Sacramento or Cleveland or ,god-forbid, Arizona.

        We are no longer tied to one area and will move where the jobs and/or cheap housing are.

        It’ll be a hard fall for places like SoCal, but not cataclysmic. Remember the seventies?? We made it through that crapfest somehow.

  19. picflight

    America is for sale;

    If GE sells it appliance unit, what else is left that people can relate to?

  20. Quincy k


    Unfortunately, I am not wrong. I ran a business on the streets of LA back in the early to mid-90’s and it became increasingly violent. I was just too naive and too young to realize it. This time, the monetary contraction currently taking place in So Cal is far more severe and extreme than that of the mid-90’s.

    The Rodney King riot was just an excuse. Prior to that there were already signs of civil unrest, something that we will again encounter by this time next year in one if not many of the major US cities.

  21. Ken

    The housing bubble has enriched many who bought and sold at the right times — assuming they are renting now.

    Which is an iffy assumption. Evidence from the Twilight Zone: Two “investors” back in the Nineties, a RL Goofus and Gallant/Dusty and Sunny pair. Their story was related to me by an informant.

    They were teenagers, busboys in two restaurants in Glendale, and their “investment” was in Magic: The Gathering cards. This was in the early-to-mid Nineties, when Black Lotus cards were peaking around $1000 a card and rising, Magic gamers rented U-hauls to carry their Killer Decks around, and lines for new card packs stretched round the block on the off chance of getting a rare card that hadn’t already been high-graded by a shipper/distributor. Ah, those days of madness embraced…

    Both teenage investors made five figures in about six weeks trading and flipping Magic cards. After which…

    One figured he’d pressed his luck enough and cashed out.

    The other put all the $10-20 grand he’d made back into more Magic cards, because “Prices had nowhere to go but up!”

    Then the counterfeit cards from Taiwan started flooding in, to the point that WOTC (Magic‘s owners) brought out reprints of ALL their cards at base face value, undercutting the counterfeiters.

    Now even the Black Lotus was now worth only initial release value; the second teenage “investor” was last seen staring into space repeating “I’m wiped out… I’m wiped out… I’m wiped out…”

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