Walk Away

I’ll Walk Away — James Hunter

Calculated Risk recently had a post Freddie Mac on Walking Away. During a recent conference call, the following exchange occurred:

Analysts: What do you see? Is it in line with historical default rates as they get underwater or does it …

Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater – you know we’re even seeing it when we try to modify and renegotiate those loans – they are walking away. They’re finding it not constructive.

In short, when people go underwater, they are walking away from the property. We now have some statistical proof this phenomenon is occurring. Statistics are great for discussing macro trends and the like, but we take a microeconomic approach here at the Irvine Housing Blog: we show you the properties the owners are walking away from. Today’s featured property is seriously underwater. It is being offered for sale at 27% under its peak purchase price.

37 Night Bloom Kitchen

Asking Price: $575,000IrvineRenter

Income Requirement: $143,750

Downpayment Needed: $115,000

Monthly Equity Burn: $4,791

Purchase Price: $785,000

Purchase Date: 8/1/2006

Address: 37 Night Bloom, Irvine, CA 92602

Short Sale

Beds: 2
Baths: 2.5
Sq. Ft.: 1,545
$/Sq. Ft.: $372
Lot Size:
Property Type Detached, Condominium
Year Built: 2006
Stories: 2 Level
County: Orange
MLS#: I07181021
Source: MRMLS
Status: Backup Offer
On Redfin: 139 days

Unsold in 90+ days


That is a daunting wall of text, isn’t it?

Nice to see that realtors are still using multiple exclamation points.

SPECIAL! I hope no investors are that stupid.




Can you believe someone paid $785,000 for a 2/2? WTF was he thinking? Even at 27% off, it is still overpriced. If this property transacts for its asking price, the total loss on the property will be $244,500. The seller put $78,500 down (which he is losing,) and Bear Sterns Residential (or JP Morgan Chase) is going to lose $166,000.

It is not terribly surprising this owner walked away. He needs scuba gear and an endless supply of money to survive the cashflow drain until this property gets back up above water.

Peak Buyer - No Down - Neg Am Loan

Equity Curve of peak buyer using a negative amortization loan.


I have received a few emails asking about the statistics I post ever day on the featured property, so I thought I would take this opportunity to review them.

Income Requirement: $143,750 — I base this on a four-times income standard. Most financial advisors would say a house should only cost 2.5 to 3 times income. I have my doubts prices will drop that low in Irvine. The income requirement is based on historic lending standards similar to what a borrower would encounter if they were to utilize an FHA loan (The FHA didn’t drink much kool aid.) Current FHA requirements only allow a 31% Debt-to-Income ratio for the mortgage and a 43% total DTI. This is only slightly elevated from the 28%/36% of the pre-bubble era. As lenders continue to lose money, credit will tighten until we are somewhere in near historic standards. I would not be surprised if the FHA were to tighten if defaults become a problem for them as well. The DTI ratio has an enormous impact on the total amount borrowed. As DTIs fall, so does the total amount loaned to a particular borrower. If people cannot borrow as much, they cannot bid up the price of real estate. The entire housing bubble was built on borrowed money, and as the quantity of this money decreases, prices fall. If we return to a 28%/36% standard, the four-times income I use in the calculations may not be made available. Current conditions in the market permit borrowers to obtain 5.5 times income due to the combination of low interest rates and very high DTIs being allowed. This is why there is ongoing activity at our still-inflated price levels. As the credit crunch grinds on, these numbers will fall.

Debt-To-Income Ratio 1986-2006

The opinion of many bulls in the market right now is that FHA loans will save the market. In practice, first-time buyers utilizing these loans will stabilize the low end — at prices 40%-50% off the peak. People utilizing FHA loans are only going to be qualified to borrow 31% of their income. As you can see from the chart above, that will put us back at fundamental valuations with the same relationship between income and price witnessed during the mid 90s. One more thing to note relative to DTIs is that the debt-to-income ratio is a measure of how far buyers are “stretching” to buy real estate. Buyers have historically committed larger sums to purchase real estate when prices are rising in order to capture the appreciation of rising prices. Conversely, buyers have historically committed smaller and smaller percentages of their income toward buying real estate when prices are declining because there is little incentive to overpay. Some may look at this phenomenon as a passive effect of the rise and fall of prices, but since buying is a choice, the fluctuation in debt-to-income ratios is an active force on prices in the market.

Downpayment Needed: $115,000 — I have been using a 20% downpayment requirement because it was the standard in the past, and I believe it will be again. Think about what Freddie Mac was saying in the conference call at the beginning of this post: the rate of default increases dramatically when borrowers go underwater. Given the evidence of this effect, wouldn’t it be prudent for banks to require larger downpayments to avoid the defaults? Considering the staggering losses banks have already endured, I suspect they will begin being more prudent in the future, either that, or they will go out of business. Many people have speculated that 10% down will become the new norm. Why? Wishful thinking is not going to change the behavior of borrowers or lenders. If people default when they go underwater, lenders will do whatever is necessary to make sure they don’t. The only tool at their disposal is raising downpayment requirements. There is nothing in the behavior of lenders or borrowers to suggest that 20% downpayments will not become the standard again. If someone can present a convincing argument why 10% down will become the norm in the comments, I would love to hear it — and the fact this requirement will destroy the housing market is not an argument for why it will not happen, it is simply an observation of the result of higher downpayments.

Monthly Equity Burn: $4,791 — I have speculated that the housing market will drop 10% a year for the next 2 or 3 years (it has actually been dropping faster than that.) If prices do drop at this rate, buyers will see their equity dissappear at the rate of 10% per year. The monthly equity burn is this yearly decline converted to a monthly figure. Most people think in terms of their monthly payment or their monthly cost of housing, so converting this figure to a monthly figure demonstrates the hidden cost of ownership created by the loss of property value.

I hope these explanations clarify things a bit. If there are any other questions, I will attempt to answer them in our collection of astute observations.

.James Hunter

Darling if ever you refuse me
Like I know you will one day
I won’t let the change confuse me
I’ll know that my cue to walk away

When I feel my chances growing slimmer
And there’s every chance they made
When the lovelight in your eyes grows dimmer
I’ll know that’s my cue to walk away

I won’t hang around where I’m not wanted
Wouldn’t make no sense to stay

When I feel my chances growing slimmer
Cause there’s nothing left to say
When the lovelight in your eyes grows dimmer
I’ll know that’s my cue to walk away

I’ll Walk Away — James Hunter

108 thoughts on “Walk Away

  1. granite

    Looks like an exodus on Night Bloom with #33, 38, and 39 also up for sale. It wouldn’t surprise me if some of these are “walk-aways” too. There’s still gallons of Kool Aid at $372 sq-ft.

    1. Esq

      I understand from someone who lives in the neighborhood that there is a HUD apartment complex nearby. This makes parking a nightmare, and causes noise issues.

      Quite disappointing, since the properties on Nightbloom are very nicely appointed. I have been waiting for the prices to come down to Earth, but after finding this out, there is no discount that would cause me to give up my lovely rental.

  2. cara

    It is truly decadently appointed, yet tastefully so, making it hard for a plebe like myself to properly evaluate its price. Given that my grandmother’s 2 bedroom condo in the mountains above Silicon Valley sold two years ago for a cool million (and it wasn’t in any way luxurious, just spacious), I can see why someone thought this was reasonable at 3/4 of a million. Regardless of the small square footage and the lack of a real third bedroom, I don’t this place will fall to under $475 even at the bottom. Not unless there’s something else wrong with it’s location or fees.

    1. George8

      Did you mean no less than $475k at the bottom?

      Think again. This place likely rents $2200. GRM 160 makes it $352k.

      1. CK

        This would rent for at least $2,600, probably more like $2,700. It is configured as either a three bedroom or a two bedroom with a big loft area. That $2,200 you throw around will get you a decent 2 bed IAC apartment, or a crappy 3 bed IAC apartment. This one is a detached condo, the size of a small 3 bedroom house. I’ve been in several of these, and they are far from an IAC apartment.

        $400-$450k at the bottom in 2010-11.

        I’ll patiently await your “Irvine is Different” response, MMG. Keep on wishin for that $300k brother. (Or is it sister?).

        1. CapitalismWorks

          IAC Rents are inflated relative to private party rents. Considering one can rent a 3/3 in Quail Hill for $2700, I can’t imagine that this place would go for anything near that.

    2. George8

      Your grandmother sold at perfect time. Hopefully she rented afterwards.

      If so, she made out like a bandit who got away.

      1. cara

        She died. My parents sold the house, and after the reverse mortgage that had been paying for her 12 hour/day in home care, they had $300k which allowed them to buy at exactly the wrong time on Cape Cod MA (for ~$600k), so when Mom sells that place to downsize to something more reasonable for just her, she’ll probably only be able to keep $150k of it, but hopefully where she’ll be buying will also have gone down and she’ll be fine.

        Oddly zilow still has her complex at 1.1, despite her 1.0 sale. (although it did need some repairs…) Maybe Silicon Valley is a bit behind Irvine in the housing curve.

          1. cara

            Not sure exactly. Mostly they didn’t want to wait another year before buying their retirement home. But with $1000 carrying costs on the place in Cupertino, and only a $300k mortgage on the new place it didn’t look so bad. Perhaps they were worried about getting hit with capital gains if they didn’t put it back into another property?

            For them it was the right decision, mostly because they can easily afford the mortgage. And most importantly we had the first all together in one place Thanksgiving this past fall, before Dad died. That’s easily worth $100k of bubble gains. Whether Mom will now feel stuck in this too huge house is another matter. With the $300k cushion, at least she’s unlikely to get underwater on the new place, which could easily have happened with the reverse mortgage in Cupertino had things played out differently.

        1. madhaus

          Cara, I’m from Silicon Valley. Where is this condo complex? Cupertino prices have just begun inching down this mont. They were up (over same week last year) even last month.

          So I suspect that your parents didn’t sell at the peak after all. If they had sold in Irvine, they would have. At least 3/4 of the zip codes up here are down over last year, but the better zips, and Cupertino is one of them, haven’t dropped yet. But I am pretty sure it’s coming.

          1. cara

            Rancho Deep Cliff is the subdivision, it’s up in the mountains below Ridge Winery. Their complex has been selling at the 1 million mark for 3 years straight, so yeah, it wasn’t a pointy peak, but for that subdivision (with $655 HOA and hefty taxes) it was during the flat top period that preceded the inevitable fall, though I am surprised it’s taken this long.

            The good thing for us about it falling soon is then Mom won’t feel so bad for taking a hit on the house in Massachusetts.

          2. madhaus

            I checked these out on Redfin, these are much nicer than typical condos. They’re big, they aren’t glorified apartments, it’s more like a townhouse development with few units per building and the two for sale didn’t have anyone above or below.

            One of the places at $1.15 mil (reduced from $1.25) sold for $1.097 mil in October ’05! The other put some bloody MAWBLE KAWLUMS in the living room. Who lives here, the Pope?

            Watch for these palaces to decline 20% by next year.

    3. mmg

      Cara–>I don’t this place will fall to under $475 even at the bottom. Not unless there’s something else wrong with it’s location or fees.

      try less than 350k at the bottom. I know its hard for people to think if this place falls to 350k people wont take it, but think about it another way, with so much inventory, loans getting harder to get, people will have alot more choices(bigger sfootage). THIS IS NOT A PLACE TO UPGRADE TO, so not many people will have this kind of downpayment and want to piss it down the drain 😆

      this is a place for a young couple with no kids or older couple downgrading. both of which would not over extend (if prices are not going up 15% per year) to get in. It’s all about psychology.

  3. lawyerliz

    That was 2 years ago Cara. What would your grandmather’s condo sell for today?

    1. cara

      Hard to say. Her complex was kinda small, and about 6 sold within a few months of her for around 1.1 million. The current two sellers there have wish prices of 1.15 and 1.19 but it’s been a year since the most recent sale in the complex. Nearby comps from Redfin were sold at $900k-$950k.

      But yes, this is not comparable to Irvine, my point was more, if some sortof similar areas with standard tract condos are selling for 1 million, I can see why this buyer back in ’06 thought 3/4 was appropriate (unless they did all these new fixings themselves)

  4. NoWow!way

    These folks have excellent taste and know how to furnish and design the interior of this home with colors, placement, accessories etc…. I love what they did with this house.

    Did you notice that the pictures were taken at Xmas time? The first and last Xmas in this home.

    The location is close to the I-5 freeway and those nice ocean breezes will put the soot and pollution from this busy route right into the neighborhood.

    I wish they would list what the HOA fees are. For sure there are Mello Roos taxes associated with this property.

  5. r€nato

    If someone can present a convincing argument why 10% down in the comments, I would love to hear it

    Um, ok, I’ll take a whack at it… 20% down? That’s awfully conservative. If a lender is determined to have as few foreclosures as possible, sure, require 20% down. But that also means turning away an awful lot of mortgage business from people who can only afford to put 10% to 19% down. I would think that lenders are willing to take on the increased marginal risk from borrowers in that range.

    Requiring 10% down would be a dramatic improvement over the days of nothing down. Besides, old habits from the bubble days will die hard. Are there any figures to be had – from pre-bubble days, perhaps – which show default rates at various down payment percentages?

    1. IrvineRenter

      That is probably the most convincing argument that can be made. I would note that lenders were under the same competitive pressures during the 40 years that 20% down was the standard. At the time they reasoned that getting more business by writing bad loans was not a good idea. When they stopped holding most of their loans in the 1970s, they became much less concerned about making bad loans. IMO, it is really going to come down to what the GSEs are willing to insure, and their willingness is going to depend completely upon the default rates they see. I don’t have Freddie Mac’s detailed data on default rates at various CLTV levels, but as you might imagine, the lower the downpayment, the higher the default rates.

      1. Perspective

        “…it is really going to come down to what the GSEs are willing to insure…”

        And the GSEs are moving in the opposite direction of 20% down requirements. Just last week they announced there wouldn’t be increased downpayment requirements in “high risk” areas.

        1. IrvineRenter

          That was the headline for the bulls. What they really did was increase the downpayment requirements for everyone else. Two of the lenders who frequent our forum have noted that the new guidelines going into effect on June 1 have tightened credit significantly and has eliminated about 1/4 of our already dwindling borrower/buyer pool.

          1. Perspective

            You failed to mention what that downpayment is… It’s not 20%. It’s as low as 3%.

          2. IrvineRenter

            Yes, it is as low as 3% for those utilizing a 31% DTI through FHA. That isn’t going to help those who need a 50% DTI to afford a property.

          3. Blueberry Pie

            Is the term DTI backwards, or do I not understand what it means? To me, 30% Debt to Income implies that a loan is made for a debt equivalent to 30% of annual income.

          4. houseonlegs

            DTI is based on any debt you have on your credit report along with PITI associated with the property debt you are applying for. If you have positive cash flow on another rental property, that positive cash flow counts as income. DTI is the debt to income ratio of all debt and all income.

          5. IrvineRenter

            You will often see DTI ratios quoted with two figures such as the FHA 31/44. The first ratio is applied to the housing payment itself and is referred to as the front-end ratio. The second ratio is the total indebtedness as described above, and it is the back-end ratio.

          6. Perspective

            Meaning the ratio of your total monthly housing cost to your monthly household income.

            The back-end ratio takes the total of your monthly housing cost + all other recurring monthly debt to your monthly household income.

          7. IrvineRenter

            Also note these numbers are based on gross income, not the net you get after taxes. If you buy a home utilizing a 44% back-end DTI, you will be spending upwards of 65% of your take-home pay on debt service between your mortgage and other consumer debt.

      2. r€nato

        as you might imagine, the lower the downpayment, the higher the default rates.

        indeed I would imagine that… but is it a linear relationship or is there perhaps a significant drop in foreclosure rate once one hits, say, 15% down? That’s what I am thinking… of course the flip side of that is that 20% down is not quite as onerous when property values are reasonable and not inflated.

        Do lenders bump the interest rate upwards for lower down payment %ages? IAN a real estate professional but I have never heard of that. If I were a lender with a cautious approach to the market, I might consider charging a quarter-point or eighth-point less for those willing to put 20%+ down, to reflect the decreased risk.

        1. Kevin

          I certainly have seen lenders who charge more fees for lower down payments. One lender I’m considering adds a half point fee at 75%, 80%, and 90% LTV.

        2. Blueberry Pie

          I would postulate that the source of the downpayment money could have an effect on the default rates.

          For instance, if somebody saved up cash for 5 years to come up with a 10% downpayment on a $400,000 house, he probably has a lower default rate than somebody who provides a 20% downpayment that they got from the profit on the sale of their previous home.

          The 10% guy has much more value on that money because he really earned it. He already showed the ability to live on less money than he makes and probably will only buy a house he can afford.

          However, the 20% guy is living on “free” money and may already be living outside of his means.

    2. Soapboxpolitico

      Renato – well done, you beat me to it! Quick on the draw this AM!

      I would only add that I believe lending institutions have had a paradigm shift in risk appetite they’ll tolerate. I believe things have changed permanently in the mind of the investor in that double digit returns are demanded. IMO, this isn’t for the better. It’s why publicly traded companies engage in risky behavior and lay-off people at the first signs of lower returns. Gone are the days when Joe Schmoe invested in Bob’s BlueChips at a nice steady return of 5-7%. Of course the “geniuses” on WallSt. feed this nonsense and engage in even riskier behavior.

      In short, 10% will be the new minimum with 20% preferred. They might even offer incentives to folks with a cool 20 down. Am I betting on it? Nope, I have my 20% sittin’ tight and making me a steady return while I wait to pounce.

      One last note … we now also have brokers and others engaged in the mortgage biz, albeit blessedly fewer than before. These folks have no real skin in the game and will again lead the way to marginal loan practices. Never underestimate the short memories of the average Joe/Jane.

  6. NoWow!way

    I’d like to point out the price erosion that is going on. Here is a link to the College Park neighborhood. Please scroll down to the bottom and on the left you’ll see the current listings for comps on this particular property and on the right column, you’ll see what prices have been paid, most recently. CLEARLY, there is a disconnect when you have a property like Yucca ( 2,621 sq. ft, sold for $610k) selling well below ALL of the current properties listed as for sale now. Please note that the square footage of ALL current properties are BELOW the Yucca SQ.FT.


    $699k and $690k for the Blackthorn properties are out of line: They back directly up to the train tracks and those trains are loud – day and night. Blackthorn has always sold at a discount in CP in comparison to other homes that are at greater distance from the tracks.

    The Athel property shows no interior photos and the photo of the pool was a bad idea – it shows neglect and future maintenance problems. The residents were in the process of upgrading the “curb appeal” with the brickwork, the driveway etc.. However, the front patio is in some stage of “upgrade”, in that it is bare dirt – the slab has been removed.

    The pine property was upgraded in the kitchen area, in particular. But apparently they ran out of steam/cashflow in that they don’t even have curtains in their main living space – just a curtain bar. No pix of the bathrooms or Master Bed, so the upgrading seems to be centered around the kitchen area. Their upgraded landscape doesnt show well- dead plant climbing the front of the home and the grass in the back is dying off. A couple more super hot weather days will not be kind to whatever “upgrades” have been put in. They’ve been having open houses a couple of times a week and there seems to be a number of people who have visited the property. This street seems to be popular with the Feng Shui crowd.

    The important thing here is the fact that the current house prices listed are absolutely NOT IN LINE with the reality of the REAL selling prices that have been occuring. Potential knife catchers, beware!

    1. IrvineRenter

      I imagine this will become very apparent when they go to get financing. Lenders are no longer ignoring low comps.

      1. NoWow!way

        For me, the disconnect between what the homes have actually sold for, versus what people are asking for now, confirms that the hype that this spring would be the “recovery” is at work.

        Realtors have the comps for these properties. Starting some $80k over the last sale of the BIGGEST HOME NOT ON THE RAILROAD TRACKS is ridiculous.

        The Athel property is a REO, too.

    2. ipoplaya

      Mayten must not have had that out-of-line pricing since it got into escrow this weekend with a $699K list.

      1. NoWow!way

        Thanks for the info. Just looking at the recent comps in the neighborhood, do you think they’ll have any problems with financing the buy?

        1. mike in irvine

          nope, chances are they will put 30-50% down.


  7. Allison C.

    Hello, IR, thanks to some of your readers’ input, I am renting instead of buying. Now,I have been contemplating if I should ‘rush’ to buy before the end of the year because of the temporary increase of conforming loan limit. Or should I wait? I would be looking for a 2,500 sq ft. sfr. Thanks in advance for all suggestions. 😉

    1. Perspective

      The likelihood of the conforming loan limit coming back down in 2009 is slim to none.

    2. IrvineRenter

      Consider what will happen if the temporary conforming limit is not raised. Will you be priced-out? Or will prices have to fall until buyers like yourself can afford to buy? I think the answer is obvious: being priced out is a fallacy, prices will fall. Also, the raising the conforming limit is going to have little or no effect on prices. It will permit the lenders to offload some of these loans in the secondary market, but the interest rates being charged are higher than for regular conforming, and the DTI requirements are much tighter. In other words, these loans are being made available to people who can really afford them, but the people making $100K who took out $800K loans are still DOA.

  8. Perspective

    “…We now have some statistical proof this phenomenon is occurring…”

    Where’s the statistical proof? It was a comment presented with no stats. How many underwater defaults are Fannie/Freddie seeing from borrowers in non-exotic loans with standard DTIs? That’s what I’m waiting to see. In fact, the media is starting to report that all of the “voluntary walkaway” reports are not supported by any statistics.

    I’m not saying it isn’t happening, or won’t, I just want some stats!

    1. IrvineRenter

      Perhaps Freddie Mac will put out a report with all of their statistics for the whole world to see. I have a hard time imagining they would simply make something like that up during their conference call. It is not a positive idea they would want to puff up.

      “if they find themselves quickly underwater – you know we’re even seeing it when we try to modify and renegotiate those loans – they are walking away.”

      This is voluntary walkaway. Freddie Mac would not be contacting these people to restructure their loans if they were not already pre-screened as being qualified. The fact that these people who could afford to continue making their payments with a restructured loan are choosing not to do so is very telling. If this information were coming from a small mortgage lender or an individual broker, I might ignore it as anecdotal, but I doubt one of the GSEs would be saying this unless it was a statistically significant phenomenon.

      1. Perspective

        That’s what I want to hear from Fannie/Freddie: “We screened our delinquent portfolio for buyers who could reasonably afford their loans based on the fully-indexed rate which represent x% of the delinquent portfolio and x% of these homeowners continue to be delinquent and foreclosure is expected.”

        Until I hear that, I don’t really know what they’re talking about. Maybe their motivation is to appease the public and Congress by trying to illustrate how proactive they’re being and that buyers just don’t want to work things out. i.e. “It’s not our fault, it’s the buyers’ fault, it’s the housing market’s fault, it’s the economy’s fault, etc.”

      2. Anonymous

        If someone did an Alt-A, overstated their income, then it would indeed appear they could afford the house on the loan docs, right? And you’d expect them to get the refi call. However, they wouldn’t really be able to afford/keep it, would they? Not exactly voluntary walk away in that case,

  9. Rkp

    IR – what type of loan did the owner take on this property. You mentioned neg am but it wasn’t clear if this owner took that.

    I get confused by these type of owners. Why put any skin in the game if you are speculating? I have friends who put 20% down on a 700k house and their neighbors are now selling for 550k for same floorplan. Sure they are bummed but they can’t imagine walking away as they still would need a place to live and they can afford their monthly on a fixed 30.

    1. Perspective

      I don’t believe people like your friends are walking away. Some of these homeowners may walk away if/when the price declines are dramatic (30%+), but they need to research this “rational” decision. Fannie has already stated that they will not purchase loans with borrowers who have foreclosures within 5 years.

    2. IrvineRenter

      Yes, the owner took out an Option ARM with a 1% payment rate.

      I get confused by these owners as well. I suspect they put money into the transaction to get better financing terms. They probably did not think it possible that real estate prices could decline, so they did not think their money was at risk.

      As for your friends, even if they are only slightly underwater, their is still “option” value in their mortgage. Prices do not have to move up very much before they are “in the money” again. The further “out of the money” a homeowner is, the less option value they have. As your friends fall further underwater, they will likely grow more despondent and think more seriously about walking away. As long as their payments are manageable, they will likely stay put.

      1. rkp

        “As your friends fall further underwater, they will likely grow more despondent and think more seriously about walking away.”

        I don’t see that happening. Not just for my friends but I don’t think most people who bought on a 30 year fixed with affordable payments are going to walk away. Where would people walk away to and what would motivate them to if they can afford their payment and the house meets their needs? Just having buyers remorse is not going to cause them to get up and leave if they aren’t stretching themselves. They would still need to find a place to rent or buy and would have to go through hassle of moving and ruin their credit scores. I don’t think people who took 30 year conservative mortgages will ruin their credit scores if they can afford their payments and stay in their houses.

        As I said before, my parents and inlaws were both underwater in the mid 90’s and never thought about walking away. I think we will see walking away by the folks that have a reset mainly. Majority with a 30 year won’t walk away unless they have to move for job, divorce or such things.

        1. Blueberry Pie

          I’ve been underwater on my car since I bought it 18 months ago. I still need that bad boy to get me to work.

          1. Perspective

            Funny how most people accept the immediate depreciation of their new car of 25%+, but your house depreciating 15% will compel you to walk away.

        2. lendingmaestro

          I agree with what you’re saying. The problem is not many people purchased with 20% + as a down payment in conjunction with fixed rate mortgage.

      2. CapitalismWorks

        I think you are forgetting about the other option (pardon the pun). The PUT option. The lower this thing goes the more moneyness the put. As prices continue to trend down difference between carrying costs on the existing mortgage less carrying costs on the same unit in the current market (accounting for the additional costs of destroyed credit for seven years), becomes are very compelling argument. The greater the negative result of this simple equation, the greater to the incentive to exercise the put.

        1. IrvineRenter

          Your analysis is a good one. I bet if you compared the price curve on a put option as it gets in the money to the increase in defaults as people go underwater per Freddie Macs data (if we had it,) you would probably see a striking similarity. That is why they were commenting on the unusual “steepness” in the default rates.

    3. Rocker

      Though they have little room for error now, a job loss or a medical emergency, anything that can stop their ability to pay their mortgage could force them to sell in a down market and they will need to bring a check to the closing table besides losing their down payment.

      And the question is, how long will they be living under this risk? are they aware of that?

      1. Perspective

        That is a risk that should concern anyone underwater, but that wouldn’t result in a “voluntary walk away.”

  10. Anthony

    Re: the first graph.

    I would like to know the legend of the 3 lines in the first graph.


    1. IrvineRenter

      The light gray line represents the market price with its associated bubbles due to irrational exuberance. The steady line beneath represents the fundamental value of rental parity to which prices fall after each bubble deflates. The other line represents the equity curve of today’s neg am borrower.

  11. No_Such_Reality

    “Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater ”

    Not to split hairs, but that statement is very different than ‘For borrowers that find themselves underwater.’ To me, it specifically is talking about Speculators, not overextended home buyers that actually bought it to live in. Granted, in the last two, three years, I don’t know if the speculators were 20% or 80% of the market, I suspect 80%.

    Also, it could be Conference Call talk too and really mean they see it across the board but make it sound like it’s a narrower band.

    1. Soapboxpolitico

      I’m a little lazy this AM so I won’t go looking for the article to back this up but … I remember reading a piece about a year ago or so where a large percentage of the sales at the peak were classified as second homes. (I think the percentage was north of 50%, perhaps as high as 60%, forgive me I just don’t recall the specifics. I just remember being stunned at the stat being that high.)

      Clearly it’s anecdotal but we can infer that nearly all those sales were speculation and not Mikey the Millionaire buying a crash pad. Maybe a stretch here but I would venture that we’ll see nearly all those purchases on the market as shorts and REO’s if not already.

      1. CapitalismWorks

        The national vacancy rate (no owner or renter living there), is running at 2.9%. This is the highest ever recorded in the 55+ year history of this statistic. So yeah, there were A LOT of speculators buying in the past few years, and many of them are going to walk away from bad investments.

          1. Major Schadenfreude

            Homeless rate went down a lot…they’re squatting in the empty homes!

            /sarcasm off.

  12. EvaLSeraphim

    How do you define a walk away? To my thinking, it’s like jingle mail. Here though, it’s a short sale and the owner wants to avoid the foreclosure, if possible, by selling short. To me, that sounds more like a reset problem than a true walk away.

    1. IrvineRenter

      I would define “walking away” as someone who was capable of making the payments on a mortgage who for whatever reason decides not to. It goes to the heart of the statement made by Freddie Mac that people who were offered loan workouts are not doing so because “They’re finding it not constructive.”

  13. picflight

    [b]My Offer[/b]
    After giving this property a thorough look, my offer today is [b]$184,000.00[/b]. I believe this is what this property is worth.

    1. Soapboxpolitico

      Ouch! That is bearish indeed! 🙂

      I believe the equivalent rent is $2200/mo. So a GRM of 160 would put it at $352,000. (Previously posted above too.)

      $200K would be a steal indeed.

      1. jhill

        It would be around 200K in a nice area in Phoenix (where it will be about 106 today) or Tucson (103). Use the 375K you have left over for regular weekends in La Jolla, Laguna, etc. And don’t tell me about schools, nobody with kids lives in a 2/2.

          1. CK

            LC — Do you think this is the IrvinG, TX Housing Blog? Last week Irvine was “not that different than Corona”, and now it has weather rivaling Phoenix? Try 83 degree forecast high for IrvinE, CA. 76 tomorrow.

            Perhaps you were not aware that Irvine is about 8-10 miles from the ocean, as the crow flies. That body of water tends to have bit of a moderating effect on the weather, FYI.

          2. Rocker

            LC, CK,

            FYI, inspired by your weather debate, just to let you know how far “the information at your fingertips” mantra has gone:

            Here’s a weather map for Irvine (and other OC cities), where you can see the weather stations measurements updated almost every few seconds:

            [url=http://www.wunderground.com/stationmaps/gmap.asp?lat=33.70378&lon;=-117.79678&zoom=11&type=map&rad=1&rad;.num=1&rad;.spd=25&rad;.opa=70&rad;.stm=0&wxsn=1&wxsn;.mode=tw&svr=0&cams=0&sat=0]Irvine Interactive Radar & Weather Stations[/url]

          3. No_Such_Reality

            But here’s a simple check during the summer. Drive to Laguna Beach, turn around and drive back up Laguna Cyn Road to thru the 131 to Northpark, get off on Irvine Ctr and hang a right towards Portola Spings. Let us know if you car’s thermometer can keep up with the temp change. How wait, I forgot, those roads are all gridlocked during the summer.

            For alternate quick humor, just hang an inland turn off the 405 on Culver and watch your outside temp soar as you head inland thru Irvine.

            The homes in Portola need the AC running in January to keep the home comfortable during the day.

            Irvine is a big place. UP is very different than Portola Springs.

          4. CK

            LOL Rocker — That’s the coolest thing I’ve seen all day. The temperature on this thing thing reads 90 for Irvine right now, I pulled weather.com for my zip (92614) and it says 84. Wonder who is right? Either way — it’s too hot today. I like to complain if it gets below 60 or above 80.

          5. CK

            NSR — too funny. Did that just yesterday! Left Aliso Beach Park at 2:30pm, and noted that it was 80 (per my dashboard). As we headed up the 133 was calling out temperatures to my wife. It was 89 by the time got to the 73, and 94(!) at the 133/405. And then back down to 89 by the time got home in Westpark. I believe that is what is referred to as microclimates.

            The best climate I could find yesterday was under that 63 degree surf….Oh how I wish I could afford Laguna….*sigh*

          6. Soapboxpolitico

            WOW! Are we off-topic or what? 🙂
            But hey, I’ll join in … speaking of micro-climates… I ride a motorcycle frequently and one really becomes sensitive to even minor fluctuations.

            Coincidentally, riding west on 133 (Laguna Cyn) there is a strange little dip in temps right before you get to the 73 overpass. In fact, it’s noticeable and somewhat constant. Just a week or two ago I road thru there and I swear the temp felt like it dropped 10 degrees. Try it sometime.

          7. No_Such_Reality

            “Coincidentally, riding west on 133 (Laguna Cyn) there is a strange little dip in temps right before you get to the 73 overpass”

            Yeah, it’s called Shade. http://en.wikipedia.org/wiki/Shade

            It’s created by the tree canopy heading down the canyon.

          8. Soapboxpolitico

            Cute and snarky but wholly inaccurate. The only shade to be found on that stretch of the 133 is the overpass itself and I specifically said it’s BEFORE one reaches the overpass. I suggest you pay closer attention next time down the canyon … if you’ve ever been down it.

            It’s akin to experiencing a thermocline in the open water.

        1. Blueberry Pie

          I think the formula for a house is:

          $300 x square footage
          absolute value of (temperature extreme minus 75) divided by 100
          Times $200,000
          summer humidity percentage times $100,000

  14. Seattlegameboy

    My Offer

    After giving this property a thorough look, my offer today is $24,000.00. I believe this is what this property is worth.

    Only a dumb knifecatcher would offer over $180k for this dump.

      1. Seattlegameboy

        I have about the same chance as picflight and he is offering $160k more!!! 🙂

  15. William E. Jones

    I say it all the time, so if you’re sick of hearing it just skip this message…but paying more than $500K for a two-bedroom house in Orange County, unless it is on or very very close to the beach, is just outrageous. It’s just an insult. There has to be a constitutional amendment against it.

  16. alan

    I’ll weigh in…

    $2,200/month est. rent seems low to me for such a highly upgraded apartment, I would think you would ask a premium and lease it out to the wealthier riff/raff rather than just taking the going rate based on sq footage.

    Also, did you see that they put in the same pic of the bbq/patio three times. Must be pretty proud of that small patio.

    1. Soapboxpolitico

      True. I was speaking more from my personal experience, not considering any premiums. I rent in a “luxury apartment” complex in Foothill/Lake Forest and we pay $2200/mo. for just about this exact size place. This one is about 80 sq.ft. larger but same bed/bath mix and we have an attached two car garage. (Swanky no?!) 🙂

    2. freedomCM

      Isn’t IAC bringing on a lot of similar apartments?

      How big do you all estimate the target audience is for $2200 rentals?

      Can you convert them into buyers? Are those people likely to buy a 2/2, or more likely to want something larger? Are they likely to be corporate transferees on the career track who don’t really want to buy? Are they more likely to want to buy closer to the ocean/nightlife if they are younger/single?

      1. Soapboxpolitico

        freedomCM – Since I currently rent such a place and pay the $2200/mo. I can tell what I’m looking for as a buyer and it’s certainly NOT a 1500 sq.ft. attached 2/2!

        My wife and I are settled on something around 2000-2200 sq.ft. 3/2 or thereabouts and SFR, older neighborhood, NO Mello Roos and low HOA. We don’t care about yard size, I am morally opposed to MR and I have little value for an HOA but recognize they’re a necessary evil. I do not mind buying a 30 year old home at all as I tend to think they’ve got a little more character and diversity than the cookie-cutter, stucco-boxes jammed onto stamp sized lots these past 10 years or so.

        (Did I mention my degree is in architecture? I mention it now because the kind of homes built in the last 5 years in Irvine actually offend my sensibilities and training, but that’s only my opinion.)

  17. Ben

    Irvine Renter –

    I find your purchase stats/requirements useful, but a bit misleading. The income requirement you list is based on the basic DTI ratio you described assuming that 100% of the purchase price is financed, but then a 20% downpayment requirement is also listed.

    Using this property as an example, (to me at least) your posts make it seem like a potential buyer must have both a $143,750 income and a $115,000 down payment. Instead, (using your usual assumptions which I think are good ones) one could either buy this property with a $143,750 income and zero down, or if they put the 20% down you list, then only a $115,000 income would be needed because they would be borrowing less.

    I’m a daily reader, but if you’ve already made this clear (or my math is just wrong), I apologize.


    1. IrvineRenter

      I am using the income requirement for total purchase price. The actual loan would be around 3.25 times income, and the downpayment would be about .75 times income. The market bottomed in 1997 around 4 times income with people putting 20% down, so it is a useful guideline.

  18. Kelly

    Isn’t this property considered part of Northpark not Northwood? My family and I are new to CA (moved here 3 months ago from MA) We looked at this property a while back but couldn’t quite figure out that neighborhood. We have 2 small children and didn’t see many kids around there. Out of curiousity, can anyone provide any info. on that neighborhood? It seems a little off the beaten path.

    BTW my husband and I both love this blog! It has given us great information on housing and a lot of laughs! Keep up the great work! 🙂

  19. ochomehunter

    Question to Irvinerenter:

    Fannie Mae and Freddie Mac announced over the weekend that they will do away with larger downpayment requirements in areas throught. This would mean that a person who has 3-5% for down would be albe to get loan. Again, my question is that if someone goes for a 95% loan, what would be the DTI? If its no more than 31% and assuming 31% is on adjusted gross income taking out all other debt and expenses, it would leave the median buying power of Irvine resident to get approved for a loan no more than $400K, given he makes median income. Again, media is all hyped about this new developments from FNM and FRE, I dont see a turnaround anytime soon. Do you?

    1. IrvineRenter

      The whole announcement has been spun as a bullish loosening of credit, but the lenders in our forum who have actually read the new guidelines (because they have to live with them) say the devil is in the details. In order to qualify for a low downpayment scenario, you have to have stellar credit, a low DTI and cash reserves. The guidelines have been tightened across the board. Masterofdamoney has estimated that 1/3 to 1/4 of our already depleted borrower pool cannot meet the new standards. I anticipate fewer escrows and more deals falling out of escrow after June 1.

      The 31% requirement for FHA — which is still the only game in town for getting 3% down loans — is a front-end DTI that applies to the mortgage payment. They have a 44% back-end DTI applying to total indebtedness.

      Right now, the GSEs are the only secondary market. The ABS market is basically dead right now. This puts the fate of the market in the hands of the GSEs. As they tighten credit availability, transaction volumes will wither and prices will drop. They will continue to tighten as long as default rates are high, and default rates will be high until prices are affordable and they stop dropping. The downward spiral is in full force.

      1. ochomehunter

        Thanks IrvineRenter. I am planning to hop on board Mid 2009-Early 2010, given the fact that we have affordable home that time and things look good on future growth. I am sure Govt. will try everything in their arsenal to wadeoff downfall, I bet nothing is going to work. History repeats itself, housing would be least desirable investment as compared to other markets which wil pick up first such as Stocks, etc. I am sure most investors who speculate will stay out of housing for a long time to hereon.

  20. Chris

    I’d rather pay $450k for 2, 2 and 1/2 in Oak Creek…there’s one listed now with no taker yet.

  21. bought_high


    I have respected your analysis and your ability to predict prices based on fundamentals, but you gotta stick to the fundamentals. The house price as a factor of income is absolutely meaningless! The house mortgage as a factor of income is meaningful. You know interest rates set the amount someone can pay for a house and not some quick short-cut that “smart” financial advisers use. Published financial advisers (see BMIT posts) have proven time and again they cannot understand simple financial principles – so they stick to short-cuts.

    By your numbers above – $143,750 yearly salary, this person meets 31% DTI on mortgage when the loan is at 9.04%. Now seriously, the credit market hasn’t gotten that bad yet. I still see published rates at ~7% for JUMBO’s.

    Buying at a low fixed interest rate (like I did at 5.63%) unfortunately ties you to your house if the rates rise – since your selling price suffers based on others DTI% limitation. This is probably as valid a reason as fraud out there right now. 5.63% to 7.0% means 14% loss on the house price.

    1. Surfing in Newport

      As other Astute Observers have pointed out on the blog, most people do not do a calculation. The look at their financial situation of what they are willing to spend on buying vs. renting. While it may seem strange that a fundamental such as price to income ratio would stay fairly constant, their are actually good reasons that this happens.

      You can’t think of interest rates being raised and lowered in a vacuum. On average interest rates should reflect the general inflation expectations of the market. So if interest rates are higher, then one would expect inflation expectations to be higher. If inflation expectations are higher, then spending more per month for housing relative to renting makes more sense. This effectively cancels out the decrease in price caused by higher interest rates.

      Bottom line is that nominal interest rates should not have a big impact on housing prices. Real interests however are another story. The bubble started because real interest rates dropped. Then the cycle was reinforced by the feedback effect of future expectations of price gains. Real interest rates going up because of the credit crunch should have the opposite effect.

      Historically as late as early 2000’s (I posted this previously) the price to income ratio was 4.5:1, at the peak of the bubble it got to be over 10:1. IR’s use of 4:1 may be a little low, but not by much.

      1. bought_high

        Surfing :

        You’re probably right that most people do not look at the ratio of house price to income – it doesn’t matter if you intend to stay in the house. But anytime someone looks at what they can afford – they are looking at payments. And payments are based on the interest rate of course. When people bought with negative amortization loans, they got duped – and the bank got whacked. But as other astute observers have noticed – people in stable 30 year fixed mortgages are not going to leave if they can afford the payment unless compelled by another reason. To try to make money by walking away is a dicey bet – you’d have to bet on the market depression longer than your credit record impairs our ability to buy a house.

        But you are right that inflation is underwater home owners friend.

    2. IrvineRenter

      When calculating the front end DTI of 31%, it is not just the mortgage payment, it is the mortgage payment plus mello roos, PMI, FHA insurance, property taxes, HOA, hazard insurance, etc. In short, it would not take a 9% interest rate to lower the qualifications to 4 times income.

  22. CK

    Silly’s Mom — Although I agree with your assessment that this weird little neighborhood does not really fit anywhere, this tract (Mericort) is technically assigned to Northwood in a neighborhood called “Raquet Club Park”. Tamarisk by William Lyon is also assigned the same neighborhood. See link below for all the Irvine tract codes.


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