Losing My Religion — REM
Wikipedia defines faith as “a belief in the trustworthiness of an idea that has not been proven.” Religious faith is a collection of beliefs based on ideas which are neither testable or provable. If you accept the core beliefs of a religion on faith, you generally get a feeling of peace and well being that serves to reinforce the “correctness” of the acceptance of faith. Most religions build on these core beliefs and assemble a series of ancillary beliefs for guiding human behavior known as religious dogma. California has a major cultural “religion” that cuts across traditional denominational lines — the religion of real estate.
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the “higher power” of market forces — real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn’t matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn’t matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled “Why Christianity Must Change or Die” in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California’s religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California’s Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.
Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.
Figuratively, today’s featured property is a church (just like all other houses in California.) The fact that it is located on Church Street is testament to the faith the buyer had in its continuing appreciation. Based on the resale history, there was reason to believe prices would always go up. Our faithful owner borrowed 100% of the money necessary to worship here.
Asking Price: $649,900
Income Requirement: $162,475
Downpayment Needed: $129,980
Monthly Equity Burn: $5,415
Purchase Price: $815,000
Purchase Date: 1/30/2007
Address: 157 Church Place, Irvine, CA 92602
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,000 |
| $/Sq. Ft.: | $325 |
| Lot Size: | – |
| Property Type: | Single Family Residence |
| Style: | Other |
| Year Built: | 1998 |
| Stories: | 2 Levels |
| Area: | West Irvine |
| County: | Orange |
| MLS#: | P647342 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
UPSTAIRS AND 1 BEDRM DOWNSTAIRS. FIREPLACE & ENCLOSED BACKYARD.
QUIET LOCATION IN GREAT AREA OF IRVINE. WALKING DISTANCE TO AWARD
WINNING MYFORD ELEMENTARY. NO HOA. CLOSE TO TUSTIN MARKETPLACE SHOPS
& RESTAURANTS********AGENTS: PLEASE SEE REMARKS********
It is interesting that 100% financing was still available in 2007. This is a reason the collapse was delayed until the credit crunch really took hold in August of 2007. The sales history shows a number of speculators making good money off this property. Now the bank gets to be the bagholder for the first big drop in value.
Sales History
| Dec 30, 1998 | $290,000 |
|
| Dec 07, 2001 | $388,000 |
|
| Jun 25, 2004 | $735,000 |
|
| Jan 30, 2007 | $815,000 |
|
| Jun 13, 2008 | $715,138 |
|
Each day when I estimate the loss to the lender (notice they are generally the ones losing money,) I base my calculation on the original loan amount. The actual loss to the lender is usually much higher because while the property was going through foreclosure and leading up to its eventual sale, the lender was not receiving any payments, and this loss of revenue was being added to the loan balance on the lender’s books. When this lender foreclosed, they paid $715,138 at auction despite the fact that the first mortgage was originally $652,000 (the second was a total loss.) The additional $63,138 represents the outstanding loan balance on the first mortgage on the date of auction. Some of this might be negative amortization, but the majority will be missed payments and servicing fees. I will continue to calculate losses the way I have been in the past, but I want everyone to realize that the real losses may be considerably more.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $204,094 (plus the $63,138 in lost interest and fees.)
Californian’s may never lose their religion when it comes to real estate, but I suspect in the future the lenders will be a bit more weary when it comes to providing the baptismal kool aid.
.
Oh, life is bigger
It’s bigger than you
And you are not me
The lengths that I will go to
The distance in your eyes
Oh no, I’ve said too much
I set it up
(chorus)
That’s me in the corner
That’s me in the spotlight, I’m
Losing my religion
Trying to keep up with you
And I don’t know if I can do it
Oh no, I’ve said too much
I haven’t said enough
I thought that I heard you laughing
I thought that I heard you sing
I think I thought I saw you try
Every whisper
Of every waking hour I’m
Choosing my confessions
Trying to keep an eye on you
Like a hurt lost and blinded fool, fool
Oh no, I’ve said too much
I set it up
Consider this
Consider this
The hint of the century
Consider this
The slip that brought me
To my knees failed
What if all these fantasies
Come flailing around
Now I’ve said too much
I thought that I heard you laughing
I thought that I heard you sing
I think I thought I saw you try
But that was just a dream
That was just a dream
(repeat chorus)
But that was just a dream
Try, cry, why try?
That was just a dream
Just a dream, just a dream
Dream
Losing My Religion — REM
You are a sun Goddess
The journey begins with curiosity
In Penny Lane there is a barber showing photographs