Monthly Archives: September 2008

You Owe How Much?

Debt – Face to Face

A few Fridays ago, I profiled some homeowners who conservatively paid off their mortgage, and now they will have a great equity nest egg for retirement. This is how it should be done. Today’s featured property owners did the opposite. They bought ages ago for very little money, they HELOCed themselves into a massive debt, and now they will probably sell and end up with nothing.

Living life well is about balance, and the argument can be made that HELOC spending to “live for today” has its place. How much is too much? Is any amount OK? Many of the properties that I have profiled had evidence of HELOC abuse by previous owners. Many people pulled out $200,000 while their houses went up $500,000. They lived on their HELOCs and still sold for a hefty profit. Were these people foolish and irresponsible? It certainly appears now that the foolish ones were the ones who didn’t refi and HELOC themselves to the max in 2006. Those people got the full benefit of the appreciation turned to income. Of course, those people now have bad credit, but few, if any, of them are paying it back. I know what I believe to be right, but I am interested in hearing your opinion: How much is too much HELOC use?

22 Ninos Kitchen

Asking Price: $828,800

Income Requirement: $207,200

Downpayment Needed: $165,760

Monthly Equity Burn: $6,906

Purchase Price: $49,000

Purchase Date: 6/12/1981

Address: 22 Ninos, Irvine, CA 92620

Beds:	4
Baths:	3
Sq. Ft.:	2,673
$/Sq. Ft.:	$310
Lot Size:	4,600 Sq. Ft.
Property Type:	Single Family Residence
Style:	Santa Barbara
Year Built:	1977
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	S544175
Source:	SoCalMLS
Status:	Active
On Redfin:	24 days

lite-brite

Light, bright and inviting, perfect for entertaining! Comfortably
spacious home on double end cul-de-sac, remodeled and designed to
emphasize family living. Lovely wall of French doors extends family
room into rose garden. Morning sun streams into kitchen thrugh French
bay
window overlooking covered patio, flower garden, and plum trees.
The redesigned gourmet eat-in kitchen includes high gloss Italian tile,
updated appliances, new dishwasher and trash compactor, custom-built
cabinetry. Beautiful upgraded hardwood floors throughout kitchen/family
room, foyer, hall and downstairs bath. Gracious formal dining and
living rooms complete the elegant downstairs. Master suite w/dual sinks
and oversized shower w/bench. 3 large secondary bedrooms have walk-in
closets w/organizers. Supersized 16 x 20 Bonus Room (potential 5th bed)
w/wet bar & built-ins. Shutters,crown molding, and new carpet
throughout! No mello-roos,$72 association fee for club-like amenities,
walk to elementary on greenbelt!

Comfortably spacious? Is there an uncomfortably spacious? Is there a comfortably cramped? I guess that is “cozy.”

So how much did these people borrow? I don’t have data on their first mortgage, and I am not sure if the purchase price is totally accurate (it is listed as a partial sale price,) however, judging by the price of the 1980 home profiled recently, the property was likely only worth about $50,000 in 1981. We will use $50,000 as a starting figure for their first mortgage even though it was probably less.

On 6/30/1997 they opened a $266,250 first mortgage and a $53,250 second. Rather than having the house nearly paid off after 17 years, they have quintupled their debt.

On 10/20/1998 they refinanced with a $263,000 first mortgage. It looks as if they paid off the second.

On 10/27/2000 they opened a $88,000 HELOC.

On 7/3/2001 they opened a stand-alone second for $40,000

On 8/22/2002 they refinanced their first mortgage for $456,000.

On 10/15/2004 they refinanced their first mortgage for $584,500.

On 6/21/2006 they opened a HELOC for $100,000.

Total mortgage debt (assuming the HELOC is tapped) $684,500.

Total mortgage equity withdrawal: $634,500.

If this house sells for anywhere close to its asking price, these people will have their debts paid and get out without a short sale. Of course, they will not have much cash at the closing, but they got to spend all that money with no other repercussions.

What do you think about that? Wise? Foolish? Balanced?

I don’t owe you anything
what now?
not again
you’re a person I will never comprehend
I’ve listened
I’ve tried
I can’t change enough
to make you change your mind
I don’t owe you anything

Debt – Face to Face

Spanish Lace

Spanish Lace — Gene McDaniels

The name Spanish Lace sounds delightfully exotic and enticing, doesn’t it? I imagine the gentleman who bought today’s featured property on Spanish Lace was quite enamored with the property when he got it; however, now he is out $93,236, and he has bad credit. The collapse of housing prices has taken its toll.

For most of the summer, I was profiling small condos and other low-end properties as these where the ones showing distress. Lately, problems at the mid to high end of the market are becoming more apparent. Today’s featured property is a nice, 4-bedroom new home in Woodbury selling at 26% less than its peak sales price. The Villages of Woodbury, Quail Hill, and Northwood II will be where the mid to high end stress will show up first because all of these owners paid bubble prices and they are currently under water. The price collapse in these neighborhoods will spread to others around Irvine. A buyer shopping in the $650,000 to $700,000 price range will be able to get more for their money in these neighborhoods. This will take buyers away from the more established neighborhoods causing transaction volumes to drop off even more. When sellers in the more established neighborhoods become more motivated, they will find competition from the collapsing upstarts.

120 Spanish Lace Kitchen

Asking Price: $689,900

Income Requirement: $172,475

Downpayment Needed: $137,980

Monthly Equity Burn: $5,749

Purchase Price: $933,500

Purchase Date: 3/10/2006

Address: 120 Spanish Lace, Irvine, CA 92620

Beds:	4
Baths:	4
Sq. Ft.:	2,300
$/Sq. Ft.:	$300
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	2005
Stories:	2 Levels
Floor:	1
Area:	Woodbury
County:	Orange
MLS#:	U8003891
Source:	SoCalMLS
Status:	Active
On Redfin:	10 days

Great corner location.Large 2 story detached house. Light and bright
with many upgrades.Beautiful flooring thru out.Stonetree model # 3 with
4 bedrooms 3.5 baths with a big living room that flows into the
gorgeous kitchen area.Large master suite with a balcony and marble
master bathroom.Green belt view and you can walk to all the community
has to offer.

This is REO and not a short sale, so there will be a transaction somewhere near this relatively low asking price. If the property sells for asking price, and if a 6% commission is paid, the total loss on the property will be $284,994. The original owner put 10% down, so he is out $93,236. Washington Mutual is going to eat the rest.

I would like to thank Britney for providing me today’s listing. It is good to have you back…

She was standing there, so beyond compare, in Spanish lace
My heart touched the sky, captivated by her angel face
Dancing neath the moon I soon discovered the new world that
lovers always
find When I saw her there, so beyond compare, in Spanish
lace

We danced away the night, until the morning light said Time
to go
I knew wed have to part, but sadness filled my heart, I
loved her so And
now that love has flown, alone, I think of the heartaches
that I will have
to face Dreaming of that night, the stars that shone so
bright, and
Spanish lace

And now that love has flown, alone, I think of the
heartaches that I will
have to face Dreaming of that night, and stars that shone so
bright, and
Spanish lace

Dreaming of that night, and stars that shone so bright, and
Spanish lace

Dreaming of that night, and stars that shone so bright, and
Spanish lace

Spanish Lace — Gene McDaniel

Open Thread 9-6-2008

Save Me — Queen

The big story of the weekend seems to be the “conservatorship” of Freddie Mac and Fannie Mae. The American taxpayer will now be liable to pay for all the losses on the toxic mortgages these two poorly-run entities insured.

From Calculated Risk:

Bloomberg: Paulson Plans to Bring Fannie, Freddie Under Government Control

WSJ: U.S. Near Deal on Fannie, Freddie

WaPo: U.S. Nears Rescue Plan For Fannie And Freddie

NY Times: U.S. Rescue Seen at Hand for 2 Mortgage Giants

LA Times: Fannie, Freddie takeover possible

This is the bottom line: Freddie Mac and Fannie Mae and insured billions of dollars in toxic mortgages. The losses on these mortgages will end up exceeding the amount of money these companies have. If these companies were to go out of business, the entire secondary mortgage market would collapse, and our real estate markets will be in turmoil as transaction volume would plummet from its already anemic levels. The government believes it has to take over these companies in order to have a secondary mortgage market. A government takeover means the taxpayers of the United States just became liable for all the losses on the bad loans insured by these two companies. When you pay your taxes, you are now paying for a portion of all the bad mortgages given to speculators, flippers, fraudsters and the like.

It started off so well
They said we made a perfect pair
I clothed myself in your glory and your love
How I loved you,
How I cried…
The years of care and loyalty
Were nothing but a sham it seems
The years belie we lived a lie
I love you ’til I die
Save me, save me, save me
I can’t face this life alone
Save me, save me, save me…
I’m naked and I’m far from home

The slate will soon be clean
I’ll erase the memories
To start again with somebody new
Was it all wasted,
All that love?
I hang my head and I advertise
A soul for sale or rent
I have no heart I’m cold inside
I have no real intent
Save me, save me, save me
I can’t face this life alone
Save me, save me, ooooohhhhh…
I’m naked and I’m far from home

Each night I cry I still believe the lie
I’ll love you, ’till I die

Save me, save me, oh, save me
Don’t let me face my life alone
Save me, save me, ooh…
I’m naked and I’m far from home

Save Me — Queen

The Season for Rollbacks

Seasons of Love — Rent

How do you measure the impact of the decline? Five hundred twenty-five thousand Six hundred minutes? Is it measured in hundreds of thousands of dollars? Is it measured in the toll it is taking on families facing foreclosure? Is it measured in the lost opportunities of those trapped in their homes? Is it measured in the devastation to our economy or our banking system? How do you evaluate the real cost? I don’t have answers to these questions; I don’t believe that anyone does.

I have been watching the carnage in all financial markets recently with a curious fascination. I have never before seen deleveraging on such a massive scale. Recently the values of nearly every asset class has been declining: stocks, bonds, real estate, and commodities. This is happening because money is leaving all of these markets for the safe haven of cash. There is often an increase in saving and a curtailment of debt in a recession. This one is particularly interesting because it seems to be a classic “Minsky Moment” where deleveraging is forcing the sale of all assets — even good ones — to repay debts. This is monetary deflation in action. Cash is King again.

We are quickly seeing the end of the spring buying season. Instead of a
rally, we have witnessed a brief flattening, a step on the staircase to
market oblivion. What lies in front of us is the fall and winter both
literally and figuratively. Prices will likely begin to fall again this
autumn, and the winter months may see a very cold headwind. Now that the housing bailout bill has eliminated downpayment assistance programs, everyone is now required to have a downpayment. Also, the FHA raised its equity requirement from 3% to 3.5%. Since very few people were saving money during our failed experiment with 100% financing, demand — as measured by dollars available from lenders to qualified buyers — is going to plummet. The REO supply from the ARM resets and lower prices is going to continue to dump large quantities of must-sell inventory on the market. The stage is set for another equity crushing drop.

24 Seasons Kitchen

Asking Price: $524,900

Income Requirement: $131,225

Downpayment Needed: $104,980

Monthly Equity Burn: $4,374

Purchase Price: $690,000

Purchase Date: 3/10/2006

Address: 24 Seasons, Irvine, CA 92603

Beds:	3
Baths:	3
Sq. Ft.:	1,553
$/Sq. Ft.:	$338
Lot Size:	–
Property Type:	Condominium
Style:	Contemporary
Year Built:	2003
Stories:	3+ Levels
Floor:	1
View:	Mountain
Area:	Quail Hill
County:	Orange
MLS#:	P654361
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

HIGHLY UPGRADED FROM FLOORING TO GRANITE COUNTER TOPS TO CABINETS. NEW
CARPETING BEING INSTALLED ALONG WITH NEW MIRRORS IN BATHROOMS.

When our speculator bought this property with a $552,000 first mortgage, a $138,000 second mortgage, and a $0 downpayment. Basically, he gambled with Chapel Mortgage Corporation’s money, and he lost. This property was purchased by the ABS trust it was packaged into for $462,088. That is a 33% decline from the peak purchase price. Interesting that no knife-catching flippers were willing to bid any higher. If this property sells for its asking price, and if the lender pays a 6% commission, the total loss will be $196,594.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

Five hundred twenty-five thousand
Six hundred minutes,
Five hundred twenty-five thousand
Moments so dear.
Five hundred twenty-five thousand
Six hundred minutes
How do you measure, measure a year?

In daylights, in sunsets, in midnights
In cups of coffee
In inches, in miles, in laughter, in strife.

In five hundred twenty-five thousand
Six hundred minutes
How do you measure
A year in the life?

How about love?
How about love?
How about love? Measure in love

Seasons of love. Seasons of love

Five hundred twenty-five thousand
Six hundred minutes!
Five hundred twenty-five thousand
Journeys to plan.

Five hundred twenty-five thousand
Six hundred minutes
How do you measure the life
Of a woman or a man?

Seasons of Love — Rent

Rental Value

Things I don’t Understand — Coldplay

How much is a property worth? The ultimate answer is whatever someone is willing and able to pay for it. With the remnants of kool aid intoxication still gripping the market, there is no shortage of people with the willingness to pay any price to own property, but with the constriction of credit, there is certainly less ability to pay for it. This is to be expected in the initial stages of a price decline. People’s memories are of the rally and all the money people made, although we will start to see a reduced willingness to buy as the bear market grinds on.

Once the poison of kool aid has been purged from the collective consciousness of the populace, people will require a new motivation to purchase real estate: it is cheaper than renting. I first wrote about this phenomenon in the post How Inflated are House Prices? I later followed up with a more detailed analysis of the Rent vs. Own decision. Today’s featured property is offered for sale at a price far in excess of its cost of ownership. This property is being offered for sale at $589,000, and it was available for rent in January at $2,300 per month. There is a comparable property currently for rent at $2,500 a few doors away. That puts the value between $368,000 and $400,000 for an owner occupant using a 160 GRM.

31 Potomac Inside

Asking Price: $589,000

Income Requirement: $147,250

Downpayment Needed: $117,800

Monthly Equity Burn: $4,908

Purchase Price: $625,000

Purchase Date: 12/29/2005

Address: 31 Potomac, Irvine, CA 92620

Beds:	3
Baths:	3
Sq. Ft.:	1,300
$/Sq. Ft.:	$453
Lot Size:	1 Sq. Ft.
Property Type:	Single Family Residence
Style:	Dutch Queen Anne, Edwardian
Year Built:	1985
Stories:	2 Levels
View:	Park or Green Belt
Area:	Northwood
County:	Orange
MLS#:	S533522
Source:	SoCalMLS
Status:	Active
On Redfin:	105 days
Unsold in 90+ days

Inside location,Three bedrooms and three baths, with two car garage.
One ved room with bath in main floor. High ceiling, Living room with
fire place. Detacged home in Northwood, close to community pool,spa,
awarding northwood high school.

ved room?

There is a reason for this seller’s reluctance to lower his price: he has a huge downpayment in the property. This was a pure speculative purchase made with much of the owners money. If he could have rented the property for $2,300, he could have covered his payment on the $375,000 mortgage. Now, it is only a matter of how much of his money he is going to lose. If he waits until the property hits bottom, he will lose all of his $250,000 equity investment. As it stands now, if someone is willing to pay his asking price, and if he pays a 6% commission, the total loss will be $71,340.

Why would someone buy this property? The monthly cost of ownership would be about $3,700 per month. The cost of renting a similar property nearby is only $2,500. Also, when you factor in the monthly equity burn of $4,908 due to the declining market, this purchase makes no sense. There is only one compelling reason someone would buy this property: they believe the market is at the bottom and they have fantasies of endless appreciation. Perhaps there is someone out there who is only concerned with “owning” a property to provide for their family, but overpaying for real estate for psychological and emotional reasons is not doing the family any favors.

Someone stands to lose $250,000 on this property. The banks are not lining up to offer 100% financing because they are tired of being the bagholder. If this guy does not lower his price quickly to meet the market, he will be the big loser. If he does lower the price to sell, perhaps he can split the loss with the knife catcher. In whatever form it happens, there is $250,000 that is going to disappear into the ethers. Needless to say, I will not be bidding on this property any time soon.

How tides control the sea, and what becomes of me
How little things can slip out of your hands
How often people change, not to remain the same
Why things don’t always turn out as you plan

These are things that I don’t understand
Yeah, these are things that I don’t understand

I can’t, and I can’t decide
Wrong, oh my wrong from right
Day, oh my day from night
Dark, oh my dark from light
I live, but I love this life

How infinite is space, and who decides your fate
Why everything will dissolve into sand
How to avoid defeat, when truth and fiction meet
Why nothing ever turns out as you plan

These are things that I don’t understand
Yeah, these are things that I don’t understand

I can , and I can’t decide
Wrong, oh my wrong from right
Day, oh my day from night
Or dark, oh my dark from light
I live, but I love this life

Things I don’t Understand — Coldplay