Irvine Renter — Authors@Google
I go on for over an hour about The Great Housing Bubble. I hope I kept it interesting.
We are scheduled to have an IHB Block Party on Monday, March 9,
2009, at J.T. Schmids at the District. Come out and meet with everyone
from the IHB.
In this weekend’s open thread, I have a brief analysis how the government is selectively nationalizing certain companies to provide a means for pumping cash into the economy to make up for the losses caused by asset price deflation.
Also, I would like to share with you some interesting blog posts I read this week at The Housing Chronicles Blog, and at the site of local realtor, Shevy Akason, who has been profiling OC properties at or below rental parity.
Ring of Fire — Johnny Cash
I fell in to a burning ring of fire
I went down,down,down
and the flames went higher.
And it burns,burns,burns
the ring of fire
the ring of fire.
The Housing Chronicles Blog
How many people would actually walk away from mortgages?
12% of all mortgages and 48% of sub-prime mortgages in default
Inman News suggests 10 ways to reform buying/selling of real estate
Shevy Akason’s Site
Laguna Hills Investment Opportunity
Costa Mesa 3/4 luxury home— Value buyer opportunity!
{book1}
Our economy is a mess. The Federal Government and the Federal Reserve have to find a way to put out a fire burning through $3,000,000,000,000 (that is three trillion dollars).
So how do they plan to do it? Their partial nationalization of several banks (including CITI), AIG and the GSEs provide them with 3 major conduits into the national economy. By pumping money directly into the banks through disguised purchases of common or preferred stock, they can shore up the balance sheets of these institutions and put them on a solid footing to lend once asset valuations have fallen to cashflow sustainable levels.
AIG is the ultimate backstop. Since AIG insured everyone’s bonds, it is the counterparty that is going to absorb the majority of the losses in our financial debacle. By taking over AIG, the government can cover these losses instead of spreading the pain to bondholders that include most banks. In the opinions of those in charge, the losses are too big to be passed on to the bondholders without causing a meltdown of several other large financial institutions.
It is easier to cover these losses through AIG than it is to engineer 20 more government bailouts. It is easier to endure the public outrage over huge losses at one firm than it is to endure moderate size losses at 20. Either way, the government is going to have to pick up the tab because the losses are simply too large. At least that is the thinking in Washington. The are probably right.
All of these losses were triggered by the housing market. Controlling mortgage interest rates and terms by taking over the GSEs is the only way to prevent a complete meltdown of the housing market (think 60% – 80% declines rather than the 40%-50% declines we will see). The recently engineered bailout of homeowners–which will not help Irvine–would not have been possible if the Federal Government did not own the GSEs.
Each of the institutions taken over by the government (CITI, AIG, GSEs) provide a conduit for the direct infusion of cash to make up for the losses in our economy. Without these cash infusions, things would likely get much worse. Many will disagree with this assessment, particularly those who believe in unfettered free markets; however, whether you agree or not, this is the unstated policy our officials are following. Let’s all hope it works.
{book2}
Love is a burning thing
and it makes a firery ring
bound by wild desire
I fell in to a ring of fire…
I fell in to a burning ring of fire
I went down,down,down
and the flames went higher.
And it burns,burns,burns
the ring of fire
the ring of fire.
The taste of love is sweet
when hearts like our’s meet
I fell for you like a child
oh, but the fire went wild..
I fell in to a burning ring of fire
Ring of Fire — Johnny Cash
“I hope I kept it interesting.”
Ya gotta be kidding. I was glued to the computer the whole hour. Nobody explains the bubble better. It must the “anger” of still overpriced Irvine houses that motivates you to write and speak so well on this issue.
Mr. Akason has me wondering about being an investor with his use of the RentvsOwnulator. The only fly in the ointment is if rents start to slide.
He is someone I would trust to help me find an investment property–a true investment property and not a speculative flip. He understands cashflow analysis better than most. He is trying to carve out a niche in this area. I think he will be successful.
A coworker who tabulated rents for many of the new coworkers noticed a drastic slide in rents for new comers. Without asking, the landlord reduced his rent by ~$100 per month ($1500 to $1400) for a 12 month leased apt. New rents in the Winter 07/08 at $4300 high SWF, early summer $3000 for ~2500 sf. COND
Last spring the Irvine building I stayed had 30% vacancy (available for leasing) and ~30% were paid by company for temporary housing but were unoccupied.
I am trying to do the same thing for some potential clients that would like to buy an investment property. Problem is, most of the candidates I find are short sales. Take the 82 Night Heron Ln property listed at or below rental parity. A quick look at the deeds shows what appears to be multiple mortgages. A short sale would require all the lien holders to cooperate. If all the mortgages are from the same lender, this is a possibility. But on this property, and many, if not most, of the short sales I see, there are loans from multiple lenders. Given that the junior lien holders face a total loss on most of these deals, there is little chance they will sign off.
So for now, all I can tell my clients is I will be happy to sell them a property, but the current reality is it will not be a profitable rental for some time, or they need to wait for prices to come in-line with the economy. Making me quite possibly the worlds worst real estate agent.
Even though I own the book and have been a daily reader for a long time now, I sat through the whole thing.
Good job!
Great lecture. My favorite pat was the announcement that “America was (is) a big Ponzi Scheme.”
Amen to that! I wonder how long it will take Americans and the rest of the world to realize this? I love how this country creates huge scams and labels them with titles like “the American Dream”, “Social Security”, “Stimulus Packages” etc…the list goes on and on LOL!
IR-
Great lecture … and with no teleprompter.
I like your suggestions for reform. Too bad most of them are not new ideas … they’re actually the rules our parents had to live with when they bought houses. We abandon those rules, and now we’re all paying the price.
Great Q&A session too!
Bravo Sir!
Ah-HA! You didn’t open with a joke! haha Just kidding, wish I would have been there, that’s a great lecture.
Good job!
-bix
I am glad you enjoyed it. My wife teased me about watching it. She kept asking me if I found myself entertaining. She could only take about 5 minutes of it. Of course, she has to live with my blather about the housing market all the time, so I can understand…
IR should be the Secretary of Treasury instead of that tax evader if Obama had any intelligence. Instead, the radical President is staffing himself with tax evaders, croanies, thugs, and shitheads who want to bail out all their buddies who are nothing but tax evaders, croanies, thugs, and more shitheads.
We don’t need “changes” but “unchanges”.
Yes, good, interesting, and very informative presentation. I keep hearing about how lenders are not lending – but I think they are lending to credit-worthy borrowers. FHA loans (even jumbos) are available with about 3% down – even to people whose credit is not perfect. I guess everybody wants to live in a Peter pan world than the real world. While the shock is too painful to ignore, I’m not so sure the lesson has been learned.
True, they are lending if your score is between 780-830.
But, if you fit in this category, you probably are savy enough to wait for the bottom. A bottom where you could afford to put 80% down, interest rates and unemployment will be in double digits.
Some lenders are making deals, but they are very paranoid. The pendulum has definitely swung to the other side.
And they are busy with refinances.
We got our refinance deal approved, now we got to wait up to three weeks before we close. The story I was told is that lenders laid off quite a few people and the ones that are left are overwhelmed with demand.
Our scores are mid 700 and we got our refi approved.
At the low end of the “conforming” jumbo.
Fixed 30 years at 5 3/8. 50% LTV (house next to us just sold). Full documentation of income, financial status. Not self employed…. blah, blah..
They even wanted to put us in an impound account, but I refused.
That’s how paranoid lenders are today. With a good track record and lots of money in the deal they still wanted us to accept an inpound acccount.
I thought about the cost of extending the mortgage by refinancing, but we’ll be saving 500 bucks a month so we can easily put that into the loan and make it into a 15 year loan.
what I was trying to say is that “see where too easy credit led us”. I’m not at all for going to the other extreme and not lend at all, but common sense lending needs to return and stay that way. Too easy credit cuased inflated real estate prices and created so many dislocations before and after the crash; it’s best not to repeat the same mistakes because we wanna get things going so quickly. Otherwise, what has really been learned?
I am loving all the music!! LOL—Go Larry great job!!
IR,
Great insight into the minds of the “investor” or buyers.
Your observations on panders of the RE bubble and finance bubble:
Losing is wining
It’s different this time.
IR’s response “Just Don’t Do It.” Funny that the mantra of 1980-2005 was “Just Do It.”
http://findmylandmark.com/the-blog-f18968.html may be of interest on the life a nation or empire.
The people that acted responsible are now forced (not asked) to pay for the excess of the irresponsible borrowers, bankers, brokers, lenders, govt. and political hacks.
p.s. You didn’t babble, you gave great presentation that the common man can understand.
An OC appraiser losses her license, finally.
http://www.ocregister.com/articles/real-appraisal-estate-2324285-appraisers-villalobos
Any bets this didn’t happen in Irvine?
“We haven’t been paid for weeks. Everyone in the (Irvine, Calif.) corporate office was fired Friday afternoon…”
http://www.azcentral.com/arizonarepublic/business/articles/2009/03/02/20090302biz-apartments0303.html
For those who still think Irvine is immune.
Saw this in the local NEWS here. Bethany is run by sleazebags. I had a personal experience with one of the named complexes in the list.
I didn’t realize they were based out of Irvine though. It’s great to see all those pricks are now jobless. Couldn’t have happened to a more deserving crew.
IR, nice job, there were a lot of top notch brains in that room and I wonder how many of them fell victim to the mania….
On a side note, more premium assets like GOOG and even Gold are going to perform similarly to Irvine Real Estate. As the broader asset market gets crushed in deflation, people will sell off better equities like GOOG and Gold to meet cash needs or to buy equities far below fundamental levels. This will happen around S&P500; 450 – 550…. a P/E multiple of 18+ X just isn’t going to hold up…
Nicely done. All home-buyers should be required to watch this before signing anything.
IR –
This was an absolutely excellent explanation of why the gov’t is picking who to bailout. It almost made it seem like the gov’t knows what it is doing, or at least has a plan.
But then I was really dumbfounded to read in today’s Washington Post (http://www.washingtonpost.com/wp-dyn/content/story/2009/03/07/ST2009030702455.html)that the practice of lending mortgage money to those that can’t afford it continues even today.
Great lecture. Was wondering about your comments regarding rising interest rates. I honestly thought that this bubble would burst due to rising rates. It is completely shocking to me how this bubble has collapsed with record low rates.
I am looking at waiting another 12-18 months to buy (been renting now for 4 years). Do you see rates rising before that period? Or can the Fed not keep this sham up for that long?
I guess my greatest fear is to wait to buy a home that has fallen in value, but with higher rates I am still paying the same monthly.
Interest rates for conforming loans may stay low. It’s the jumbo loans which will be really difficult. The spread may just keep widening. That would leave us with a lot of homes which become much more affordable if they lower their price 5-20%.
One bright spot for people wanting to sell homes. 2006 and prior, the conforming limits were set based on median home prices. Those conforming limits will not be dropping with declining home prices.
Just finished the video. Great job, IR. Your lecture should be brought to the university circuit.
Excellent job. Thanks so much for posting this video of your lecture. Wish I had been there in person.
Interesting and infuriating at the same time.
Moved here in 2005 at market peak. I’m convinced we have yet to see the worst of it.