Our HELOC Economy

Today’s post began as an email exhange between me an OC Progressive. He has analyzed the impact of the loss of mortgage equity withdrawal on the local economy. What he found is remarkable.

21 S Caraway kitchen

Asking Price: $635,000

Address: 21 S Caraway, Irvine, CA 92604

Steal My Sunshine — Len

i know it’s up for me
if you steal my sunshine
making sure i’m not in too deep

Rather than paraphrase, below is the full text of OC Progressive’s post:

Housing Bubble Busts Every Local Budget – Get Ready for Extreme Makeovers

In trying to follow local politics here in Orange County,
I’ve been looking very closely at local government budgets, and there’
s one trend that seems to be emerging rapidly. We’re seeing a
precipitous decline in local sales tax revenue. And this is not going
to be a temporary problem, but rather one with serious long term

I was absolutely floored by OCTA’s fiscal review that showed a
difference over three years, in the projection of revenue from sales
tax, that lowered the 2009-2010 projection of sales tax countywide by
19% over their previous projections. (This was a difference between
projections, not between actuals, but both current and previous
projections were based on solid actual numbers and best case

The decline in sales tax has two components, and one will not recover. What nobody seems to be picking up is the relationship between the mortgage bubble and the collapse in California sales tax.

Calculated Risk has consistently posted graphs and reports that show Mortgage Equity Withdrawal (people taking money out of their
houses) as a percentage of disposable income. If you read the Irvine Housing Blog,
you’ll see example after example of folks who used their house as an
additional income from 2000 to 2007, turning debt into tax-free income,
frequently in the range of 50,000 a year. The phenomenon peaked in Q4
2006 when MEW was nine (9)% of disposable income nationwide, and 6% of
consumer spending. A year later, it had only dropped by around 20%.
Now it’s essentially cut off because no one will fund the loans
anymore, and no one will even fund the credit card debt that was
routinely paid off with visits to the house ATM machine.

Because Orange County in particular, and California, in
general, have housing prices so much higher than the national average,
and because we were at ground zero for the origination of the new
mortgage products, my guess is that mortgage equity extraction in the
OC may have been as much as twice the national average as a percent of
disposable income, meaning that up to 18% of the county’s disposable
income, and 12% of the taxable sales, were coming from MEW.

sales tax revenue money fell off a cliff in fiscal 08-09, although the
lag in reporting and balancing reports is making that truly apparent
only now. Last September the drop-off was in the six per cent range. Costa Mesa is now reporting a 12% year over year decline in sales tax for 08-09.
John Chiang just reported that “sales taxes continue to be hammered by
diminished retail spending across the state”, with an 11.8% year to
year drop-off in March. (And March sales might have borrowed some high
ticket sales in advance of the April 1st sales tax increase!) If you
dig down into the details of this Rockefeller Institute report,
you’ll see that a national decrease in retail sales tax reported by the
Wall Street Journal is actually a phenomenon driven by the real estate
bubble states of CA, FL, and AR. Double digit sales tax losses in those
states pull the national “average” loss of 6.2% down to 3.2%.

It’s hard to figure out how much of the decrease is a result of a
general economic slowdown, and the huge job losses, and how much is
based on the end of MEW, but my observation is that nobody is even
factoring in the disappeared MEW as a part of the problem, and local
and state electeds seem to think that normal cyclical patterns will
reassert themselves so that retail sales will revert to the mean,
Therefore, current assumptions and 2009-2010 budgets at every level
may be underestimating both the current and future drop-off in sales
tax revenue.

Instead, it’s more likely that a significant chunk of our
retail sales (let’s say 10% when compared to FY 2006-07) are gone
forever because of the collapse of MEW, and the jobs in local retail,
restaurants and services are following the jobs in finance, real
estate, and all the affiliated jobs that supported the refinance
industry. There are always lags, especially with small business owners
who are reluctant to throw in the towel, but we already have far more
retail than we need, and much of it is unprofitable.

Because of the budget preparation cycle, and the lagging
revenue information, local budgets for 08-09 were based on retail
sales for Q1-Q4 2007, so cities are drawing down reserve general fund
balances at a rapid rate, leaving very little flexibility for ensuing
years. Mid-year revisions didn’t cut expenses fast enough, so as
budgets are finalized and the retail sales numbers for FY 08-09 receive
real visibility, you’re going to see a series of bad choices.

This will hit transit first and hardest, where local transit
funds come from a 1/4 cent tax, and we’re looking at devastating
impacts in bus and transit systems in Orange County and across the

Effects of sales tax collapse varies dramatically from city to
city and agency to agency based on the share of property tax that local
governments get, which is a bizarre calculation made when prop 13 went
into effect, but the overall effects are dire. Property taxes, whose
gross receipts had been going up around 6% a year, based on the 2%
increase for existing properties, and huge gains for resales. My guess,
more pessimistic than most, is that property tax revenue will now be
decreasing in the 2% per year range as property values drop by 50% and
reappraisals slowly move through the assessors’ systems, with some
additional problems with non-payment. Hotel taxes, which are a big
income source for many cities, are plummeting with the general economy.
Even stable sources like business license fees, franchise frees, and
utility taxes are dropping, so there are no positives to balance out
the drop in sales tax.

Given the way that local politics work, and the incredible
power of public safety unions, my gut feel is that very few California
cities will react quickly enough taking the steps they need to balance
their budgets, and that the Vallejo bankruptcy is a precursor to a wave
of municipal failures. It’s going to hit hardest, first in the places
where we’re already at depression level unemployment numbers, with no
new jobs in sight. Look at a city like Merced that has a 10 million plus gap in a 40 million dollar budget for next
year, after budgeting to dip 4 million into reserves to balance the
08-09 budget, and you’ll get a feel for how deep the cuts are going to
be. Merced anticipated a 7% drop in sales tax, and saw close to 19% in
the the fourth quarter of annual 2008. And there are fine points that
people don’t get. Merced will not only burn through the reserves that
they thought could carry them for five years, but they’ll also lose the
$800,000 or so of revenue that they used to make in interest on the

Merced’s an extreme case, but it’s just a little earlier than
a city like Huntington Beach, which is now looking at a shortfall of at
least 6 million in revenue for the 2008-2009 fiscal year.

Every local government is going to be facing double-digit cut
backs in budgets for 2009-2010, and even worse cutbacks in 2010-11 if
their projections are too optimistic, and they get hit with substantial increases in PERS contributions that year.

Obama’s stimulus funds are patching a huge hole in the state
budget, but aren’t going to fill the problems with local funding

All of the cities are applying for a part of the ONE BILLION
DOLLARS (cue Dr. Evil) that Obama has pledged to maintain local law
enforcement, but that’s divided over three years, and may pay for
5,000 cops nationwide, maybe 500 in California or an average of one
for every one of California’s 458 cities and 58 counties. Innumeracy
reigns at the council dais sometimes when elected officials are
grasping at straws.

We’re going to see an extreme makeover of local government.
Some revenues will recover very slowly. Other revenue, like the phony
money that was coming from the housing ATM, are just not coming back.

Local governments have grown used to steadily increasing
revenues, and have planned accordingly. Now they have to hit the reset

Extreme makeover time!


There you have a detailed and data-based analysis from someone who pays careful attention to these issues.

So what do you think our local governments are going to do? I suspect we will see a large number of municipal bankruptcies. A recent court decision concerning the Vallejo, California, bankruptcy allows the City to void its union contracts. When local tax revenues went up dramatically during the bubble, much of this money went to union wage and pension agreements. Now that this revenue is gone, probably permanently, cities will have difficulties meeting these obligations. I expect we will see more bankruptcies and union contract cram downs.

At some point, the reality of the permanent loss of MEW is going to set in on both homebuyers and government officials. When homebuyers realize it, there will be serious withdrawal pains from kool aid intoxication. When government officials realize it, there will be ugly political battles that will likely end up in court battles.

The fallout from the loss of mortgage equity withdrawal has yet to be fully felt and realized. It will be another shock to Californians.

21 S Caraway kitchen

Asking Price: $635,000

Income Requirement: $158,750

Downpayment Needed: $127,000

Monthly Equity Burn: $5,291

Purchase Price: $460,000

Purchase Date: 2/26/2003

Address: 21 S Caraway, Irvine, CA 92604

Beds: 4
Baths: 2
Sq. Ft.: 1,808
$/Sq. Ft.: $351
Lot Size: 4,950

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Year Built: 1977
Stories: 1
County: Orange
MLS#: P684218
Source: SoCalMLS
Status: Active
On Redfin: 1 day

Beautiful Home in Quiet & Prime Location of Woodbridge(near
Woodbridge North Lake). Fabulous floor plan with spacious bedrooms,
Fantastic Up grade Wood Floor. Located at the End of a Cul-De-Sac
street. Perfect for Kids!! 4-Bedroom-Single-Level In Woodbridge.

Random capital Letters?

Two exclamation points.

  • This property was purchased on 2/26/2003 for $460,000. There was an inter-family transfer on 6/14/2007, but this did not impact the financing on the property. When the property was purchased, the owner used a $413,540 first mortgage and a $46,460 downpayment.
  • On 2/25/2004 she opened a HELOC for $58,800.
  • On 4/12/2004 she refinanced the first mortgage for $426,300.
  • On 3/24/2005 she opened a HELOC for $230,000.
  • On 8/16/2005 she refinanced the first mortgage for $650,000 with an Option ARM with a 1% teaser rate and got a HELOC for $55,500.
  • Total property debt is $705,000.
  • Total mortgage equity withdrawal is $291,460 including her downpayment.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $108,100.

From now on, when you see these $300,000 mortgage equity withdrawal numbers on typical Irvine properties, you will have a good idea of the impact that had on our economy, and you will also see the impact the loss of this money will have moving forward.


i was lying on the grass on sunday morning of last week
indulging in my self defeats
my mind was thugged, all laced and bugged, all twisted round and beat
uncomfortable three feet deep
now the fuzzy stare from not being there on a confusing morning week
impaired my tribal lunar-speak
and of course you can’t become if you only say what you would have done
so i missed a million miles of fun

i know it’s up for me
if you steal my sunshine
making sure i’m not in too deep
if you steal my sunshine
keeping versed and on my feet
if you steal my sunshine

Steal My Sunshine — Len

93 thoughts on “Our HELOC Economy

  1. Freetrader

    Excellent analysis by OC Progressive – thanks for bringing it to IHB, as I wasn’t likely to find it on my own!

    A related issue here compounding this problem has to be the multiplier effect, which hits the economy in three ways:

    i.) the owner of the house you have reviewed today has taken out a quarter of a million dollars, tax free, and spent the money. In the real world economy, that amount of cash would be reduced by income taxes paid on the gain to, say, 80% or so of the cash amount (since it is not being reinvested in real property). Instead that entire amount got recirculated, artificially goosing the local economy by the entire amount of the cash withdrawl, and not just on an after-tax amount. That means an extra 20% or so goes to the Mercedes salesman, the pool boy, etc., who then spend THAT extra amount on goods and services. So, the multiplier effect of income spending has been increased by the lack of taxation on HELOC withdrawls.

    ii.) So the net effect, is, I think, a transfer occured as money that might have otherwise gone to state and federal income taxes was pushed on a pre-tax basis through the local economy temporarily increasing sales tax revenue locally. As any right-winger will attest, the effect this was to boost an already overheated economy while depriving the federal and state government of revenue. Not necessarily a short run problem, except that the federal government was already running huge deficits during this period and could have used the dough, while the local governments baked the increased revenue into their estimates. Counter-intuitively, though, the federal and state governments actually increased their revenues over a sustainable amount, as the untaxed cash eventually made its way to workers pockets, who then paid some level of federal and state tax on the amounts — revenues which were further baked into government budgeting projections.

    iii.) The flip side of this HELOC withdrawl madness is supposed to be that when the property finally sells, the government finally gets its fair share of the profit. Instead, what will happen is that the “seller” will be relieved of their debt, they may (or may not) get a 1099’d, but they will probably not pay any tax on this phantom gain they enjoyed. They may, for example, be effectively bankrupt. It is even worse than that, as the bank takes a write off from the bad debt, that, eventually, will allow it to pay less in future taxes (something individuals are not allowed to do)

    So, now the federal (huge Bush-era deficits morphing into Obama-era Keynesian trillions), state (a system that is dependent on high earners who no longer exist), and local (sales and property tax dependant) governments are now completely screwed, as their revenues dry up in an ugly reverse-multiplier feedback loop.

    Probably OC Progressive would agree with me that in this situation, simply increasing taxation isn’t going to solve the mess we are in. There are going to be major cuts in services and benefits, and they are going to hurt. The cuts will undoubtedly affect the quality of life of many Californians, who enjoy State and local-financed benefits they haven’t had to pay for (unless they be counted previously among ‘the rich’). The federal government is in slightly better shape as they can continue to erode the value of the dollar by printing money, but the States and locals don’t have that option.

    In conclusion, as the press officer said in “Full Metal Jacket”, “It’s a huge shit sandwich, and we’re all gonna have to take bite.”

    1. Chris

      “In conclusion, as the press officer said in “Full Metal Jacket”, “It’s a huge shit sandwich, and we’re all gonna have to take bite.” ”

      Me love you long time 🙂

  2. Chuck in Newport

    This is a great angle on and explanation for one aspect of the housing bubble popping. The ripple effects of the bursting of the bubble will be felt for many years, in many way. Anyone who oversimplifies the effects is in for a real eye-opener as things unfold/unravel in the next 1-5 years and on. The government act of throwing money at banks, or its attempts to “stabilize” home prices,” are fool’s errands and are just wasting more money. Much damage has already been done, and the effects are continuing to roll in, so to speak. Wherever there were taxes coming in during the bubble, many of those have dramatically decreased and like the MEW-related taxes, they are not coming back any time soon. We all had better get used to the budget brawls and court battles on the horizon – the fight for appropriations (and new revenue sources – like that bummer of a tax being contemplated that will impact my tax-free book-buying at Amazon – will be emerging, much to our chagrin) is just beginning. On top of our wanton deficit spending by the Feds.

    BTW, what’s “Up grade Wood Floor”? Is there an incline in the house?

    1. IrvineRenter

      “BTW, what’s “Up grade Wood Floor”? Is there an incline in the house?”

      I was going to make comment on that one, but some have criticized me for making compound words out of “down payment” and “cash flow,” so I let that one slide, but I had the same thought you did. I was wondering if the grade was handicap access compliant.

  3. OC Progressive

    Freetrader adds some very valuable points, and I agree that there’s no way that local governments make up the lost revenue with taxes or fee hikes. Local governments will be cutting head count, even in public safety, freezing or reducing salaries and benefits, eliminating programs, and bringing fees up to full cost recovery in any areas where they haven’t already done so.

    Some cities like Irvine, which tripled their contingency reserves during the boom years, have more room to maneuver and more flexibility with when and where they make their cuts.

    1. IrvineRenter

      Yes, this is a just-above-median house. It may fetch a bit more because it is single story, but it will not hold in the $600s.

      1. Geotpf

        I dunno. It comps out fine. Assuming it sells (always a big if on short sales), the price is right for the market.

        Look at the dollar per sq ft graphs of houses sold for both this ZIP code and Irvine in general, they have been basically flat for months. We may be at a bottom, although probably a temporary one.

        1. Walter

          If they don’t mess around and get it sold this summer, the current comps should hold.

          If the take the high offer that falls out of escrow this fall, watch out below.

          1. tlc8386

            If our city managers were smart they would think of new Green housing to spur new building thus a new growth sector for Irvine for the huge waste of land in the Great Park!

            But no one thinks what do we need to get employment back, tax revenues back instead it’s just tax us more.

            Well you are totally right the feedback loop concerning raising taxes only produces less spending.

            We will continue to see deflation, job losses and pay decreases. Cutting all the excess out. Many will move out of Ca.

            If I were the government I would take a hard look at prop 13–it’s a total uneven field of taxation vs. long term homeowners and new comers. And the new homeowenrs are the growth engine of CA housing.

            The higher paying “new” jobs cannot support the government especially if those disappear. Many old homeowners are paying obscene low property taxes.

            The next thing the government will do is raise business tax and those companies will consider moving as well—

            People will wake up to the totally unfair tax system here in CA and either fight back or move out.

          2. tonye

            If you were to repeal Prop 13 suddenly you’ll see many more homes come into the market.

            These homes will be sold by folks that have equity.

            The end result will be a real catastrophe on home prices and banks.

            Look, if I sold my house for 600K I’d be undercutting the market back to the late 90s. Some of my other neighbors could put theirs on the market for 400K…. what do you think that would do for everyone who bought since 98? We’d be taking a complete crash on home prices.

            Me? Hell, I wouldn’t give a hoot. I’d dump my house and move to the outskirts of Reno.

            Before you think this would be good for renters… think again. Such a price catastrophe would affect EVERYONE except those of us who’ve been in our homes for a looong time and have plenty of equity still.

            No man, don’t bitch about Prop 13, bitch about how our pols in Sacramento behave like drunken sailors on leave with our tax money.

          3. Mitesh Damania

            Nice try.

            It’s not that some are paying low taxes. It’s that some are paying high taxes. Used to be, the schools, police, and fire ran just fine on previous tax revenues. What changed?

  4. winstongator

    How long are teaser rates good for? I’ve heard of 3 years. How long after her 3 years were up did this house hit the market. A 650k 6% gives a normal payment of about $47k/yr, but the teaser would be $6500/yr – the teaser is only about 50% higher for the whole year than the full mortgage would be per month! What did the homeowner do with the ‘extra’ $40k/yr?

    For 3 years that could be up to $120k of interest added to the original principal. I wonder what the appraisal was and at what level the neg-am would have caused an immediate payment increase.

    I’ll bet that 40k/yr was being booked as an asset on some bank balance sheet, and some fraction of that was being spent. The low payment option-arms pushed prices higher, but also ‘freed up’ a lot of disposable income.

    Even in non-bubble pricing, how could a $500/mo mortgage payment make sense for this home?

    1. camsavem

      It’s worse than that. That money was being shown as an asset and they were borrowing against that at a leverage of up to 30-1 to buy MBS on wall street.

  5. doug r

    So AIG contracts are sacrosanct, but union contracts are disposable?
    I guess it’s more of the thinking that brought on Prop 13.

    1. Lee in Irvine

      We were told we had to bailout AIG because it created “systematic risk”. They called it a bailout, but it was really nothing more than a transfer of wealth from taxpayers to WS banks. Goldman was the big winner … Hank Paulson’s old firm. Coincidence? I think not.

      1. Geotpf

        The argument was, basically, if you didn’t bail out AIG hundreds of other companies who were counter parties to those contracts would collapse as well, unemployment would soar to 20%, and the second great depression would occur. I believe there was at least a good chance of this happening.

        Now, I don’t like the WAY it was bailed out-I thought it should have been straight-out nationalized. But it needed to be done, IMHO.

    2. Kelja

      In California, there is no doubt the unions paid off the politicians. A fireman can retire with 90% of their last year’s pay for the rest of their life after 20 years of work. Public employees regularly gamed the system by bulking up overtime in their last years on the job, some making more than six figures in just the overtime pay. Since retirement is figured on the final years’ pay, retirement was more than comfortable.

      Unions should be more flexible in this time of financial crisis, but don’t bet on it. They will, however, be handed final defeat by bankruptcy judges.

      I have absolutely no compassion for union members.

      1. nefron

        I seriously doubt that overtime is used to calculate retirement. State employees do try to get into the highest paying job they can and stay there for at least three years, because their retirement is based on that, but who doesn’t try to get into a higher paying job whenever they can? It’s not like ALL state employees manage to get the manager job in their department. It’s one individual.

        As for today’s post, this is what I have been yelling my head off for years about. We cannot have an economy that is based on consumers buying goods with the equity in their houses. It was a disaster guaranteed to happen. Can’t avoid it, because equity isn’t infinite. We need a return to manufacturing in this country, in one way or another.

        1. SD Kate

          I have an aunt and uncle that retired from state jobs, and they did the overtime thing their last 3 years because their retirement was figured on the highest 3 years of salary. And yes, it did include overtime. One retired in 2003, and one retired in 2007.

          1. nefron

            Well, SD Kate, what union were they members of? I’ve heard the exactly opposite story about state employees retiring on their straight salary, even though they earned overtime for years.

          2. Kelja

            Firemen making well into six figures, using overtime, in the last couple years to spike their retirements – common in most California cities.

            The unions are part of the problem. They are just as corrupt as the politicians. Wake up.

      2. george8

        You have not seen any yet if compares to what we have in New York State. My town is called Oragetown ( in Rochland County NY) (population just short of 50,000), here are the top pay township employees in 2008:

        Top 10 wage earners in Orangetown by gross pay

        Kevin Nulty police chief $188,139
        Robert Zimmerman police captain $176,043
        Anthony Mercurio police lieutenant $170,350
        Ronald Delo sewer director $169,463
        James Stevenson sewer mechanic $168,681
        William Dizzine sewer supervisor $167,856
        James Brown detective lieutenant $165,994
        Michael Ryan police officer $162,851
        Donald Butterworth police lieutenant $160,615
        Christopher Strattner police sergeant $156,839

        And our school district payroll looks as impressive as well.

        We are indeed policed out, teachered out and overall unioned out.

        1. newbie2008

          George8 IMHO: That’s peanuts and chump change. Check out OC Regrister on OC Sheriff pay. Your police chief makes less than OC detectives. Have your local and state have any tax increase measures than have not passed in recent years?

  6. Pwned

    Here it comes. There will be massive teacher layoffs after this school year, massive cuts across the board in cities that think they’re immune. Southern CA has created a ridiculously unsustainable gilded culture where the lifestyle can’t be supported by income. Public schools for the most part suck, so places like Irvine get inflated. It’s not uncommon to spend over $15k/year on private school per kid, lease new cars, renovate every few years, get time share condos in Cabo or Tahoe, all to keep up with the Joneses. You need minimum $300k gross income to truly afford this stuff. As HELOCs became the norm this mentality spread from high income families to all the Joe Sixpacks. Now everyone is equally entitled, and equally screwed.

  7. AZDavidPhx

    Here is a fantastic story about a member of your community. I think it brings great insight into the mortgage debtor culture.

    More Californians are missing their mortgage payments — some deliberately — but fewer are having their homes repossessed.

    More Californians are failing to make their mortgage payments than at any time in the last 20 years, but fewer of them are losing their homes, according to new figures.

    another factor in the soaring default rate could be that some struggling homeowners are purposely skipping their payments so that they can get their loans refinanced

    Lenders are so backlogged with requests to adjust loan terms that “they focus on the borrowers who already are circling the drain and ignore the people who are keeping up with their payments,”

    Lynne Neagle said she and her husband had trouble paying their mortgage, but their loan servicer ignored their pleas to renegotiate terms


    until they quit paying, that is.

    Suddenly, she said, they were presented with new ways to lower their payments and are currently negotiating new terms through the Hope Now program set up by the federal government and some of the country’s largest mortgage lenders.

    Before we stopped making our payments, nobody wanted to deal with us,” Neagle said. “We stopped paying, and that really got their attention.”

    AZDavidPhx: You are proud of yourself for defrauding the lender? You borrow all this money and spend it on a house and then start making demands on the lender to “work with you”? Nice sense of entitlement there. Who is supposed to pay back all that money that you spent? Me?

    Neagle and her husband were close to paying off their home loan in the early 1990s when they decided to refinance and take out some equity to help pay for their son to study aerospace engineering at Cal Poly Pomona.

    He earned his bachelor’s degree in 1999, but the Neagles ended up with about $600,000 in debt and, as the housing market started to crash, a home that was worth only a little over $400,000.

    AZDavidPhx: There you go. It’s the lender’s fault that you threw away your equity on your son’s education. I suppose a student loan or a less expensive college was not a viable option.

    They tried to talk with their loan servicer, American Servicing Co., which is part of Wells Fargo, about a modification but were rebuffed, said Neagle, who works for Wells Fargo as a collateral specialist in Irvine.

    AZDavidPhx: How dare those greedy Scrooges at American Servicing Co. not offer to help you pay for your son’s education. Have they no soul?

    1. IrvineRenter

      “He earned his bachelor’s degree in 1999, but the Neagles ended up with about $600,000 in debt”

      WTF? We are supposed to believe their son’s education at a public university cost them hundreds of thousands of dollars. I wonder if perhaps they failed to mention how they pissed away the other 98% of the money they borrowed.

      1. AZDavidPhx

        Agreed. 1999 was a long time ago – the bubble was but a sparkle in its father’s eyes. I’m guessing that they tasted their Kool-Aid for the first time in 1999 and then it became a regular thing for them year after year.

        I just find it amazing how these people act like they are all standing up to the man and fighting the system. They are equally as despicable as the banks who transferred the cash to them. This is the crux of the entire problem – everybody involved is a bad actor who blames the other guy and each one of them is 100% right.

        You know, IrvineRenter – if you mosey on over to whitepages.com, there is an entry and address for the named party in the NEWS article in a community pretty close to Irvine. You might find some interesting information if you take a peek under the covers…

      2. nefron

        You’re not supposed to notice that. It ruins the victimization angle that the article is striving for.

      3. Chuck in Newport

        I’m glad you said it- -that is what I couldn’t figure out. The writer never bothered to ask about how the math didn’t add up. How can they be about to own their house, then suddenly be 600K in debt – -offering only that they paid for their one child’s college education at a state school? Harvard would have only cost 200K for a BA including ;iving expenses. Bad enough that they hid their REAL purchases…worse that a newspaper doesn’t ask the next question that is unbelievably obvious. And then suggests that we should feel sorry for these people.

        1. AZDavidPhx

          What’s even more interesting is if you look at the sale’s history on Zillow for what I am guessing is the house in question –

          Sale History
          10/09/2008: $465,000 *
          11/18/1976: $60,000

          If they took out 600K in equity – we are talking about some serious cashing in.

          I can see why that Kool-Aid tasted so good. They must have thought they won the lottery and went on a spending spree.

          1. Lee in Irvine

            I bet 600k is about equal to a million dollars in pretax earned income during the same span of time.

            They were entitled to it, and now they’re entitled to a loan mod to keep their home and make things better … much better. “We stopped paying, and that got their attention” … get it?


      4. dpstrand

        I graduated from Cal Poly Pomona in 2002 with about $15k in student loans. There is no possible way these people spent $600k on Cal Poly tuition.

        1. Dave

          My two son’s attend Cal Poly. Tuition for both is a little under $7000 a year. I sent the reporter a nice e-mail about his biased reporting

      5. newbie2008

        Even Harvard and Stanford are only $55,000 per year at sticker price for essentially everything except vacations and other travel. I heard (never met) a few students who parents buy them a $100,000 plus car that the students just gave away in the end of their fourth year. That after 20 years in academia. The only ones that I know of that have actually spent $125,000 per year didn’t go to education unless you count nasal fixs as an education.

      6. Architect Dave

        Uh, I graduated from said Cal Poly Pomona with a degree in architecture in 2001. In 1999 and previous years, tuition was only $2,000 PER YEAR!!! Ridiculously low tuition, even for a state school. And their kid with an aerospace engineering degree likely only had book costs and a few small other fees associated with engineering majors. So maybe double the tuition. Hello? 4 years @ $4,000 per year = $16,000. What happened to the other $584,000, lady??

    2. Lee in Irvine

      “Before we stopped making our payments, nobody wanted to deal with us,” Neagle said. “We stopped paying, and that really got their attention.”

      Now that’s some funny, funny stuff. ROFLMAO! Stop paying … that’s the answer! And it got their attention!

      But the butt of the joke is on the responsible, not the frivolous spenders.

      WTF was I thinking when I paid off student loans early, decided to pay cash for my cars, and chose to rent instead of buy. I should have bought a 2 million dollar “villa” in Turtle Ridge with 5k dollars down on a negative-am loan, then stopped making payments after the reset … “let’s work out a deal Mr. Banker”.

      There’s something very wrong with this picture.

      1. AZDavidPhx

        Oh boy did we sure show them. We stopped paying our bill and that sure got their attention!

        They couldn’t ignore our demands anymore after such a decisive demonstration of force was fired across their bow. Victory was ours to be had.

    3. MarkB

      I read this earlier. The current tuition at Cal Poly Pamona is $1800/quarter and was no doubt much less in the late 90’s. There is no way the Neagles spent this money on their son’s tuition. This is an example of the credulity of the MSM and the outrageous sense of entitlement on the part of some people. They should be allowed to default unless they are willing to give back all the toys (TVs SUVs etc) which they no doubt bought with borrowed money they cannot repay.

  8. DrakoneSmith

    …is actually a phenomenon driven by the real estate bubble states of CA, FL, and AR.

    What’s poor Arkansas have to do with this? 🙂

    1. OC Progressive

      Good catch. AZ (Arizona) is the bubble state, not AR (Arkansas).

      And NV is generally also on the list of the four worst bubble states, although Nevada’s numbers weren’t significant in looking at the sales tax shortfall.

      My natural inclination is to try to make an Arkansas joke, but you can’t do that when California is really the national joke.

    2. Major Schadenfreude

      “What’s poor Arkansas have to do with this?”

      Arkansas is the place these people should be shipped. Send all HELOC abusers there.

      (Sorry about that AR).

  9. Chuck

    I don’t know – this location is “outside the loop” in Woodbridge, and it is just one house away from the noise and pollution of Irvine Center Drive. There are a lot of people who won’t even look at it because of this. $635k for a 4/2 in Woodbridge isn’t too far off, but maybe not for this location.

    1. Chuck

      Whoops – it looks like my comment didn’t nest in the right palce – I meant this to be a reply to Geopft’s comment way above – sorry!

    2. Geotpf

      Hmm. It is near Irvine Center, although that batch of trees between the houses and Irvine Center (and the other house) might block out much of the noise. Hard to tell without going to the house itself to know how bad it is. If it was the end house itself, a discount would probably be needed, but one house in…dunno.

    3. movingaround

      In order to afford a 600,000 home at a less than conservative 4X income you have to make 150,000 a year. And all you get is 1800 sq. feet on top of a toxic plume.

      The rest of the country has no clue what went on here and is still going on. I have heard people try to liken it to the prices of houses in Manhatten – but Manhatten is a small island inside a much larger state – CA is not only a huge state but the 10th?? largest economy in the world – a bit different scale.

    4. Craig

      $350 per square foot for a 70’s home in Woodbridge is way too high, when newer homes in nicer neighborhoods are going for $300….

  10. ICNIC

    A look of an outsider………


    Coming from the other side of the ocean, from the “socialist” environment of Europe, the first thing that stroked me was the number, size and surface of shopping areas.

    My daughter had homework in history two weeks ago – to compare free market economy to socialist economy. They tried to claim that the US is a free market economy. Well it is obviously not. Free market means that what you earn you can spend (after paying your taxes). Free market doesn’t include huge money transfers by the government to “save” the irresponsible businesses/ homeowners.

    Education – should not be on the theoretical ideas – it should be on real-life. Teenagers in school should understand (and most of them have enough brain to be able to) what you explain here.
    It should be an obligatory class that every kid will learn and complete, at every age at it’s own level. The level you bring here can be achieved in high-school. The main point of education should be that you can only shop with the money you earn. If kids will be educated on the basis of real life and real numbers of incomes, and will deeply understand that the situation of their parents, neighbors, family members is driven from spending over your budget, the next generation will be saved. They should study it with real stories of real people, and real case-reports from the local news. They should be obliged to follow and understand the current situation from the point of view of a “spending only what you earn”

    As to the current (excellent) post, I do think that consuming is a main issue in America. That is why shopping areas are so much more than needed.
    People want MORE of everything. This is the American dream. People should be educated from young age to be happy with less, and to save for the future. Yes, I believe many of these stores should close-up, even if it means les taxes.

    I would call it the “consuming bubble”, which explodes now just like her sister – the “housing bubble.

      1. priced_out

        (Not that anyone will end up reading this, I’m posting so late…)

        What does that $61 a day include? Food, surely. Clothes? Gas?


        It looks like rent alone is costing me $56/day.

  11. MsMarvel

    We looked at this house, it was for sale in the middle of 2002. It obviously didn’t sell that year. We called this floorplan the “donut house” because of its central atrium but we passed on it because it had no back yard.

  12. Eat it in the OC

    Am I safe in assuming that the couple in the LA Times article can still afford their payments since they were paying them? Also, wouldn’t willful attempt at failure to pay a debt be considered fraud and thus criminal? I wonder what would happen if I went to Best Buy and maxed out my credit card and told the salesperson that I had no intention of paying the bill. Would they call the cops?

    1. Geotpf

      We don’t have debtors’ prisons in the United States. The worst that can happen is that they take your stuff and ruin your credit. In theory, they could sue you to recover the funds, but that never actually happens in practice.

      1. Mitoman

        There should be a debtor’s prison, those who owns too much will eventually get in prison, this way they think about it before they borrow money. Just like they do before they borrow from mafia.

  13. newbie2008

    Excellent analysis.
    The debt benefited in past years:
    1. Lenders
    2. Borrowers
    3. Stores and restraunts
    1. Regular people that had to pay higher price for #3.
    2. Renters.

    Now the debt is hurting:
    1. Taxpayers by the bailout.
    2. Pensions and 401k who bought the toxic debt.
    3. Workers who’s jobs were shipped overseas.
    4. Renters who’s landlords are being foreclosed.
    5. Those that used large downpayments during the last 5 years.

    Those benefiting:
    1. Bankers who are repurchase their companies that were sold to the pensions and 401k at the high.
    2. Bankers who are still getting the bonus and bailout money.
    3. Loan abusers that are walking away from their debt and especially those using non-recouse status.
    4. Those that purchased with nothing or negative downpayments and are getting 6 month to a year free rent.

  14. MalibuRenter

    Part of the drop in sales taxes is due to fewer building materials being purchased. An extreme version of this in reverse happened after Hurricane Katrina. The Louisiana state govt was suddenly running a surplus due to sales tax revenues.

  15. wheresthebeef

    Our society has turned into a “no fault” society. No one is responsible for their own actions and blame is passed on down the line.

    I have a coworker who recently bought a foreclosure in Lake Elsinore for 300K that the previous owner paid 525K at the peak. Turns out the previous owner is an LA County sheriff who did a buy an bail. He bought a house on the same street before walking from his underwater house. The smart sheriff traded his credit score for a substantially smaller mortgage payment for a similar house.

    Stories like this irritate me to no end. Playing by the rules gets you nowhere in this society.

    What ever happened to that megafraud Gary Watts’ short sale in RSM? I hope the hammer comes down on that circus clown…because I sure as hell don’t want my tax money paying for his poor real estate investment!

  16. MalibuRenter

    Riverside County is already reducing its assessed values by 10%. More to come, http://riverside.asrclkrec.com/ACR/Content.MSO/PowerPointWebPagePreview/20090407 BOS Preliminary 2009-2010 Roll Report.ppt

    The Riverside Assessor has been out in front of this issue for years. He talks about it publicly and honestly.

    He will have plenty of company. I could do intricate calculations on this, but I expect that total assessed values will fall 15-25% in LA/OC over the next few years. In a typical recent year, about 10% of properties changed hands and were reassessed, and about half of the properties in LA County have changed hands at least once since 2000. The assessed valuation isn’t quite as sensitive to current prices as you might expect. Otherwise, somewhere like LA County would have a 60-70% drop in assessed values from 2007 to 2012.

    1. Geotpf

      10%? When everything is said and done, 50% is probably closer to accurate for Riverside County.

      Imagine the hit in local budgets when you lose 50% of property tax revenues (well, the tax losses won’t be that bad, since Prop 13 slowed down growth and people who bought before the bubble weren’t paying full assessed value anyways).

      And speaking of Prop 13, that will guarantee that property tax revenues will remain low even if house prices recover.

      1. MalibuRenter

        I don’t think it will drop 50% in Riverside. Some properties are still at rather old and low assessment values. I wouldn’t be at all surprised at a 30%-35% drop by 2012. I would have to crunch through more numbers to get an exact estimate.

        1. Geotpf

          I’m currently in escrow on a house in the city of Riverside where what I’m paying is a 62.5% discount from the last sale. This is not an uncommon discount around these parts.

          1. Mitesh Damania

            What part of Riverside and are u gtting a discount compared to the comps in the area?

          2. Geotpf

            It’s in central Riverside, which is called “Ramona” in real estate speak. And it appraised at less than 10% more than what I am paying for it, although I think I got a better deal than that.

            However, search for the entire city, look for houses on the low end (say, under $175k). Click on one at random until you find one with a sale in 2004, 2005, 2006, or the first half of 2007. The chances that the current list price is less than half the 2004-2007 price is greater than 50%.

            There are plenty of bargins to be had.

  17. alan

    My 2 cents

    Last time I checked, the public sector, state and local government, accounted for about 15% of all the jobs in OC. So the declining tax base will snowball as unemployment increases once the public sector starts the inevidible layoff’s and spending further declines.

    1. newbie2008

      You assume that govt will actually cut jobs. CA state increased the number of state employees while claiming to decrease the number. Same repres. staffers, they had the “pay reductions” that was a pay increase. The increase was not as much as budgeted, so it was called a pay reduction. Same for the number of state employed. The locals have to do something more tricky. Pay for only 38 hours, but you can work overtime at overtime rates. Works well with police and fireman on the clock, but teachers can’t play that game because they are salaried. I’ve not seen very many tax increases that the public has voted down. IMHO

      1. Geotpf

        Almost all state-wide propositions that directly raise taxes fail. Now, bonds and other things that require increased spending regularily pass, and so do tax increases on a local level.

  18. furious sugar

    Speaking of Woodbridge and sales tax….– what is going to happen to the Crossroads shopping center at Culver/ Barranca? Any one know what will go into that empty Mervyn’s? Both that center and the one that back up to it on Culver and Alton have alot of empty store fronts. And the Mobil station at Creek and Barranca is gone too.

  19. tlc8386

    I think it’s ironic how Bush wanted to privatise social security or give us some kind of more control over where the money was to be invested yet these state and government jobs pay pensions that only one can dream of . The typical person who gets social security now is lucky to be getting 2k per month—in the future most will get 3k. These state employees who have put how much money into the system get 90% of their pay–that amounts to triple the amount of Social security for the average person making a 100k a year here in Irvine. How does this work? Well one word from our taxes. The majority of us without a pension pay into socical security and that is all we get folks. We do not get even 50% of our pay. WE get about a third.

    Payroll tax, social security tax, sales tax, property tax–and the list will keep growing because we are the source of all the income.

    One can blame the unions they fight and pay dues for their gains so tell me how does this work for the government and state funds?

  20. Paul P.

    Ref: “devastating impacts in bus and transit systems”.

    Good. Hopefully public transit will shut down permanently. Last facts I saw on L.A. Transit was a yearly-subsidy (by taxpayers) of $40K/year *per user*.


    1. Geotpf

      That may very well be correct. Of course, if such didn’t exist, traffic, pollution, and wear and tear on the roads would all increase significantly, and those affect everybody, including those who never step foot inside a bus.

      1. Mitesh Damania

        Traffic actually moved quicker when the OCTA employees were on strike. No silly 1/20 filled buses blocking the last lane and causing traffic hazards during the rush hour and INCREASING my commute time as the last lane traffic spills into other lanes. I’ll see a silly bus blocking the lane every other block during rush hour as 1-2 persons get on/off per bus stop.

        Most of the time I see buses empty. If you add up all the costs of the bus, gas, driver, maintenence, and facilities upkeep, that’s a lot of money!!! The MTA and OCTA are mob run most likely.

        I bet it would be cheaper to buy the riders a used car each for $5000 every year than to keep the buses scam going.

  21. E

    This is what I love about this blog.

    You don’t have to live in Irvine to get one hell of an education.

    Just out of curiosity, what is the largest amount of equity extraction for an individual residence?

    I recently came across a shortsale in L.A. at 3.6 million. House was probably purchased for about 150k in the early 70’s judging by the tax records.

    1. Geotpf

      Is this it?


      501 S ROSSMORE Ave
      LOS ANGELES, CA 90020

      Short sale at $3.675 million, no prior sale history tracked by Redfin, which means the last sale was probably earlier than the 1980’s or so.

      Then again, this is an impressive house with a history (it belonged to one of the founders of Warner Brothers), so maybe not-I would think it would be worth more than $150k in 1970ish. But still, a short sale with no prior sale history for the past couple decades is pretty damned weird and only makes sense if somebody was using the house as the world’s largest ATM.

    2. priced_out

      The education on this blog is astounding. I just wish I had access to the same data that IR has for my area — I’d like to get a sense of the bottom will be.

      I think the real estate cartel needs to get broken up. Their strangle hold on price data is infuriating to someone not on the inside.

      IR: If you do become a realtor, do you think you might advance the freeing of information?

  22. newbie2008

    The state and locals can easy increase the overall sales tax revenue by taxing food, health care and other services. They will likely pick off one at time. Account service tax for those wealthy people that can afford accountants. Then another service group …. Then increase the rate one at a time. Works best when all the state do the increases in concert. Property transfer tax fee at 0.25%, doesn’t sound like much but that $750 on $300000 house. Hide it by rolling on the title insurance tax.

Comments are closed.