Bailouts are rescuing the irresponsible at the expense of the prudent, or so we all believe. But didn’t the prudent benefit from the Great Housing Bubble as well?
Asking Price: $654,000
Address: 34 Blazing Star, Irvine, CA 92604
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Glenn Beck on the Housing Bubble
Today we have a guest author, Dejnov. It is good to get differing perspectives and points of view, and I don’t mind taking a break once in a while. So, with that introduction, the IHB presents:
The Bailout for Prodigious Spenders by Dejnov
In numerous housing blogs, there is a current pervasive meme circulating about how responsible prudent renters, to their own personal detriment, are being forced to bailout the spendthrift homeowners. Like Aesop’s fable of the ant and the grasshopper, the industrious ant worked long and hard every day to build a nest egg for the long winter months approaching, while the carefree and lazy grasshopper frittered away the summer days. When winter approached the ant was comfortable knowing that he had enough stores to last until the next summer, while the grasshopper found himself starving. The grasshopper, or homeowner and equity spender, decides to ask the ant, a renter and saver, for charity to help him weather through the winter months. Depending on the version of the fable the grasshopper either is personally rebuked by the ant for his laziness and allowed to starve, the ancient version, or has pity shown upon him by the ant and allowed to weather the winter within the grasshopper’s home, the current Christian version.
Currently, the general consensus on housing related blogs is that a third more sinister version is occurring. The grasshopper, through political influence, has his crony banker buds forcibly steal enough of the ant’s nest egg to make himself whole. While the current news about endless bailouts seems to imply such a schadenfreude inspiring situation, I think that the analogy is incorrect, and given the current situation a different, fourth ending, to the story might actually be occurring; one where the ant wins, and the grasshopper, even with bailouts, loses.
To fully understand the future outcome, the summer months must first be analyzed. During the late 90s and early 2000s our economy enjoyed huge expansions in credit and leverage, with many people being able to assume debt-to-equity and debt-to-income ratios far above what was earlier considered prudent and standard. This allowed house prices to rise and home owners to extract their nominal equity gains through loans and spend that money freely. With credit (and leverage) ratios expanded every year and required equity amounts reduced, those who owned tangible assets saw their net worth increase yearly, while those who had no large tangible asset base didn’t. But this is all old news, and has been stated ad infinitum in many housing blogs. The basic premise is that leverage only helped those with assets and hurt or hindered those who didn’t. The reason such an idea is so pervasive is that it’s easy to quantify and calculate. Houses, and to a lesser degree stocks, are the single largest identifiable line items on an American’s balance sheet. Net worth growth due to house (stock) appreciation is currently tracked by endless agencies and investors. Whole sell-side industries continuously shill about the large appreciation and net worth growth that occurred to help sell their products.
While the earlier assertion is somewhat true, leverage has also helped less asset-heavy Americans’ balance sheets. Karl Denninger on the Market Ticker had a great article about leverage (http://market-ticker.denninger.net/archives/865-Reserve-Banking.html). Leverage is, inherently, not a financially ruinous concept and something to be avoided at all costs. If used prudently, it reduces interest expenses and allows savers to annually save a larger percentage of their earnings. High bank leverage rates for the last ten to fifteen years allowed Americans to finance zero-interest loans on cars, access student loan credit at near or below long term inflation rates, get zero-interest short term credit card loans, and allowed the government to reduce the overall tax burden. From 1987 till today, the top bracket on income tax has never been more than 40% and has been as low as 28%. A comparative look at the history of federal income tax in the 1900s shows that for most of this time, top bracket tax rates were much higher than what we’ve seen in the last twenty years (http://en.wikipedia.org/wiki/Income_tax_in_the_United_States). In the last century top tax brackets have been as high as 91% to 94%. The same holds true for capital gains tax rates.
So what does this all mean for our hard-working exploited ant? Whatever he was earning, he got to keep more of it. He had to pay less in taxes, and all of life’s interest expenses were cheaper. A strong saving ethic would have been amply rewarded in this climate. While it might not have been prudent to invest all of one’s excess returns in either housing or stocks, someone who diversified his investments and held money in a savings account has done well. Granted, interest payments on a savings account have been pitiful (in some instances near zero), there hasn’t been any loss of capital, and long-term financial security was never more possible to achieve. The last ten to fifteen years have allowed responsible thrifty consumers and strong savers the potential to grow positive balance sheets by reducing their incidental and financing costs.
“Well that might be true,” states the ant, “I’ve done moderately well these days. But it’s nothing like how the grasshopper has done. I mean he’s completely blown past me in net worth. Look at his house, with the pergraniteel, the Bentleys and Lexuses in his garage, and all the fancy leather furniture he’s got. I myself just rent an apartment and drive an eight year old Pinto.”
“Pssst, hey ant, don’t forget all the MEW-funded bling-bling I bought for the SigO” chimes the grasshopper!
There hasn’t been any contention that the grasshopper has lived a more consumption-conspicuous lifestyle. What really is the issue, currently, does the grasshopper with bailouts, actually have more resources than the ant to survive the onset of winter? The winter I’m referring to is the ongoing credit deleveraging and subsequent contraction in pay, jobs, car/house prices, prices on everything else, etc. A current wonkish paper (The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble) by Rosnick and Baker tries to elucidate on the current state of affairs.
The last accurate measurement of net wealth was completed in 2004. Well it’s currently 2009, how are we doing now. Rosnick and Baker answer unequivocally: “badly.” Net wealth for baby boomers cohorts (ages 45 to 54 and ages 55 to 64) is significantly down, with the younger cohort’s median net wealth down by 45% and the older cohort’s median net wealth down 38%. But what is more surprising, and pertinent to this article, is their finding that over all wealth quintiles and age cohorts, those who were renters in 2004 currently have a greater net worth than those who were owners in 2004. In some cases, the renters have a lot more net worth. Even with the great run-up in home equity after 2004 until 2008, a little over a year of losses has put house-owners into a worse financial position than renters. That’s a somewhat contrarian conclusion. For many years, the real-estate shills have espoused how owners, through owning real estate, are a more capable and financially secure class of people than renters. Presently, this doesn’t seem to be the case for baby-boomers.
While Rosnick’s and Baker’s paper considers only baby boomers net wealth (we’ll have to wait until next year for a more accurate assessment of how everyone is doing) there are a number of inferences that can be made.
First, wealth loss has been greater for those who are younger. Older generations typically have a larger net worth, higher paying jobs, stronger job security, and less financial leverage, while younger generations are saddled with student loans, larger loan balances on their mortgages, and starter careers.
Secondly, as one ages typically the more intransigent one becomes. Baby boomer renters, with their ample time to accumulate wealth, rent for one of two reasons. They could never qualify for home ownership (which seems a historic impossibility given the conflux of option ARMs and Alt-A loans pervasive around 2004) or were accustomed to renting instead of owning. If it’s the former, the renting cohort is represents a less financially stable, creditworthy group; if it’s the latter, the cohort has the same financial strength as a typical homeowner, but chose not to rent for a different reason. That reason most likely was real estate’s inflated price in 2004.
Lastly, Rosnick’s and Baker’s estimated the average price loss on houses from 2008 till the end of 2009. They initially estimated that real estate prices would decrease between 10% and 28% (depending upon market severity), but had to revise their estimates for a loss between 21% and 33% to reflect current trends. This brings up an interesting situation. At the end of this year, irrespective of the wealth quintile, cohort, financial situation, or house loss estimate, baby boomers who owned properties are less wealthy than those who rented. This also includes all prior bailouts to date. Maybe the grasshopper’s banker buddies aren’t so friendly after all? If the present downturn in housing doesn’t end this year, what does the current situation portend for Americans’ future balance sheets?
To date, the ant’s lifestyle choices haven’t actually impaired him, while the grasshopper’s has, but what about the future? What happens when the grasshoppers start to foment rebellion and earnestly petition their representatives in Congress to strong-arm help from the ant? After all, they are the voting majority and wield much more political muscle than the lowly ants.
In the near future there will be a lot of policies and laws that will help coerce a large majority of house owners into recourse loans that will destroy this cohorts long term wealth. Housing represents the largest line item on the majority of Americans’ balance sheets and to have such a large negative interest rate and loan amount will have profound effects on Americans thirty years from now. While the data just two years into the housing crash already shows renters wealthier than owners, twenty years from now the difference in wealth will be even larger. This will mostly be due to the large amount of positive equity that renters have accumulated and will subsequently loan to owners for an increased risk premium (interest rate).
Commentary from IrvineRenter
I agree that renters also benefited in as much as everyone benefited
from the economic prosperity of the bubble. I don’t think people really
dispute that. The question is one of degree. Owners received huge
financial benefits and lifestyle benefits by owning and borrowing and
spending their equity. This benefit was many orders of magnitude higher
than the benefits renters received from the economic expansion caused
by all the homedebtor spending.
Now that the crash is on, the losses
are not typically being borne by homeowners because they are walking
away from the bills and leaving it for lenders and taxpayers to pick up
the tab. In the end, the benefit to renters during the bubble will be
wiped out by the increased tax burden caused by the collapse, whereas
the benefits of the homedebtors will not be fully erased by the same
collapse. Homedebtors may look worse on paper because many will be
penniless, but they will have years of memories of rampant consumerism
that cannot be taken away.
In the end, renters will come out ahead
financially because they were never given free money to spend, so they
never got used to the spending, and they did not have to endure
foreclosure and bankruptcy; however, former owners will have the
memories of the trips, big houses, fancy cars and other perks of free
money that renters never got to enjoy. Personally, I am glad I am in
the renter camp, but sometimes I wonder if the party would have been
worth it; so do many other renters.
Asking Price: $654,000
Income Requirement: $163,500
Downpayment Needed: $130,800
Purchase Price: $740,000
Purchase Date: 3/16/2004
Address: 34 Blazing Star, Irvine, CA 92604
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,600 |
| $/Sq. Ft.: | $252 |
| Lot Size: | 5,400
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Contemporary |
| Stories: | Split-Level |
| View: | Park or Green Belt |
| Year Built: | 1975 |
| Community: | El Camino Real |
| County: | Orange |
| MLS#: | S580111 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
dining room. Granite countertops in the kitchen. Family Room has two
bedrooms built in the space and are not permitted in tax assessor
informaiton. Sold as is. Located close to all schools. One bathroom on
lower level, two bathrooms upstairs. Pool and spa have a removable
child safety fence.
informaiton?
- This property was purchased on 3/16/2004 for $740,000. The owner used a $592,000 first mortgage and a $148,000 downpayment.
- On 10/26/2004 he opened a HELOC for $87,000.
- On 6/23/2005 he opened a HELOC for $125,700.
- On 8/23/2005 he refinanced for $735,000 with an Option ARM with a 1.9% teaser rate.
- On 10/28/2005 he opened a HELOC for $140,000.
- Total property debt is $875,000 assuming he maxed out the HELOC.
- Total mortgage equity withdrawal is $283,000 including his downpayment.
The property went into default, and IndyMAC bought it at auction for $619,742.
Foreclosure Record
Recording Date: 11/07/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000524952
Foreclosure Record
Recording Date: 07/07/2008
Document Type: Notice of Default
Document #: 2008000323207
Foreclosure Record
Recording Date: 05/22/2008
Document Type: Notice of Default
Document #: 2008000244983
If this sells for its asking price, and if a 6% commission is paid, the total loss to IndyMAC/FDIC/US Taxpayer will be $260,240.
How do you feel about paying for that? Is the fact that we may have extracted some benefit from this behavior enough to make you feel better about it?
some updates for those of you who don’t frequent the forums…
[b]Updated MLS Irvine Closed Sales through [color=red]June 2009[/color][/b] at [b][url=http://irvinerealtorsite.com/]www.irvinerealtorsite.com[/url][/b].
(previous years are at tabs at the bottom)
– I show 192 closings for June, resale (6.4/day).
– Mortgage info has been updated through April, and I will get to May/June when time allows.
– June median price for Irvine is in at $580K, up from $550K in May.
As a refresher:
[b]Yellow[/b] is still unconfirmed (no data reported yet)
[b]Blue[/b] is “suspicious” even though it is recorded.
[b]Green[/b] is confirmed.
Closed lease info has been updated through June, as well. 220 MLS leases, holding firm at $1.55/sqft. average.
Thank you as always,
-IrvineRealtor
Thanks, IR2
This closed lease info is great – thank you very much for compiling this!
Some quick info pulled from OC County Clerk/Recorder.
327 NTS filed on 6/1/09 alone.
263 filed on 6/2.
116 filed on 6/3…
518 filed on 6/11
550 filed on 6/12…etc.
The Clerk doesn’t have filings past 6/22/09. Total NTS for OC 6/1/09 through 6/22/09 was 3,174 for OC. Curiously, the numbers dropped from the 500s on the 11th and 12th, to the 50s the week after.
Of course, this is all of Orange County, so can’t determine the exact amount of that in Irvine alone. But you get an idea of the numbers.
Unfortunately, there are many, many people responsible for the mortgage crisis and to point the finger at one group of people is not responsible or rational. There is no quick fix. Analyzing and finding the problem areas is great.
“For many years, the real-estate shills have espoused how owners, through owning real estate, are a more capable and financially secure class of people than renters. Presently, this doesn’t seem to be the case for baby-boomers.”
It was true back a few decades ago when only traditional mortgages were been written with little or no securitization (hmm…I thought securitization is a word) whatsoever. After Greenspan’s near ZIRP 6 years ago, all hell broke loose wrt housing price.
Where’s Nancy when we needed her to debunk this 🙂
Posting as Dealeo and trying desperately to save this sinking ship one fool at a time at the OC Register.
Preying on the desperation of homedebtors:
Loan Mod Frauds
Not sure if it’s always “intentional”, but many times when working with a 3rd party, the phone is disconnected when I call them to follow-up.
Since the mod process takes 1-3 months, it could be that they couldn’t find enough suckers to stay in business.
Not really sure what a 3rd party does for all that money either… Our mods are non-negotiable: we base your modified payment on documented income and expenses using a formula. Same deal whether you call or you PAY someone to call. I guess they can help phony-up the docs so you “fit” into a better mod, but that’s fraud too.
That’s exactly what they do. If they are legit, the promise the homeowner the world, call the servicer the same way the homeowner would, get the same deal, and sell it to the homeowner as a great deal.
If they aren’t legit, they steal your money, promise they’re working on stuff, then flee the city.
I had one of those crooks come to my office trying to solicit to work with me and my clients. Old guy, obvious scam artist, with a young kid who didn’t seem to speak a lot of english. My immediate reaction was that the old guy was there to sucker the homeowner to pay up front. The young kid was there to case the house for valuables, so that they could hit the place before they leave town. I called the cops as soon as they left my office.
OMG! This can’t be good:
Report: Subprime and Alt-A Loss Severity Hits 64.7% in June
When I report each day on the losses to the mortgage holders, I do not add in lost payments, management fees, negative amortization and a number of other costs I have no way to estimate. The actual losses to the lenders and investors are probably 50%-100% higher than what I report.
I don’t see how on Earth the prudent can be said to have benefited from the housing rampage, but I can list several ways in which the prudent were harmed, as follows:
1. The runup in real estate prices caused a corresponding runup in rents, while wages and salaries remained stagnant. Renters found themselves paying as much as 80% more, which I did, for a similar apt. I was converted out of one building, went to one exactly like, down to the configuration of the apartment, and paid 80% more rent.
2. Property taxes escalated steeply, harming all homeowners and rental property owners. My landlord’s taxes on hi 42-unit have TRIPLED since 2002. Meanwhile, my 76-year-old mother’s taxes have doubled, to $4000, while her income is being decimated by low interest rates. She might have to sell at a most disadvantageous time just because she can no longer pay the taxes. Ever-increasing property taxes make home ownership a joke- you don’t own your house, your local gov’t does.
3. The housing rampage triggered a wave of overbuilding, which means that long-term homeowners are experiencing slippage in their property values due to excess inventory in the neighborhood.
4. Municipalities across the country let building codes lapse, resulting in the construction of millions of shoddy, defect-riddle condos and houses. Here in Chicago’s South Loop, one major developer notorious for the shoddiness of his buildings put up a 55-story monstrosity with severe water seepage problems, which will require about $3MM in mitigation, which will probably work for only a few years. The residents are stuck in these places, and the neighborhood is stuck with a number of very bad new buildings that will drag down values in the surrounding area for many years.
5. Millions of homeowners who were sitting pretty in houses bought cheaply 20 or 30 years ago, with small mortgages, were enticed into withdrawing substantial equity from their houses, resulting in even more homeowners deeply underwater.
In summary, the only people who benefited from the easy money rampage were the home builders, hedge fund managers, mortgage originators and the other parasitical scum who came crawling out of the woodwork to take advantage of a situation that was set up to induce dishonesty.
I agree with most of 1-4 above, but those described in part 5 do not fall within the category of sensible, prudent homeowners.
Having gone from an owner to a renter – things looked so stupidly inflated that I saw no other sensible course – I can vouch that renters are still screwed. Rents are high – gotta make those gigantic mortgage and tax payments – and renters still see no benefit compar
But I personally benefited tremendously from the bubble by selling my house and paying off student loans I thought I’d still be saddled with for 20 more years. I now have no debt and sit on a modest – some would say quite modest – pile of cash, which I’ll augment as fast as possible in anticipation of 2015 or so.
Am I prudent for selling, or was I just taking unfair advantage of prudent, long-term owners who lived within their means and stayed put no matter what? Surely I have benefited from the oligarchs turning our real-estate market into another wing of the Big Casino, but I saw what was going on, and felt I had to sell because I had no other choice.
Those prudent folks who stayed put continue to benefit from the mortgage-interest deduction, which is a ghastly distortion of the free market, and, if they truly were prudent, took out no extra debt on their homes. They are being handed the bill to clean up this mess, but one could look on it as simple repayment of the silly mortgage-interest deduction welfare handout they have received over their lifetime as mortgage holders.
I think the prudent have been screwed, but plenty of prudent people made out like bandits as well.
(As to the few who paid cash for their home: I apologize for slandering them.)
Congratulations on your prudence, foresight, and market timing in selling at the peak.
I tried in vain to persuade my mother to do the same.
Yes, luck played a role. It always does in markets.
Equal parts luck, prudence, and fear, in my case.
I’d like to add that I think renters will shortly begin to see some real advantages over homeowners, as the supply of empties grows and the number of desparate landlords multiplies.
There remain several problems for renters. The two most prominent are the lack of decent single-family homes for rent, at least beyond the ugliest, most run-down house on the block; and the cultural belief that renting is for losers.
This is what I found – very few SFH for rent in my area below $2200/month.
I became hooked on IHB while I was living in Southern California. I moved to Denver to escape the cultural pathologies of California. Not that Colorado lacks cultural pathologies; I had just had my fill of California’s particular delusions.
I believe that the Colorado correction differs in structure. There seems to be less ultra high-end stuff, so that the nature of the Alt-A/prime collapse here will likely be more gradual yet more widespread, as it lies among the middle- to upper-middle class. It’s as if a broader segment of the population is at risk, though the average amount of leverage is less.
There are plenty of for-sale signs in the established neighborhoods, and prices are dropping, but reality has not begun to take hold. Since prices did not rise as much as in California, there are fewer who abso-damn-lutely must sell.
I don’t know about HELOC abuse here, but there was plenty of overbuilding, even though prices did not rise to a grotesque multiple of incomes. My immediate goal is to expand my knowledge of general homeowner indebtedness here.
Much of this is guesswork, informed only by what I have seen in the local sales and foreclosure numbers.
But, to address your point: There are 1 or 2 for-sale signs on many blocks, yet the number of rentals is, as yet, surprisingly low.
I would enjoy a couple of years of cheap rent, but those years have not yet started.
Oh, and I can confirm another poster’s observation that renters sure “enjoy” the opportunity to move quite frequently.
The opposite is true in some areas. Right now, out here in Riverside, only somebody with horrible credit (such as a recent foreclosure) or is only living here temporarily should be renting, as rents are approaching double what the monthly payment (including insurance and taxes) to buy the same house would be in some cases-plus there’s the eight grand tax credit.
I agree with your points and would add to number 3. In So Cal the builders held all the cards as buyers literally camped overnight to get in line to buy “releases” of new tract homes. Because of that advantage, SoCal is now left with an inventory of newer homes with no yards, neighbors’ windows 4 feet apart, mello roos, HOA and shoddy construction. Now that buyers are starting to get the upper hand, we find the inventory lacking any character whatsoever. At least I do and it pisses me off.
The only point that applies to renters (savers) is the first point. Rich Toscano over at Professor Piggington and Calculated Risk have researched rental increases for San Diego and Los Angeles on their websites. (If I can find the articles, I’ll hyperlink to them) After compensating for inflation they both showed that rental prices for San Diego and Los Angeles since the mid 90s haven’t increased more than 20-30% above inflation. Compare that to a nearly 3X increase in house prices in two of the most “bubblelicious” cities in America. The renters clearly have had a much smaller increase in there cost of living.
Btw- Shadowstats.com has details on how the governement for the last 15 years has been undercounting the real rate of inflation (based on pre-Clinton accounting rules). That 20-30% increase can be easily explained by inflation counting shenanigans. The 3 times increase in house prices can’t.
As to the other 4 points, they seem to apply mostly to homeowners and MEW-extractors than to renters. Even if the homebuilders did shoddy construction and bad city planning, when the renter decides that prices are at or below rental parity, those houses will sport a discount due to these issues.
Dejnov.
I found the Piggington article about housing affordability.
http://piggington.com/monthly_house_payments_rents_and_incomes
Rich has seen own to rent ratios approaching the same levels as the last housing led recession. He also shows data for over thirty years. Rental rates can’t be overblown that whole time (cities would stagnate and slowly implode, which hasn’t been happening to SD). Renting in SD is affordable, with housing approaching.
I’ll try and find the CR posts sometime this afternoon.
Dejnov.
It was very clear that ALL asset and service prices were bid up during the bubble. Home debtors competed with the prudent for every asset and service with their borrowed money. Everyone paid more for everything during the bubble.
Isn’t that called inflation, and isn’t the federal reserve supposed to raise interest rates to combat that?
We got Prop 13 in California precisely for that reason.
People were forced to sell their homes because they could no longer pay their real estate taxes… their homes were going “up” in value but unless you sell, you can’t realize the gain, so why should you be forced to sell?
The idea behind Prop 13 was -like the IRS treats long term ownership of assets- that you should not be taxed on unrealized gains.
The byproduct is that we have held back the irresponsbile spending of Sacramento. God forbid those idiots had their hands in our pockets all these years.
I think that at any refinance point, or heloc opening, the tax value should change. The owner gets an appraisal and agrees that it is fair, and they are, to a degree, realizing a gain. It would have somewhat limited heloc abuse and somewhat helped tax revenue. Not hugely significant, but still probably an easy change.
I can add another – I bought a house before the run-up in prices, and secured a LOC because my basement was unfinished, and I knew I’d wantt o finish it.
I still may do it with cash, but the LOC was there if I wanted to use it.
A few years ago, I couldn’t find any contractors that had time in their schedule to fit us in (the job was too small,) and the prices we were hearing made me want to do it myself (that would be a big mistake!)
Now, my LOC is frozen, so I’ll have to use cash – good thing I saved up these past 5 years. But the positive side is that I have my pick of contractors and can do it for about 40% less than in 2007.
IR
I have a question about how this whole Alt –A mess is going to play out. Who is going to buy these houses to stabilize the market? It seems that most of the people buying now are first time buyers in sub prime areas. It seems that prices are headed back to 2000 prices. So any one that bought in the last 9 years will be basically be under water and unable to move up. That seems like it will kill the move up market so no price stabilization form that market. I don’t think that there are enough people with high cash down payments that have been sitting out the bubble to stabilize the market, so it seems the only people to stabilize the mid range is going to be cash flow investors. Am I missing some thing? It seems like that is going to be a huge hit to the mid range. Thanks
No, you see exactly what I see. Your description of the situation is right on.
As for how this mess will get cleaned up, I think banks take the prices down to cashflow investor levels and hold them there until the inventory is worked off. In the worst markets like Victorville or Lancaster, the banks will sell bulk REO to investors who can take longer to clean up the mess.
Doesnt it seem like the banks are dragging it out as long as they can though? Instead of unloading at investor level (which is what they’re doing at the low end) they seem to be holding onto the mid/high end stuff and letting it leak out very slowly so they can milk it for all its worth
I am looking to buy and i am seeing that there are too many buyers in the market currently. This includes first time buyers and very large number of investors. Most distressed sale properties with discounted prices get multiple offers and investors with all cash offer always outbid the first time buyers. These days there are too many all cash buyers from oversees. My agent listed a property and she mentioned that 3 all cash offers were from a realty investment firms from china.
so, your question of who is going to buy, not an issue in socal. I wento an open house recently and the place unbelievably packed with prospective buyers, like 20-25 couples present at the same time and more were pulling in..
I am looking for my move up house and I am seeing the same foreign money flood that Sam described.
One house I was looking at which was at a competitive (but not firesale) price had 16 (yes 16!) offers on it with several at full asking price with all cash and two significantly above asking (all cash). I was dumbfounded since I did not think the $700-800K market was red hot. I thought the selling agent was lying to get a ‘buzz’ going but I think it may be true since this was what I experienced with a few other properties I looked at but not as extreme as the case I described (2-5 offers with at least one all cash).
Some of my friends which are first time buyers are finding the $400K-$550K market is difficult too with their offers (good offers) with $80-150K cash down being passed up for all cash offers.
This is not just in Irvine but other cities as well in South County.
Are others seeing the same thing also because this was not what I was expecting.
Maybe I just happened to hit on the ‘hot’ properties since I also see other properties sit forever (maybe short sales not being worked on)?
I think it’s more that despite reasonable or even high total inventory levels the inventory of appropriately priced stuff is tiny and hotly contested.
(whereby appropriately I mean listed within 5% of true comps)
Yes, this has been my experience as well. Lot of cash offers and multiple bids on good homes. It is difficult for me to envision prices going lower here.
That was true for good parts of CM until a month ago. ByeBye multiple bids above the asking.
I’ve talked to a couple of realtors at parties, and they keep claiming that there are lots of investors with cash who are bidding up the prices on houses. One guy in particular said he’s working with a client who has cash, and they keep making bids on houses (and apartment units) and getting outbid. He said this was in the Sylmar area. I have no reason to believe he was lying. These stories scare me.
They shouldn’t. These buyers are still looking at the technical indicators from the last 15 years. They expect this downturn to be a ‘buying opportunity’ and not a fundamental re-evaluation to long term trends. This ‘pent-up’ demand is based on recent kool-aid intoxication and not on the present forward-looking trends.
While the housing blogs were early to the party, it’s pretty common knowledge today that housing will lose approx. 10% a year for the next two years. Even Citigroup researchers came out with declining house predictions. (These are the same analysts with buy ratings on major banks). These buyers are losing 30 to 50k every year.
It’s actually good for these people to reinvest capital into the markets. There are lot of people that got lucky with their house appreciation and decided to sell at the peak. Now that prices are down 20 to 40% they think they’re making a killing on the house price. These buyers don’t realize that there is still overall more room to lose. If your a patient investor/renter you want the easy money bets to be pulled out of the system. This will help reduce overall investment capital and allow better deals to be had when we reach below rental parity.
Dejnov.
I guess I like to think that if there are people sitting on hundreds of thousands (or millions) of dollars of cash right now to buy houses, that they are probably intelligent people to get to that point, and maybe understand the economy better than I do.
I am a drinker of IrvineRenter’s Kool-Aid. So much of what he has written makes a lot of sense to me. But real-life stories to the contrary concern me.
When I first found IHB back in mid 2006, everyone (and I mean everyone) was on the bandwagon and wondered why I hadn’t bought a house yet. My close gamer buddy had just become a part-time RE agent and was so looking for a commission from me, my cube-mate also was more than willing to help me tour his condo area too look for the perfect place to “grow roots”. At the time, my wife and I were DINKs and in their eyes we had no excuse. The only thing that stopped me was me not being able to stomach that much debt right after school and IHB.
That year and the next I became a regular visitor of IHB, calculatedrisk, dr. housing bubble, mish’s site, etc. What I learned was an eye-opener.
Don’t worry so much irvinerenter hasn’t steered you wrong yet, you just have to have a little patience.
Ok, I lied. You have to have a lot of patience and nerves of steel. But if you’ve made it this far, you should have that in spades.
Dejnov.
Also, these “investors” will pick up part of the tab, and not the government who bails out the banks. And whatever is picked up by the government, it’s picked up by us, the tax payers.
Let the speculators burn their own dollars, which means less of my tax dollars.
I would disagree with a couple of points made in the introductory article and comment.
1. The article states, “What happens when the grasshoppers start to foment rebellion and earnestly petition their representatives in Congress to strong-arm help from the ant? After all, they are the voting majority…”
They are far from the voting majority. 80% or more of homeowners are not underwater.
2. While memories are irreplaceable, they are cold comfort for anyone likely to live another 20-40 years. The majority of people, particularly those involved with interest only and negative amortization loans, have lived for the present. That’s over – and every day is a reminder that it’s going to get worse.
(Sure, some are continuing to live rent free – I’m willing to adjust the survival figures to 19-39 years to accomodate bloggers raising that as an ongoing perk).
Thrifty makes valid points. My wife and I have spent a lot of money improving our 100+ year old house. We refinanced to make improvements and lower our rate but not to buy what we couldn’t otherwise afford. We still have a mortgage but it hasn’t increased much while our income has. We have lost some (imaginary) equity but certainly not all.
Owners who were responsible should still be prepared for what lies ahead and should be at least as well off as renters, if not better off when the mortgage is retired.
I did oversimplify the demographic choices with only renters/savers and homeowners/MEW-extractors. Responsible homeowners who did not extract equity from their house would definitely fall into the saver category.
In America they’re currently at least 21% of the total population (the amount of homeowners that own their home free and clear). I’d probably include those that have paid down more than 50% of their mortgage to this amount (I have no idea how many there are, but they can’t be any of the people who bought houses in the last eight years). This group might be 10 to 20%. Renters make up 30% of the total population in America, and are usually on the lower financial totem pole. Those who could buy, but chose to rent and not pay bubble prices are a small amount of the total population, probably not more than 5 to 10%.
All told a decent estimate is 35 to 50% of the population isn’t financially hurting right now. Not a strong majority.
Dejnov.
Thrifty,
On important issues the majority doesn’t get their way. The powerful get their way. The bailout plan was in with GB. OB ran saying GB bailout plan is BADDDDe. Once in BO is in office, he doubled the bailout funds. The more thing change the more they stay the same.
The closet thing you describe is the Swede rebellion on FC’ed farms. The bankers got back and then got the Fed Res. Bank in place to prevent a reoccurance. Majority pushed for non-recourse provision, but they have lots of stings that borrower are all too willing to refinance away.
Nancy: you may be interested in the last 4 paragraphs of this July 4 article from ABC news “America’s most troubled luxury neighborhoods”
http://abcnews.go.com/print?id=7988874&ref=patrick.net
Properties I wanna buy don’t go down significantly in corrections. If Santa Monica goes down 25% by index, it applies more so to the areas that I wouldn’t feel comfortable living in (yes, there are such areas).
We’re not deluded or caught up in wishful thinking here, I know what I’m dealing with in this area.
Even in Irvine, I’ve noticed the distressed homes selling in the better prime areas are their worst choices (close to busy streets, with undesirable views, etc). I would not pay ANY amount to buy properties with certain downsides. Those are the ones cluttering the market at this point, and reflected prominently in the statistics.
patience.
No one has mentioned how long from NTS to listing on this on property yet.
NTS Sale – 11/08
Listing date ~ a week ago?
Almost 8 months before it was even listed.
Yes- I noticed the same thing– why did this take so long?
Most often it is because the asset managers at the banks are so overwhelmed with properties that it takes them that long to get to it.
Do you really believe that?
Even after I showed you numerous defaults from 2003-2005 in Hancock Park and Los Feliz?
I seriously doubt that they are overwhelmed.
IMO, the banks are doing a friggin GREAT job of gaming the system on the way down.
“In the end, renters will come out ahead financially because they were never given free money to spend, so they never got used to the spending…”
I think this is the key element of the conversation. Renters/savers have a value system that will serve them well in the bleak future. MEW enthusiasts/conspicuous consumers are simply too old and set in their ways to make substantial adjustments in their personal philosophies. They’ll desperately try to regain the advantages they had when they were living in a Ponzi world, but, ultimately, they’ll wind up screwed. Don’t get me wrong, we’re all going to pay a high price. But those with long-term philosophies built on reality will wind up far better off.
In a follow up article I’ll detail how renters/savers will come out ahead in the next 10 to 15 years. It’ll mainly be due to doing what they were always doing (saving) and how the system will indirectly reward that. Even if the government doesn’t want it too.
The next 10 to 15 years (maybe longer) will see a large shift in perception as America fixes the damage to their balance sheet. No matter the outcome (barring WWIV), there will be plenty of opportunities for savers to earn profit over this timeframe.
Dejnov.
I often read this blog too late in the day to participate in the conversation. I would like to say that I really enjoyed reading your article today; thought provoking and against the grain of this blog. I’m not sure if I believe your conclusion: that renters are screwing home owners (that is your conclusion, right?) but I appreciate how well written your piece was, and will continue to ruminate on your argument.
Thanks
Regarding renters-
Overbuilding was so rampant during the bubble that it will likely continue to bring rents down in the mid-term. As properties slide closer to current investor cash-flow levels, knife catchers will be suckered into become landlords. But because there is such a large inventory of properties, more landlords will mean more rentals available which drives down the rental prices. The investors throwing cash in right now will not be able to renew their leases next year at the same rent, and they will quickly become cash flow negative.
With the banks keeping the foreclosures coming onto the market at a trickle (or a dull roar), it’s keeping rental prices stable for now. After another six to twelve months?
Banks are playing chicken with how the value of mortgages on their books are kept. If they are losing 6% a year in interest, but the market value if they sell is 25-50% (or 75% for some condos), do they eat the cash-flow loss or take the hit to the value of their book when they sell – that’s the ‘hold to maturity’ myth.
How much extra spending does a move from a 735k 6% range, principal included 30yr loan, to a 2% opt-arm? 40k ballpark? Plus the number of months that might have been lived in without payment. That is probably over 200k added to the loan. I don’t think banks should be able to get outside the home assets, they did write the loan and let it grow, but these numbers are big.
Pool not in good shape – needs some Cl.
Are banks really able to keep overpriced houses on their balance sheets as a legitimate asset? I assume that banks have some other kind of lender (investors or the government?) looking at their financials.
For instance, at my company we have a line of credit with a bank. Every month I have to send them a “borrowing base” that summarizes our financial standing. Part of that includes a formula for calculating how to value our accounts receivable. Accounts that are over 90 days old begin to lose value. Customers who have an excessive percentage of our total receivables lose value, etc.
Don’t banks have to answer these same questions? Doesn’t somebody look at that 900 sqft house in Compton valued at $400,000 and discount it from the bank’s financial position?
Some of these would have been the legacy loan program that recently died. I don’t know if loans in default would have qualified. REO props def wouldn’t have qualified, but if you could have sold a loan in default, the chicken-calculus about whether to foreclose or dump it in the LLP would have been complicated. I don’t know how banks book reo props, but would be very interested.
If this crisis hasn’t taught us that there are different rules depending on size and status of a business, I don’t know when we’ll learn it.
Great article in the LA Times this weekend on rental price deceleration.
http://www.latimes.com/classified/realestate/news/la-fi-rental5-2009jul05,0,652107.story
Telling quotes:
“Households are choosing to double up, triple up,” Calanog said, and the consolidation has left rentals standing empty.
Not only are adult children moving back to live with parents, but “we’re seeing the reverse, parents living with adult children,” USC’s Conway said. “To bring in income, they’ll rent out the mother’s house.”
The article forgets that there are two kinds of grasshoppers: 1. Those that got a cut off the top. The RE agents, Mortgage brokers, title insurance collected their fees and then banks that sold off the bad loans. 2. The loan abusers.
My tale is that #1 will be made whole by govt. intervention, but #2 will not be made whole.
The ants will be made to pay for #1 at gun point through taxes/IRS, fees, use of the courts, police and military, etc. Look at CA IOU. No looking to reduce the rate of spending (state pay rate) — just cutting hours. #2 will be used for justification for #1, but #2 will not get the bailout. #2 will be tricked into changing the non-recourse loans to full recourse and made into indentured servants.
“… allowed to weather the winter within the grasshopper’s home, the current Christian version.” How can it be said to be the current Christian version. Most public school will not allow any Christian message into the school. But the grasshopper being invited in is the current verison taught in public schools. They neglect to tell the grasshopper will bring more of his lazy friends the next year and later the ants will be forced to provide for the lazy grasshoppers who have excess time to organize.
As a homeowner, landlord and renter, the house inflation and abuse have not benefited me. The unit is in the mid-west, so neither rent increasea nor appreciation have been appreciatable in the med-West. Only insurance have significantly increased. Property taxes are just passed on to the renter.
It’s like the neighors having a grand party, not inviting you and then sticking you with the bill.
newbie2008 wrote: “… allowed to weather the winter within the grasshopper’s home, the current Christian version.” How can it be said to be the current Christian version. Most public school will not allow any Christian message into the school.
This version of Aesop’s fable is very similar to the prodigal son sermon. You are correct that schools don’t allow Christian messages, but by changing the ending to the fable (which is non-denominational) you can still get the same message in. Just not Christian-certified.
Dejnov.
The prodigal son came to his senses and repented. The grasshopper is showing little if any coming to his senses. The is no repentance on the banks, RE agents and abusers. Just more greed and fear mongering.
Aesop’s fable as originally written were with universal and true messages.
My kids’ class had the queen ant liking the grasshoppers music, so the grasshoppers were all invited in to play their music (i.e., put on govt payroll). The grasshoppers can make good enforcers for the queen against the little ants. I still think the bank/financer grasshoppers will get the bailout and new bonus and the borrower grasshopper will be the indentured servant/enforcer.
Just a note- my sister works for the state of CA, and she is getting a 14% pay cut, along with 3 Fridays furloughed per month. Maybe members of the CA legislature aren’t getting their pay garnished, but the civil servants certainly are.
Is she getting a real cut of 14% with the same amount of work or is she getting 14% cut with extra time off?
In many salaried positions there are cutting salaries, bonus, 401 and expecting unpaid overtime.
But they still keep their cushy benefits…
the 5 scenario:
Grasshopper shoots Ant and Ant’s family then moves in to Ant’s well-stocked abode for the winter.
Off to get razor wire & security his and her’s shotguns!
Even in our former IAC apartments we moved twice, the first time was for a roomier upgrade, and the second because we had to due to refurbishing of the rooms. Then we had to move again (to a house) because the neighbors upstairs couldn’t (or wouldn’t) control their kids. And now we have to move again after 1 year because the owner of my house has fallen on hard times and has to move back.
People who lose their houses only have to move once.
Fascinating article on the San Jose high-end
getting “vaporized”:
“In San Jose’s east hills, owners at The Ranch ‘had it all’ until housing bust”
http://www.mercurynews.com/ci_12743787?IADID=Search-www.mercurynews.com-www.mercurynews.com&nclick_check=1
SanJoseRenter,
Large Declining house values, that can’t happen at the Ranch, because the Ranch is special. ;}
Great location for the silicon valley, but it’s falling anyways. The only places that will weather it well are places that didn’t skyrocket and remained affortable (income/price and steady job market).
I really enjoy this blog and agree with a lot of the points made but can someone, anyone, please, please stop talking about *homeowners* (or “homedebtors”) vs. *taxpayers* as if there is a difference? Last I checked getting booted from your home ATM doesn’t suddenly exempt you from paying taxes like the rest of us. If anything, ex-homeowners are in for a rude awakening when they no longer have that big, fat deduction every year. I understand that when most people say “taxpayers” they mean “those of us who weren’t greedy or stupid in the last 10 years,” but pretending that people who’ve been foreclosed on won’t *also* be paying for a portion of the bailouts seems disingenous somehow.
Broke, unemployed Realtors, Specuvestors and Mortgage brokers who gamed the system and are losing their home(s) DON’T pay taxes.
How do you pay taxes if you’re broke?
And no…they don’t deserve an inkling of sympathy.
Random thoughts/questions about cash buyers:
Could these offers be coming from a group of people with the cash on hand?
Homes purchased with “all cash” are generally not putting money in peoples hands for move up, but getting peoples ass out of a ringer.
If point one is a yes then these people and their money is in short supply.
Do realtors have to disclose who these cash offers are from?
With Americas housing ATM shutdown, the chinese people assisting in the support of the housing market with all cash will not last long. How many chinese made plastic trinkets will we buy instead of food?
I’m sure there are many more rhetorical questions easily answered which answer Glenn Becks Question about Obamas’ plan.
Me thinks “he’s brought in the big guns now.”
It’s one thing to say buying instead of renting the past 5 years was a bad idea, it’s quite another to claim it’s a bad idea for the next 15 years too.
Is it me, or is the blogger’s pro-rent bias is getting more radicalized by the day?
Here’s a Good article from “The Economist”:
***********************************************
[[ Can pay, won’t pay ]]
Jun 25th 2009
From The Economist print edition
It is easier to dump a home loan if a friend has done so too
HOUSE prices in America have fallen so far that as many as one in five households have mortgage debt greater than the value of their homes. In a few states, borrowers are not liable for the shortfall between an unpaid loan and the resale value of the home it is secured upon. Even where borrowers are on the hook, lenders often find it too costly to pursue unpaid debts. So some homeowners may be tempted to default and escape the burden of negative equity.
How widespread is this practice? New research* based on a survey of 1,000 homeowners suggests that one in four mortgage defaults are “strategic”—by people who could meet their payments but who choose not to. The main drivers of strategic default are the scale of negative equity, and moral and social considerations. Few would opt to renege on their mortgage if the equity gap were below 10% of their home’s value, the authors find, partly because of the costs of moving. But one in six would bail out if loans were underwater by a half.
Four-fifths think strategic default is wrong. Those in the unethical minority are four times more likely to renege on loans (allowing for other influences) when their negative equity reaches $50,000. But morality has its price. When the equity gap reaches $100,000, “immoral” homeowners are only twice as keen to walk away from their debts as “moral” ones. People under 35 or over 65 are less likely to believe that default is wrong. So are the well-educated.
Anger about bail-outs of banks or carmakers does not weaken the moral barrier to default. But people who live in neighborhoods where home repossessions are frequent are more likely to welsh on loans. Homeowners who know someone who has defaulted strategically are 82% more likely to say they would do so, too. The likelihood of strategic default rises more quickly once the rate of local home foreclosures reaches a critical level. That hints at a vicious cycle of foreclosures that both depress home prices and weaken the social and economic barriers to further defaults. To break the cycle, policymakers need to address the problem of negative equity, not just unaffordable interest payments.
Nancy: the articles you are showing support IR’s conclusions and goes against your conclusions.
Hm… it’s like the big elephant in the dark room; someone grabs the tail and says it’s along rope. Someone grabs the trunk and says it’s a long hollow pipe… you know how it goes.
We sit in the same class as 20 other students, only 10% get A’s. We all heard the same words from the teacher.
Nancy, The smart ones turn on the light and see.
Keep your RE agent mantra going: Buy the most you can afford. Don’t look at price to income ratios. It’s a good time to buy.
But don’t present other people work and trying to sneak in the opposition conclusion. If you differ state why NR or IR is wrong — their information is incorrect or their logic is flawed.
Don’t imply NR is a hack politician. His credentials are much better than 99.999% of all RE agent’s credentials.
In your above analysis you neglected to mention that the super-rich make most of their money from capital gains. The capital gains tax rate was cut from 28 percent to 20 percent in 1997, and cut again to 15 percent in 2003. With the top tax rate on ordinary income (that is, on working Americans who receive W-2’s) at 35 percent, the non-working rich grew substantially richer during the Bush Administration. The comparison between working renters and non-working owners seems misplaced.
They say you can’t please everyone all the time. Gave up on that long ago. I think some understood my points already; and the ones who don’t get it, well may fortune be with them, regardless.