2003 and Bust

We are seeing more discretionary sellers with significant equity trying to exit the market. Is this the beginning of capitulation?

1306 Terra Bella   Irvine, CA 92602  kitchen

Asking Price: $329,900

Address: 1306 Terra Bella Irvine, CA 92602

There’re secrets in this life
That I can’t hide
Somewhere in this darkness
There’s a light that I can’t find
Maybe it’s too far away…
Or maybe I’m just blind…

When I’m Gone — 3 Doors Down

Is there a light at the end of this tunnel? The green shoots meme is dying, the housing market continues to show weakness, and more supply is coming. Maybe the end is too far away, or maybe I just can’t see it.

We are navigating uncharted waters in our housing market. Never before has there been such efforts to manipulate prices by our Federal Government and the Federal Reserve. The artificially low interest rates have caused debt to be far more affordable, and it has allowed homebuyers to bid higher than they otherwise could with conventional loan terms. The result of this manipulation is that many properties outside of Irvine have already reached rental parity. Does that make it a good time to buy? I don’t think so.

Last month, we saw a sudden spike in interest rates caused by a selloff in 10-year Treasury Notes. There are a number of reasons why this happened, but one of the main causes was the belief among investors that they could find superior returns elsewhere. This will be a big problem with house prices going forward. Let me explain why.

Interest rates are low because Treasury Bills and Notes are the only safe haven during a time of economic contraction. When there are no competing investment opportunities that provide better yields, investors will flock to the safest investment that pays them something. It is better to make very little than it is to lose money. However, the moment the economy starts to recover, there will be many investment opportunities that will pay better than the 3% investors are accepting in 10-year Treasury Notes. The flow of money out of Treasuries and into competing investments will drive up yields on Treasuries and in the process drive up interest rates on home mortgages.

There is no way to prevent this flow of money out of Treasuries and into better yielding opportunities. Even if the Federal Reserve where to buy the Treasuries itself by printing money, the resulting increase in money supply would cause inflation which would cause investors to dump long-term Treasuries as well. In short, once the economy improves, interest rates will go up, and house prices will continue to go down.

Many people who are underwater on their mortgages or who view prices as being “depressed” are waiting for the economy to improve with the assumption that an improved economy will result in improved house prices. It will not work that way. An improving economy will result in higher interest rates and continued pressure on house prices.

We are witnessing the deflation of a massive, worldwide credit bubble. The effect has been most dramatic in real estate because much of the money flow during the credit bubble went into real estate. Everyone is waiting for the return of all this leverage in the hope that the bubble will reinflate. This leverage is not coming back; nor should it.

There is a meme floating around in the financial media that lending is a confidence game, and if lenders would just start lending again, asset prices would stabilize and everything would be back to normal. This is nonsense. Lending is not a confidence game. Lenders are actually quite confident that they will not be repaid if they loan money to people who cannot service the debt and pay back the principal. No amount of “confidence” can change the basic math. Insolvent borrowers do not repay debt, and loaning them money to sustain a Ponzi Scheme does not work; in fact, it just creates larger losses later. In case you didn’t notice, later is now.

1306 Terra Bella   Irvine, CA 92602  kitchen

Asking Price: $329,900

Income Requirement: $82,475

Downpayment Needed: $65,980

Purchase Price: $379,000

Purchase Date: 11/6/2003

Address: 1306 Terra Bella Irvine, CA 92602

Beds: 2
Baths: 3
Sq. Ft.: 1,167
$/Sq. Ft.: $283
Lot Size:
Property Type: Condominium
Style: Mediterranean
Stories: 2
Floor: 1
View: Greenbelt, Treetop
Year Built: 2001
Community: Northpark
County: Orange
MLS#: R900670
Source: SoCalMLS
Status: Active
On Redfin: 163 days

SPA, CONDO IS 3RD BLDG ON THE LEFT.1306 Terra Bella   Irvine, CA 92602  paint


PAINT? Yikes!

This property was purchased on 11/6/2003 for $379,000. The owner used a $279,000 first mortgage and a $100,000 downpayment. This owner did not refinance or HELOC his investment (he lives somewhere else). Despite a 2003 purchase date, he is offering it for $40,000 less than he paid, and he is hoping to get out with a little of his downpayment. I think this is a wise move, but few in his circumstances are doing the same. Maybe a little IHB publicity will help him out.

102 thoughts on “2003 and Bust

  1. MalibuRenter

    My landlords had their house for sale for $830k in 2007. They got some “lowball” offers around $750, but decided to take a vacant house off the market.

    Market prices have just dropped below what they paid in 2003. They paid about $500k with $100 down. By the end of the year, all of their down payment will be gone.

    Nice people. Bet they aren’t happy about this. They could have had a $250k profit just for having owned a house for 4 years. Now they are already at a loss, and will lose all of their down payment .

    They now have two underwater houses.

    1. AZDavidPhx

      They got some “lowball” offers around $750, but decided to take a vacant house off the market.

      Come on now, did you just expect them to “give it away”?

    2. newbie2008

      Low ball offers? From the new market prices, the old offers were high flying and old asking price were in outerspace.

      IR, for “…lending is a confidence game” is the full name of a “con game?”

      Increase wages are the normal cause of inflation. Increase wages are the result of inflation. Lax monetary policy and a scaricity of supply are the usually the primary ingredences for inflation.

    3. Jeff

      They may be nice people but they sure did not deserve a “profit” for their house in 2007. The house was 4 years older than when they bought it and had depreciated/deteriorated accordingly. The land underneath (dirt) was still dirt. Houses are just like cars- they should be worth less in nominal dollars (and much less in inflation-adjusted dollars) over time. We need to get rid of the mindset that believes houses (boxes) should naturally and inevitably appreciate over time. Why? The roof gets, older, the furnace gets older, the driveway develops cracks- the list goes on an on. Sure, some cars (e.g. a classic restored 70s muscle car) are worth more 30 years after they are built, and some land (dirt) is worth more over time (e.g. beachfront OC land). In such cases supply and demand raises prices. But the average house (box) should absolutely be worth less over time. The only reason a stucco box in Santa Ana is not $50 or $75K is because bank lending is not based on local savings rates as it used to be. Instead it is based on the ability of national banks to borrow money at the Fed discount window and lend out more than they keep on their books under a fractional system. Lending should be based on savings, which should be based on profits.
      Folks, we should be paying cash for houses, or perhaps 2x annual income (and living much more simply in smaller houses).

      1. Geotpf

        A house, properly built and maintained, should last forever. This is different than a car-cars have a finite lifetime, in general (without totally rebuilding the thing). There are billions of buildings on the planet that are over a hundred years old. If you replace things when they need to be replaced, there should minimal difference in price between a 20 year old house and a 100 year old house, IMHO. A newer house deserves a bit of a premium, because everything is relatively new, and to modern tastes, but that’s it.

        As for the price of homes, supply/demand sets prices, period. Easy financing increases demand, of course, as it allows people to buy more house than if they had to pay all cash. But it also allows people to be able to buy a house that would be stuck in a cramped apartment all their lifes otherwise.

        1. Ellery

          Old growth wood is much better than the farmed lumber in new construction.

          I’d rather update a 1920’s home than attempt to change the “bones” of new McShitbox.

    4. Chris

      Frankly, 2007 is already the year of low ball offers. They were lucky to get that type of price.

      I sold my condo back in August ’07 (not in Irvine) and I also got a low offer (not a $80k haircut but, nevertheless, a lower offer). On top of that, the new mortgage holder were expecting that I give away the fridge, washer and dryer which cost me more than $2k brand new which I had bought back in ’05. Suffice to say that I knew I would have a loss on that condo (less than $10k) but then I realized that if I didn’t take that ONLY offer (sad, ain’t it?…one freaking offer only), I would have a larger loss and a hard time to sell that condo later on.

      Looking back, that new mortgage holder must have been pissed to have been so greedy 🙂

      1. newbie2008

        Chris, check out the current prices for your old condo and neighborhood. You might consider yourself lucky to lose only $10K.

        1. Chris

          I do quite often (and hence the last sentence above).

          $150k loss and counting on his part.

  2. winstongator

    Great post. You’re generous in calling “This [merely] nonsense”. Far more extreme language can be used.

    The analysis of economic improvement -> higher interest rates -> downward pressure on home prices is simple, but should caution people.

    Upon quick first read “Lenders are actually quite confident that they will not be repaid if they loan money to people who cannot service the debt and pay back the principal.” I thought, they were happy to make loans that people didn’t have the capacity to repay in the bubble. It took a second look to see the – and pay back principal. It should be or instead of and. A refi or sale was just fine for lenders because principal was safe and more fees came in. The overvaluation of collateral combined with poor capacity analysis is a dangerous mix, at any credit score.

  3. mav

    “In case you didn’t notice, later is now.”

    that’s exactly right…. i’d like to add the corollary:

    Hyperinflation was then.

    1. DarthFerret

      mav: “i’d like to add the corollary:

      Hyperinflation was then.”

      As readers and posters on an admittedly bearish blog, we should be very careful about straying into the realm of sensationalism. IR’s posts here are so exceptional, because they rely on cold, hard facts and detailed analysis, not fluffy diatribes against inflated demons.

      We will be accused of alarmism and worse by the Koolaid Krowd no matter what we say, but there’s no reason to prove them right with statements such as the above. Despite recent attempts to redefine the meaning of hyperinflation (much as some managed to validate the [mis]spelling of ‘nukular’ simply by using it), the CORRECT, technical definition of ‘hyperinflation’ was and remains Phillip Cagan’s 1956 definition of “a monthly inflation rate of at least 50%”.

      Hungary had hyperinflation in the 1940’s. Argentina had hyperinflation in the 1980’s. Chile had hyperinflation in the 1970’s. The U.S. has NOT experienced hyperinflation, and, as bad as things have gotten and are likely to get, we will not see hyperinflation during the next decade.


      1. Ellery

        Perhaps it would have been better stated as…

        “We already went through a period of high inflation”

        Most people can’t/don’t want to wrap their heads around the idea of deflation.

        1. mav

          I accept the correction, however if one looks at the run-up in prices of commodities, health care, college education, and well really everything that is required to live a stable life…. we already experienced a false ultra-high inflation period…

          My comment was more in regards to the inflation mongering going on now, which is nonsense…. it already happened now time to experience that once in a life time phenomenon, until we pass on and our ancestors repeat it all over again…

    1. Blueberry Pie

      I’ve come across a lot of open houses containing rooms with at least one wall painted red. I like the color red, but painting a whole wall in a house is kind of jarring, and even a little creepy to me.

        1. NOT

          For those of you who have been “forced” to watch Sex in the City, Big had a Red wall, and lots of “chicks dig it” 🙂

        2. Scrawny Kayaker

          I like that paint in the bathroom. Reminds me of a restaurant bathroom or two in Seattle.

          But the realtard’s flash in the mirror makes it and the sink look like a grinning cyclops looking to its right. Plankton, writ large, SpongeBob fans?

      1. AZDavidPhx

        You will need the red walls to make you drink more heavily and forget about all the money you lost.

    2. newbie2008

      Didn’t you see the grand front of the condo. Just like a resort. A wonderful lobby and front entrance. Then one small room for sleeping and one small living room. Just like a resort.

  4. IrvineRenter

    Mish on the housing bubble:

    Housing Update – How Far To The Bottom?

    “The Case-Shiller charts suggest that the worst may finally be over. However, so far all we can say is that things are getting worse at a decreasing pace. This is not the same as getting better. Indeed it may take 2 years or more to cross the zero-line in the second Case-Shiller chart. That would be consistent with a bottom in 2011.

    Thus I see no reason to switch from my long-held estimate of a 2011-2012 timeframe for a bottom. Furthermore, even once housing does bottom, do not expect a V shaped recovery. Housing prices are likely to remain weak especially in real (inflation adjusted) terms for another decade.”

  5. Property Owner


    It would be interesting if there was a two column list somewhere where one column listed rental parity cities in OC and the other column listed the out of parity cities with the % deviation from parity in parenthesis. Whether you base it from the current subsidy environment or true parity is up to you. Maybe a third column so both subsidy and true parity (with deviations) can be viewed. It would probably be a lot of work but would be interesting to see the trend.

    1. IrvineRenter

      If I could find good data for OC cities on median home price, median household income and median rent, I could construct aggregate figures. The calculations would not be as difficult as obtaining the information. It would be very revealing of the pockets of irrationality around the county. I suspect you would see lunacy in the beach communities and Irvine, rental parity in most other towns, and downside overshoot in Santa Ana.

        1. IrvineRenter

          It will have the median income data. The Bureau of Labor Statistics keeps the CPI which is where you find the rental data, and Dataquick or the CAR keeps track of the median home price.

          Three pieces of data, three different sources.

  6. AZDavidPhx

    This is great. Looks like the lawyers found a way to get in on the bailout buffet. This is a great way to spend bailout dollars, playing around in court.

    Wells Fargo Bank Sues Itself

    In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.

    As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.

    “The primary reason is to clear title and ownership interest in a property to prepare it for sale,” Waetke said in an email exchange. “So it really is not Wells Fargo vs. Wells Fargo.”

    Yet court documents clearly label “Wells Fargo Bank NA” as the plaintiff and “Wells Fargo Bank NA” as a defendant.

    Wells Fargo hired Florida Default Law Group., P.L., of Tampa, Fla., to file the lawsuit against itself.

    And then Wells Fargo hired another Tampa law firm — Kass, Shuler, Solomon, Spector, Foyle & Singer P.A. — to defend itself against its own lawsuit, according to court documents.

    Wells Fargo’s defense lawyers even filed an answer to their client’s own complaint.

    “Defendant admits that it is the owner and holder of a mortgage encumbering the subject real property,” the answer reads. “All other allegations of the complaint are denied.”

    McKillop, the condo owner’s attorney, told me he thinks Wells Fargo doesn’t know what it’s doing, and that its lawyers figure it is all billable hours to them.

    You can’t sue yourself,” McKillop said. “It’s just so ridiculous. .. It’s a waste of paper. It’s a bastardization of the legal process.”

    Wells Fargo’s two law firms didn’t return messages to explain their filings.

    The condo owner is belly up and hired McKillop to pursue a “friendly foreclosure,” attempting to escape any lingering liabilities after the foreclosure sale.

    “It was a property they thought they were buying as a good investment as a lot of people did back in 2005 and 2006,” McKillop said. “All we want to do now is get this property taken care of as fast and as easily as possible for all parties.”

    Rather than suing itself — a stunt that was never even attempted on the MTV show “Jackass” — wouldn’t it be easier for Wells Fargo to release one of the liens to itself? Or pursue some other internal accounting strategy rather than tie up the court with nonsense?

    This is just folks cranking out paperwork without conscious thought,” said Anthony Sabino, a law professor at St. John’s School of Law in New York City.

    Now, it seems these moronic mortgages require moronic foreclosures.

    It takes some pretty shameless lawyers and a rich culture of corporate stupidity for a company to sue itself.

    I hope Wells Fargo loses this case and ends up having to drag itself all the way to the Supreme Court.

      1. Sue in Irvine

        How about the city of Irvine suing the Irvine Unified School District to stop the proposed football stadium at University High?

        I read somewhere yesterday about the top 100 towns to live in. I only read through a few of the top 10. Among them was my hometown of Birmingham, Michigan. Somehow I found homes for sale and was suddenly nostalgic for the old days, even though I’ve lived in CA for 29 years.

    1. Dan in FL

      Not a joke. This is really my case, and everything in that article is true.

      I have another case where a more regional bank has done the same thing.

        1. Dan in FL

          Wells Fargo owns the first and the second mortgage. Instead of doing things the right way, they sued themselves. Then Wells hires another firm to defend them, which is where the real stupidity starts. Then the idiot attorneys file a legal pleading denying everything the Plaintiff stated.

          So Wells hired 2 attorneys, when 1 would suffice, both attorneys do stupid sh1t, and the end result is Wells denying all of the allegations of their own complaint.

          Your tax dollars at work.

    2. newbie2008

      Is WFC seeking to get future immunity for liability, because they will just follow court orders? What if they appeal and with a straw man? Both the lawyers and WFC might do very well.

  7. Lucky Victim


    Has anyone read the news about Wells Fargo selling distressed loans at 35cents per dollar to an Irvine investor? Says the price was twice most other investors were offering. Any thoughts?


    1. IrvineRenter

      There are always opportunistic buyers (lowballers) willing to offer 1/2 of what something is worth in the hope that a distressed seller has no other options. In this instance, the seller had an interested buyer who likely appropriately valued the portfolio and bought it. Even a portfolio of non-performing crap is backed by collateral that has some value. If the loans were 80% LTV at origination, for them to be worth less than $.35 on a dollar, the collateral would have to fall over 70% in value. In all likelihood, the properties are not that depressed.

      1. winstongator

        If it includes 2nd’s or 90-100% LTV’s, it has notes with no real collateral and could see 100% loss on some other notes. From what I’ve seen in SoFL, condos have fallen >70% in value from the bubble. Put a year of non-payment could hit another 5-10% of value.

        I found a novastar loan from 3/06. Sold @ 318k, 100% financing, sold again 4/08 for 190k. Not 65% reduction, but a pretty big cut.

    2. Property Owner

      That does not surprise me. According to my friend, there was one bank last summer unloading SoCal properties in bulk sales at around $0.65 on the dollar. Of course you had to buy several dozen properties in the package.

  8. IrvineRenter

    I think we will look back on the 00s as the Ponzi Scheme Era:

    Lawyer gets 20 years for $400 million swindle

    “In a letter sent to the judge last week that was rife with regret, Dreier said he was engulfed in a “quicksand of spending” that led to desperate measures — “a massive Ponzi scheme with no apparent way out.”

    The scheme involved cheated hedge funds, investment funds and several individual investors between 2004 and 2008 by selling them fictitious securities. The government has said Dreier received as much as $740 million from the sales and that victims lost $400 million.

    To carry out the plot, prosecutors say, he supplied fake financial statements for his victims.”

    How many people were out there doing this?

    1. AZDavidPhx

      20 years at Club FED; he’ll be quietly let out in 5 years for “good behavior” while the masses are lined up to try out the newest KFC recipe being advertised on television. He can then go and retrieve his spoils from his offshore bank accounts and retire to some nice house on the beach somewhere and go golfing with his cronies. It’s just another episode of American Idol White Collar Crime Edition.

      There was probably a time in this country where this prick would have been frog marched up a scaffold and sent swinging from a rope. Not today. No sir, that’s not nearly as effective as handing him a piece of chalk and making him write “I will not steal again” 500 times on the chalkboard before sending him back out into the yard to play again.

      1. lvnvflyer

        I believe the current law requires a federal prison to serve a minimum of 85% of his or her sentence. Thus, a twenty year sentence would require time served to be at least 17 years.

        1. AZDavidPhx

          So he’ll appeal a thousand times and get a reduced sentence and serve 85% of that. There are a million tricks in the book.

          He’s got a 2015 tee off date already scheduled.

          1. lvnvflyer

            Well, he plead guilty, so his appeal (if any) will likely be limited to the sentence, which, given the magnitude of the fraud, would be hard to overturn. I would be quite willing to be a substantial sum that Mr. Dreier will not be golfing (at least on a non-prison course, if they have such things) six years form now.

          2. no_vaseline

            David’s on crack.

            That man is doing 17-20 and not a day less provided he lives that long.

    2. Autumn

      We have our very own here in OC. Mr. Danny Pang of PEM Group. Google him. He has been accused of Ponzi +.

      1. Sue in Irvine

        Not only that, but in May 1997 his wife (Janie Louise Pang) was murdered. Hmmmmm.

        1. Autumn

          Yes. He was conveniently across the continent giving a speech to hundreds of people at the exact moment she was killed. I believe one of his attorneys was arrested and tried for her murder. It didn’t stick and they could not link Pang to it. Very sad.

    1. IrvineRenter

      I was surprised they offered these properties for sale at less than $300/SF. If you make a scarce commodity (new homes) available at prices that people can afford, it will sell well. It does not mean the market is near the bottom, but it does mean that The Irvine Company is not as delusional as we once thought.

      1. sl

        Thanks for the reply.

        I used to rent in Woodbury and liked the neighborhood: very walkable, nice park kids and Jeffery open space. And no, I don’t work for Irvine Company.

        What do you think the under $300/sq ft. price will do to all the existing homes that are still priced above $300/SF not only in Woodbury or Northwood II, but also in older neighborhood ? Will it put more downward pressure or the new homes are released too slow to have any effect ?

        1. IrvineRenter

          If they were to release more, it certainly would have an effect. Most sellers are too delusional to notice, but you would think buyers would notice that TIC is now selling new for less than resale and think twice about bidding on the resales at inflated prices. TIC just showed us where the market is for new, and new generally commands a 10% premium over resales; therefore, TIC basically revalued all of Woodbury at about $260/SF.

          1. mike in irvine

            Excellent point. Most of us missed this observation. Delusional buyers should understand this is why TIC makes money.

            Hundreds of buyers visited the 11 townhouses on sale, most of us came back with a misplaced opinion about the pent up demand. Very few gave any thought towards the price affect on Woodbury.

            great post…as always.

      2. Major Schadenfreude

        “If you make a scarce commodity (new homes) available at prices that people can afford, it will sell well”

        How about that! Also, the mechanism that determines these affordable prices is called “the market” and the price is called “fair market price”!

        However, the market works best when left alone without any intervention from the government. So, get rid of Fannie Mae, Freddy Mac, and any tax incentives to buy a home, and fair market prices will return to housing. Although, I guess that wouldn’t good for the bloated REIC that it supports along with the politicians they bribe.

        1. AZDavidPhx

          So, get rid of Fannie Mae, Freddy Mac, and any tax incentives to buy a home, and fair market prices will return to housing.

          Oh no, we aren’t going to allow that. My government daddies like their house prices the way they are without all that free market socialist garbage getting in the way. Are you suggesting that we allow children (CHILDREN!) to go homeless because their parents cannot get the loans that they need from the government in order to survive?

          Have you no heart?

          1. Geotpf

            You could make the same argument against public schools-that is, children of poor people don’t deserve a good school, just children of poor people don’t deserve a good place to live. No successful country on the planet doesn’t have significant government subsidies of the poor. The US’s subsidies are below average for developed nations.

          2. Mikee

            Well, now Freddie and Fannie are following new appraisal guidelines and the NAR is pissed that the new appraisals are coming in lower than ‘offer price’. So, the banks won’t make the loans ’cause they can’t sell them to Freddie/Fannie.
            According to NAR, its now Freddie and Fannie that are “artificially” reducing the prices in the housing market.
            Freddie/Fannie – damned if they do, damned if they don’t

  9. IR_fan

    If in a high inflationary period, while interest rates will certainly go up as the nominal rate that investors demand goes up compensate for inflation, wouldn’t you expect hard assets, such as real estate, to do well during such a period?

    Rents will certainly also be increasing during the period, increasing the rental parity levels.

    1. IrvineRenter

      Rents will not increase without increasing wages. Inflation can be caused by increasing wages as it was during the 70s, or it can be caused by devaluation of the currency like it will in the future if we have rampant inflation. If inflation is caused by wage increases, it does not cause much of a decrease in the standard of living. If inflation is caused by currency devaluation, eveyone’s standard of living drops.

      Hard assets can do well in an inflationary environment if the assets in question are not overvalued to begin with. That is not the case with real estate.

      1. avobservor


        I have followed this blog for quite some time now and IMO this is hands down the best RE blog on the net today. Everything is supported by solid data and analysis. My wife and I thought about buying in Irvine back in 2008 and thanks to your analysis we now decide to wait. Evidently I am not the only one who benefitted from this blog.

        About RE inflation hedge – wage inflation has become sort of a quaint notion ever since the great global outsourcing movement in the last 20 years has basically taken away the wage floor for a big chunk of middle class jobs in this country. That’s why credit/debt became the income supplement for many US household to make up for real wage stagnation/fall, and in doing so created a grand illusion of economic prosperity. Any inflation down the road would be triggered by debasement of USD, which as you said, will reduce purchasing power for everybody. Couple that with higher interest rates I doubt RE will provide adequate hedge (gold or commodity, maybe).

        But of course before the hyperinflation (in long run it is almost a certainty given the massive liquidity Fed has pumped into the system) takes place we will have to escape the ongoing deflation trap first. With all the measures designed to slow down the deleveraging process, foreclosure moratoria, loan mods, PPIP… you name it, it dawned on me that this is not going to be quick and clean as we all hoped. The giant sucking sound of excessive credit being squeezed out will be with us for a long long time. Whether Fed’s printing is able to put enough air back to prevent a total collapse of consumption – your guess is as good as mine. I give it 50% probability that US and global economy will dodge a Japanese style deflation.

        1. IrvineRenter

          I am still worried about the upcoming deflationary events: the commercial real estate bust and the Alt-A/Prime residential bust. None of these bad loans has been written off yet, and the total of the losses yet to come will dwarf subprime.

          IMO, we will see a double-dip recession. The only respite between these dips is the anemic green shoots from Federal spending. We probably have two more years of strong deflationary pressures followed by a potentially inflationary reaction.

        2. winstongator

          Banks create money through fractional reserve lending – leverage. The fed’s liquidity injection pales in comparison to the amount of money created during the bubble, which almost completely went into RE – residential or commercial. Since our measures of inflation do not accurately capture RE inflation that newly minted ‘money’ apparently did not cause inflation.

          If the fed injection < debt destroyed by housing bubble (which is the case), the net money supply will contract.

          1. avobservor

            I agree that the effective money supply will be contracting despite Fed’s printing. The unthinkable is happening.

            That our gov’t turned large insolvent banks into zombies thru “mark to myth” accounting is likely to drag out the deflationary process. Japan was a perfect illustration how to kill the economy by allowing zombie banks alive and competing against healthy ones. Keeping the mountain of bad corporate debt on Japanese banks’ balance sheet guaranteed there would not be healthy level of lending to provide credit for the growth of real economy. And that in turn dragged down employment and real wages, and in turn suppressed price of all asset class. Obama had his chance to do the right thing but chose not to. The rising default on debt of all sort in the bad economy – corporate bond, residential mortgage loan (Option ARMs and Alt-A), CMBS will continue to make things worse, but many of these bad loans will not be written off. Banks will keep reporting record profits (think of Q1) while hoarding cash, and hiding the real losses thru accounting gimmick.

          2. AZDavidPhx

            Obama had his chance to do the right thing but chose not to

            That’s right. Remember how amped everyone was when he got elected? All the “Yes we can” slogan chanting?

            Pretty hilarious in hindsight. His victory had absolutely nothing to do with his policies and was nothing more than a very well put together campaign to manipulate the emotions of people using a combination of class warfare and racial inequality that bamboozled everyone to the point that his policies did not even matter.

            His approval rating is now dropping as people wake up from their stupor and start to realize that he is carrying the torch for his masters to keep the status quo.

            Not my fault, I didn’t vote for him.

          3. avobservor

            “We probably have two more years of strong deflationary pressures followed by a potentially inflationary reaction.”

            For deflation pressure to be removed in a couple of years, I think two things must happen first:
            1. Foreclosure/bankruptcy need to be processed quickly to clear out excess in housing and consumer credit
            2. Insolvent financial institutions must be allowed to fail with bad loans written off

            That will ensure the debt destruction takes place quickly (albeit violently) and economy finds its natural equilibrium again within a short time frame. Unfortunately, neither is happening. If we believe the deleveraging process must run thru its course before property prices reach THE bottom, we will more likely see a long, drawn out (5-10 years at minimum) decline – death by a thousand cuts.

            Unless you believe Fed and our gov’t can again create an even bigger bubble …. If that happens, God help us.

          4. AZDavidPhx

            Sooner or later people are going to have to stop using this excuse; it is losing steam with each passing day.

          5. winstongator

            Hopefully we see this with CIT upcoming. It seems like they can get in and out of bankruptcy with limited federal involvement – minus the actual involvement of the court, which is govt intervention in markets. An orderly wind down & wind back up of an operation with debt to equity conversion entirely in the private sphere will build confidence in the ability of things to be sorted out. Could it happen on a 10-20X scale for Citi is another story.

            Or not:

    1. Lee in Irvine

      Thanks for sharing. I would suggest everyone read it too.

      I had read about Joe Cassano before, but I didn’t know he was such a control freak — dick. A case can be made, that this jerk, likely had more to do with Ponzi scheme financing, than anyone else.

      1. Blueberry Pie

        You have to figure that right now there is some other bubble market emerging. It seems like we’ve been on this kind of track for 10+ years now. Just as one thing subsides another one forms.

        Right now there is some company gaming the system and making a lot of money. 5 years from now we will read about all the illegal, unethical and/or shortsighted decisions that the company made.

    1. Dan in FL

      Considering he never really owned any of the properties he talks about in his book, I’m sure he’s doing just fine.

      He was on CNBC with some other shills about a year ago on some forum or other with the incredible Erin Burnett.

      But if he was leveraged to the hilt, I wouldn’t be surprised.

  10. IR_fan

    The problem is that a sharp correction is not necessarily the only way for real estate to return to historical norms. In period of strong inflation, if home prices appreciating less than the rate of inflation, prices can also return prices to historical norms. (I am personally of the belief that a sharp correction will occur.)

    Also, when there is inflation, wages as well as everything else will adjust…unless this is a massive currency devaluation (ala Asian financial crisis), which is unlikely for the dollar.

    At the end of the day, in real terms, real estate will have to go down. But in nominal terms, there is no certainty of what will happen and over what time frame…especially if inflation rears its head.

  11. Blueberry Pie

    I read that book hoping for some interesting concepts on personal finance. I was very irritated when I realized that the basis of the book was really just “get rich quick by buying real estate”.

    1. AZDavidPhx

      Since you asked…

      I would not pay a penny over 125K. But that’s just because I am sober.

      If you believe that the median income is 100K (which I do not) then a reasonable price on a median house could be anywhere between 300K to 400K.

      How does this condo compare to your median house? I would guess that a place like this is much less desirable than the median house.

      How much less? It’s an apartment so lop off 50% right there to figure 200K.

      It has no pergraniteel or coffee maker that sings “Good Day Sunshine” when you turn it on so lop off 5% right there to figure 190K. It’s only got about 1100 square feet compared to the median house which probably has around 1500. So lop off another 25% to bring down the maximum offer to 142,000$.

      However, it does sit on sacred ground where God beamed his light during the first seven days. So go ahead and add 30% pride premium for that and get 184,000$.

      Then factor in that you are investing in your future and no more land was made after the seven days – add 45% fear premium to get 267,000$

      Remember that house prices will only go up and that real estate is local – add 20% speculation premium and you get your final offer of 320,000$.

      Hope that helps.

    1. Friarush

      Not true. Terra Bella is within the Northpark community. The only entrance is through the gates.

  12. IrvineRenter

    ‘Meth lab home problem’ sickens new owners

    “With meth lab seizures on the rise nationally for the first time since 2003, similar cases are playing out in several states, drawing attention to the problem of meth contamination, which can permeate drywall, carpets, insulation and air ducts, causing respiratory ailments and other health problems.

    Federal data on meth lab seizures suggest that there are tens of thousands of contaminated residences in the United States. The victims include low-income elderly people whose homes are surreptitiously used by relatives or in-laws to make meth, and landlords whose tenants leave them with a toxic mess.”

    1. AZDavidPhx

      No problem. We’ll just ammend the lead based paint disclosure to include Methamphetamine Labs too.

        1. HydroCabron

          I recall hearing that some state was now including inspection for traces of meth manufacture in the inspection process. Anyone else heard of this, or did I just dream it?

          After watching 2 seasons of ‘Breaking Bad’, I’d insist on that, plus a check of the bathrooms for traces of hydrofluoric acid.

  13. hb

    707 Terra Bella is interesting as well, list is 280K, marked as short sale, original sale price is 109K.

    I’m wondering about that white cord apparently hanging in the 1306 red bathroom–is that a clothes line or something? Terrible pictures, random stuff sitting around, property could be marketed a little better.

  14. Joel Carson

    Wow. Incredible observations. Real estate agents have to be fully aware of the country’s financial status before they can be a part of the solution and not a part of the problem. I sincerely appreciate your input and information.

  15. Anthony

    When are we going to see the end of WTF real estate pricing in Irvine?
    About the release in Woodbury East, thanks to those knife catchers, now with the fast sellout, TIC will raise the prices for the next release by 20K-50K, and another 20K-50K for the next next release.
    Hey, if you can’t pay your mortgage, it is your damn right to demand for an adjustment, or two, or three. Uncle Obama will chip in, with money from the stupid US taxpayers…
    Let’s go back to where we started, the previous boom.

    1. Chris

      Anthony, I’ve been complaining about this in earlier posts months ago. There’s really nothing you can do about this.

      If you’re looking to buy an Irvine house now, good luck getting the price that YOU think is fair. The bubble has been deflated. However, the balloon has not been fully deflated yet. Will it deflate further? Possibly. Are you willing to take that loss? That’s your call.

      GS didn’t blow the numbers off the chart because of its ability to do so. Intel’s rosy forecast isn’t exactly a sign that the economy is back (hell, the unemployed mass needs computers too since they no longer can use the company computers to surf).

      The moral of this story: don’t expect another bubble even though MSM and the O admin are trying to blow one.

  16. newbie2008

    IR, The property is no longer on the market. Maybe being highlighted on IHB is not health for the property or RE agents.

  17. Rockford Area Realtors

    This really makes me mad! They need to get their heads out of their asses!

  18. babymaradona1

    When do you guys think that interest rates will go up? Within 6 months or a year? Later?
    What do you think they will be 8 or 9%? Higher?

Comments are closed.