Some of the knife catchers from 2007 and 2008 are changing their minds about their great investments. This former REO buyer from last year is looking to get out at even.
Yesterday, All my troubles seemed so far away, Now it looks as though they’re here to stay, Oh, I believe in yesterday.
Suddenly, I’m not half the man I used to be, There’s a shadow hanging over me, Oh, yesterday came suddenly. Yesterday — The Beatles
Knives can be very dangerous, but they also can be a useful tool in the hands of the right person. It can be used to trim away the excess and leave a lean and useful core; however, it can also cause serious harm.
The foreclosure and bankruptcy process works like a knife cutting away at excessive debt. We still have a large amount of unsustainable debt held by many homeowners in the mid- to high-end of the housing market. There are only two realistic scenarios where these debts are cut down to size: (1) property sale, and (2) loan modification.
Current incomes do not support current debt loads under stable loan terms. Many people are trying to blame the foreclosure crisis on the bad economy and unemployment, but we would have had a huge foreclosure crisis even if the economy had remained sound. The implosion of subprime had nothing to do with the bad economy, nor was it the borrower class that created the default problems; it was the loan terms. The ARM reset and recast problem we are now facing is just like subprime. Remember, It’s not the Borrowers; It’s the Loans.
Many people would like to sell to cut loose of the mortgage payments they cannot maintain. As long as the market has owners in this situation, there will be pressure to sell and excessive home inventory. We are not seeing this inventory yet for reasons discussed on many occasions (most recently in The Lenders Are the Market), but this inventory is on its way. (see also this article in the LA Times: Another wave of foreclosures is poised to strike)
Loan modifications have failed to make a significant dent in the problem, nor is it likely that it will in the future. These programs help a few on the fringe, but they don’t do much for the hopelessly underwater and those who simply cannot afford their debt service under any loan conditions. There will be No Forgiveness of principal.
Even if loan modification programs were to work, it may be good for the lenders, but it will do little for borrowers or the economy. The payments under loan modification programs are still onerous, so people will not have much money left over to enjoy their lives. It isn’t likely that lenders will be giving out HELOCs to those people with loan modifications any time soon.
Much of the homebuying population seems to think that the free money from HELOCs will be available in a year two. Once prices go back up, won’t lenders be giving out this free money again? It doesn’t seem very likely that lenders or investors would put their money into loans that defaulted and cost them a trillion dollars. Would you?
{book6}
I first featured this property back in July of 2007 in the post Sumac Attac. It has been two years since this house began its quest for a stable homeowner. So far it has managed to find a knife catcher. Will the next owner be stable?
FAVORITE FLOORPLAN IN COLLEGE PARK WITH 5 BEDROOMS AND 2.5 BATHS ,
BONUS ROOM CONVERT TO BEDROOM WITH 2 CLOSET. REFINISHED CABINETS
,GRANITE COUNTERTOP, STAINLESS STEEL APPLIANCE ,CELLING FAN ,SECTIONAL
GARAGE DOOR , RECESSED LIGHTING , NEW PAINT IN & OUT , NEW FLORRING
, GAS STOVE ,ROSE GARDEN AND FRUIT TREES,CLOSE TO PARK , SCHOOL , FWY ,
SHOPPING .
ALL CAPS
FLORRING?
FAVORITE? Whos favorite?
This property was originally purchased on 10/28/2005 for $795,000. The owner used $636,000 first mortgage, a $159,000 second mortgage, and a $0 downpayment. He defaulted in late 2006, and the property was purchased by U S BANK NA, ; HOME EQUITY ASSET TRUST 2006-1HOME EQUIT, ; SELECT PORTFOLIO SERVICING on 05/22/2007.
Foreclosure Record Recording Date: 04/27/2007 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2007000272756
Foreclosure Record Recording Date: 01/25/2007 Document Type: Notice of Default Document #: 2007000052690
The lender did not waste any time in the foreclosure process, but they held the property for 9 months before they sold it.
The property was purchased by the current owner knife catcher on 2/28/2008 for $600,000. He used a $417,000 first mortgage, a $128,000 second mortgage, and a $55,000 downpayment. If he gets his current asking price, and if a 6% commission is paid, he stands to make $11,000. Basically, he has enough room to negotiate without losing any money. Do you think he will get out without a cut?
People who are buying in today’s market in Irvine are paying more to own a house than it costs to rent it. This has been the case since the turn of the millennium, and few people outside the readership of this blog think that will ever change. Why do they believe that? And why do we believe prices will get so low that renting is more more expensive than owning? It it all a matter of faith?
Historically, when prices crash, they fall until it is cheaper to own than to rent because there is no speculative investment value in an asset with a declining price; therefore, there is no real reason to buy until ownership saves you money over renting — unless you believe the market has bottomed. This fact keeps would-be buyers on the sidelines until prices are reasonable. This phenomenon has happened in the two previous busts, but without the fanfare of a blog like this one.
There are two features of this bust that are different than the last one that may have an impact on prices: (1) the strength of the kool aid, and (2) the internet providing greater access to information.
Since there were so many people that were so rewarded by owning houses during the bubble, there are still large numbers of people in the market that will pay nearly any price to own. These are the knife catchers buying homes on faith — faith that appreciation will return. If there are enough of these people, it may become a self-fulfilling prophesy. If the past is any indicator of the future, the kool aid intoxicated will be the knife catchers providing liquidity on the way to the bottom.
The other big change this time around is the presence of blogs like this one to serve as a voice of reason in a kool aid intoxicated world. By presenting history, reason, fact-based arguments and a conceptual framework for understanding how and why prices rise and fall, the readers here have guidelines that will help them establish what reasonable valuations are when when house prices are approaching that range of bottoming values. In the past, this information was not widely available.
Will either of these differences impact the market? I doubt it; the housing market is much too large. If house prices do not reach rental parity across Irvine, many will claim it is because Irvine is so desirable that houses here represent a “reservoir of value.” The reality is that this reservoir is akin to a Holy Grail; it is an ordinary cup given special significance due to the faithful.
Our house prices are being supported by the zeal of Irvine buyers. Are there enough of them to sustain the market indefinitely? I doubt it.
*********************NORTHPARK COMMUNITY******************** Beautiful
and spacious 3 Bedrooms, 3 Full Bath, 2 Attached Garage W/ Extra
Storage Space. Main Floor Bedroom W/ One Full Bath. Master Bedroom Has
Walk-In Closet W/ Huge Bathroom.Many Upgardes, Built -In Entertainment
Center. Just Steps To Elementry School & Beckman Highschool and
very close to freeway.
Did the realtor use enough asterisks?
This property was purchased on 12/1/2003 for $520,000. The owner used a $389,925 first mortgage, a $77,985 second mortgage, and a $52,090 downpayment.
On 11/2/2004 he opened a HELOC for $145,000.
On 4/15/2005 he refinanced with a $487,500 Option ARM with a 1.25% teaser rate.
On 6/24/2005 he opened a HELOC for $102,900.
Total property debt is $590,400 if he maxed the HELOC.
Total mortgage equity withdrawal is $122,490.
In late 2008, he stopped paying on his mortgage.
Foreclosure Record Recording Date: 03/16/2009 Document Type: Notice of Default Document #: 2009000121341
If this owner did max out the HELOC, if this sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $121,340.
The people with prime properties in Irvine certainly do not show any signs of fear; denial rules the day. These properties, many of which were purchased in 2002-2004, will ultimately end up underwater, but for now, they are asking double what they paid. Today’s featured properties are both large, single-story homes backing on to major arterials — asking over $1,000,000. WTF?
I have written many screeds on HELOC abuse and the lifestyle of pretending with borrowed money. This lifestyle has become so common and so widely accepted that few people even see it for the pretending it is. If everyone is pretending, doesn’t it take on a reality all its own?
First, I should define what I mean by pretending. Financial pretending is the process of borrowing from potential future earnings to spend today as if you make or have more money than you really do.
To see what I mean, imagine a scene at a local high-end restaurant. Two groups of people come in to eat dinner. One party is being treated by a very wealthy individual, and the other party is being treated by a pretender. At the end of the meal, the wealthy person pays the bill out of accumulated savings or current income; he incurs no liability for his consumption. The pretender pulls out a credit card and pays for the meal with a promise to make enough money to pay the credit card company later. The pretender cannot truly afford the fancy meal, and he is only able to obtain it because the credit card company accepts his veracity on the matter of future payment. What happens if the pretender’s promises are no longer believed?
The wealthy need to convince nobody of their ability to pay; they have cash. The pretenders need others to believe in their willingness and ability to make future payments in order to obtain the objects of their desire. It should be obvious who really has power and who is only pretending.
{book2}
When pretenders go on long term borrowing sprees and continue making their debt service payments, they eventually come to believe that someone, somewhere will always believe in their promise to pay in the future; borrowers believe creditors will always extend them new credit. California Personal Finance: Ponzi Style is born.
From the outside, pretenders look rich and powerful, but in reality, they are weak and dependent — their lifestyle cannot exist without some other party to give them money and power. In times of credit contraction like we are experiencing today, pretenders are exposed for what they are. As Warren Buffet noted, “You only find out who is swimming naked when the tide goes out.”
Gorgeous Rutherford one-story home! Beautiful maplewood floors and
berber carpet throughout. Spacious family room with granite-face
surround fireplace and built-in entertainment niche. Gourmet oversized
kitchen with a large granite countertop island, upgraded cabinetry and
top-line stainless steel appliance. Romantic master suite with Corian
countertop & walk-in closet with organizer. Custom paint, epoxy
coating on garage floor, custom draperies and french door.
Professionally designed front landscape with iron gates, private
backyard with ponds, custom fountains and tropical plants. Convenient
inside laundry with lots of cabinets. Association features pool, spa
and Gym.
A classic pergraniteel home.
This property was purchased on 10/24/2002 for $531,500. The owner used a $424,950 first mortgage and a $106,550 downpayment.
On 1/24/2004 he refinanced with a $530,000 first mortgage and took out his downpayment.
On 9/27/2004 he opened a HELOC for $169,000.
On 9/12/2005 he refinanced with a $817,000 Option ARM with a 1% teaser rate.
On 10/31/2006 he refinanced with a $856,000 first mortgage.
On 3/9/2007 he opened a HELOC for $105,000.
Total debt is $961,000 assuming he maxed out the HELOC.
Total mortgage equity withdrawal is $536,050 including his downpayment.
Anyone “keeping up with the Jones’s” during the bubble had some serious HELOC competition from guys like this one.
Think about what this guy has done. First, he has created a lifestyle where he gets about $80,000 a year in untaxed income to finance his lifestyle. The housing ATM is turned off, so he has doubled his debt load without doubling his wage income (unless you think his wages matched the increase in his mortgage). Now he has to learn to live without that extra $80,000 a year in spending money, AND he has to pay back the loan with a much larger percentage of his income.
Are you surprised that he might want to sell and eliminate that debt? You shouldn’t be. He and everyone like him selling to eliminate their debts is what is going to crash high end prices.
Exquisite single-story Triana home in the gated community of Northpark.
Stunning designer upgrades include travertine flooring, venetian
plaster, beryl wood entertainment center and built-ins. Kitchen
features bull-nosed granite counters and backsplash, thermador cook
top, kitchen-aid built-in refrigerator. All bathrooms designer
appointed to include tumbled marble, travertine and slate.
Professionally designed and landscaped to include a custom fountain and
firepit. Owner spared no expense on this designer model home.
I gotta have those bull-nosed granite counters.
This property was purchased on 10/30/2003 for $612,000. The owner used a $489,350 first mortgage and a $122,650 downpayment.
On 9/14/2004 he opened a HELOC for $200,000.
On 5/8/2006 he refinanced with a $791,000 first mortgage.
On 6/26/2006 he opened a HELOC for $100,000.
On 1/31/2007 he opened a HELOC for $225,000.
Total property debt is $1,016,000 assuming he maxed out the HELOC (sure looks that way).
Total mortgage equity withdrawal is $526,650.
Both of these owners took out over $500,000 in mortgage equity withdrawal and spent the money.
Purging the kool aid from California is going to be painful. Financial pretending through mortgage equity withdrawal has become deeply embeded in our culture, and it contributes to the desirability of homes and the extreme kool aid intoxication of people who live here. The fact is that lenders are not going to enable another real estate bubble here in California any time soon; they lost too much money. The housing ATM is permanently broken, and people are going to have to get used to living without it.
An insiders view on the pricing policies and inner workings of the Irvine Company. This post is from multiple sources, but I claim no first-hand knowledge of what is written. I think you will find it interesting.
Whether you’re a brother or whether you’re a mother, You’re stayin’ alive, stayin’ alive. Feel the city breakin’ and everybody shakin’, people, Stayin’ alive, stayin’ alive.
Have you ever wondered how prices on The Irvine Ranch evolved? Why are they higher than other Orange County communities? I have recently had long conversations with a few people familiar with the process, and today I am going to share it with you. Much of what is written below came from former company insiders who declined to be named for this post.
First, it may we worth reviewing Land Value 101 to provide a conceptual framework for how land is valued. Some of the concepts in this post build on the foundation of that one.
Land planning is a process whereby the elements of community are woven together in a framework that maximizes land value based on proximity to major sources of jobs. On the Ranch, The Irvine Company defines the lot sizes/density, product type, approximate price range, buyer profile, number of homes, etc. for each planning area (and parks, schools, etc.). Efforts are made to try to position the product array such that builders are not competing with each other head to head. That is part of the process of good land planning.
The Irvine Company selects a few builders to develop a line of floorplans, exteriors, financial proforma, etc. to be presented to TIC — at the builders expense. TIC project managers have a number in their mind as to what that financial proforma causes the price of the land to be and they work toward that end. It’s an easy formula that takes into consideration all the elements necessary, including builder’s overhead, their cost of financing, building materials, profit, etc. (see Land Value 101).
It’s no coincidence that the builders who present financial proformas with the highest residual land values are the ones selected. Rarely does design, style, excellence of architecture — except as a function of density — win out over high cost of land. Architectural competition becomes a race for higher density, not excellence in floorplan. But all the builders know if they don’t play the game, they won’t be invited to the party again, so they get creative with features such as bonus rooms, garage space conversions, spec levels, and other techniques. For more detailed information on this process, please visit our Architecture Forum.
Builder profits on the Ranch were often in the 4-6% range, if that (builders usually make 12% in a stable market). Building costs were a bit high, even early in the bubble, with the amenity level in homes on the Ranch, those costs were closer to $125-$145/sq.ft instead of the $85 found elsewhere. Sales staff (except for the custom lots) varied from builder to builder, but were either a flat rate (“box rate”) with small commissions for selling options ($50 for Air Conditioning, etc.) or up to.05%. The higher the sales price, the lower the commission. Sales managers were salaried (so came out of overhead) with bonuses. But even small builders rarely got anything close to 6% and that had to cover on-site people compensation (often without a draw), some level of management oversight, some level of advertising/marketing/sales training.
Back to the process…. Once the builders are selected, they close escrow on the land. In Woodbury, land prices got up to $5M/acre (see Land Value 101). A single family home on a 50 x 90 lot yields about 5 homes per acre when you take out streets, etc. So you begin with land cost of $1M, add overhead, materials, etc. to arrive at a final selling price.
Then, (it may be 2 years until they are ready to open for actual sales) before they can offer anything for sale, the builders must first present their individual lot prices (base prices and lot premiums) to TIC for review. The reason for this is that TIC, in addition to the price already garnered for the land, also participates in the builder’s profit when the home closes escrow with Joe Lunchbox/original consumer. Thus, in a rising market, TIC actually gets more for the land they sold 2 years ago.
In a declining market, the builders often make little or no profit, but they will be invited to The Irvine Company’s party again. Often builder’s profit levels are less than what they could achieve if the same money was invested in simple CD’s. To make the most of their investment in Irvine, they bought much less expensive land in Riverside, San Bernardino, Temecula, Arizona, etc. and used the same floorplans again, and again. But they were convinced that they needed a presence on the Ranch.
The builders did this because being on the Ranch brought in bus loads of developers from other companies and other states/countries and enhanced their image. Like in retailing — a loss leader — something you sell cheap hoping to make it up later. All those same builders built projects in Rancho Santa Margarita, Los Flores, Ladera Ranch, etc. Many of those projects debuted in Irvine.
Occasionally, the sequence was reversed; new product debuted in RSM, came into Westpark II at 12% higher prices. With all the same players; Standard Pacific, William Lyon, Brookfield, Richmond American, RGC, Baywood, K.Hovnanian, Taylor Woodrow…on and on. Same products, community specific themed exteriors, advertising, etc. We looked at community specific pricing and compared them — Irvine always came out on top — access to jobs locations was key (and still is). The theory was that a mid-level manager who worked in Irvine would travel a bit of a distance to buy what he perceived as a home nearly as nice as his boss who lived in Irvine. Therefore, price discounts were defined.
IMO, this process is a brilliant example of a powerful landowner leveraging their power to extract maximum profit out of the deal. The demand for housing puts pricing at a certain level, and The Irvine Company wants to extract whatever profit it can out of that demand. I wish I could set up a system whereby every new resident of Irvine gives me $400,000 cash profit (at least at the peak). That’s how you get a net worth of $12,000,000,000.
PRIME WOODBRIDGE PROPERTY , WALK IN DISTANT TO BEAUTYFUL LAKE AND
SHOPPING CENTER , SCHOOLS, RESTAURANT, MASTER BEDROOM IS ON MAIN FLOOR
,OWNER HAS A R/E LICENSE
This property was purchased by a relocation company then deeded to the current owners. The owners put 20% down, so this does not look like it will be a short sale. Of course, they are asking for enough to make a profit, but I rather doubt this property has appreciated over the last two years.
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?
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.
Located accross from the park. Cathedral ceilings in the living and
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?
Exquisite single-story Triana home in the gated community of Northpark.
