Psychological Stages of a Bubble

The housing bubble is unwinding like many asset bubbles before it. Understanding and recognizing these stages will help you better time your home purchase; Timing Does Matter.

83 Vermillion   Irvine, CA 92603  kitchen

Asking Price: $439,000

Address: 83 Vermillion Irvine, CA 92603


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Changes — Yes

Market conditions are constantly changing. These conditions can best be understood as part of a series of psychological stages the market must pass through in order to work of the excesses of the housing bubble. I first wrote about the stages of a bubble in Houses Should Not Be a Commodity. I rewrote and expanded that work in The Great Housing Bubble which is reprinted in this post. For more conceptual background on the basics of market function, please read Efficient Markets vs Behavioral Finance.

Psychological Stages of a Bubble

Once a bubble starts to form, it will go through several identifiable stages: enthusiasm, greed, denial, fear, capitulation, and despair. Each of these stages is characterized by different speculator emotional states and different resulting behaviors. There are outside forces that also act on the market in predictable ways in each one of these stages. Most often, these outside factors serve to reinforce the market’s herd behavior and exacerbate changes in price.

Precipitating Factor

There is often a precipitating factor causing the initial price rally that pushes prices above their supported fundamental values. A bubble rally is usually kicked off by some exogenous event, but it may occur simply because prices have been rising and investors take notice, or it can be merely the result of a lack of investor fear and the widespread belief prices cannot go down. In a typical market, there is a significant selloff when prices exceed fundamental valuations. This selloff is a natural reaction to inflated prices as a decline to fundamental valuations is normal and expected. Many seasoned market observers will “sell short” here to profit from the initially inflated values caused during the take-off stage. However, in a financial mania, this sell off is short-lived, and it traps many who are bearish on asset pricing on the wrong side of the trade. This “short squeeze” may prompt a feverish activity of buying as short sellers cover their positions before their losses get too great. A short squeeze may act as a precipitating factor. In a securities market, a precipitating factor may be a very large order hitting the trading floor, and in a real estate market it may be a dramatic lowering of interest rates as it was in the Great Housing Bubble. Regardless of its cause, the initial price rise has the potential to spark sufficient interest to prompt further buying and set a series of events in motion which repeat with a remarkable consistency. Market bubbles can be found in all financial markets and on multiple timeframes.

Figure 35: Psychological Stages of a Bubble Market

Enthusiasm Stage

At the beginning of the enthusiasm stage, prices are already inflated, so there is cautious buying from traders looking for trends and momentum. If prices fail to drop to fundamental valuations and instead push higher, media attention is often drawn to the speculative market. The general public starts to take notice of the money being made by people who have bought the featured asset and they begin to participate in larger numbers. Of course, this stimulates more buying and prices continue to climb. The market sentiment turns very bullish. Buyers are everywhere and sellers are scarce. At this point, prices are completely detached from fundamental valuations, but people are not buying because of the underlying value, they are buying because prices are going up.

In residential real estate markets, the enthusiasm stage is often greeted by lenders with open arms. With prices rising, there is little risk of loss from default. If a borrower gets in trouble, they can simply sell into rising prices, and neither party takes a loss. With neither party fearing loss, and since lenders make most of their money on the transaction itself through origination fees, there is an inevitable lowering of standards to meet market demand. This in turn creates more market demand leading to further lowering of standards. The credit cycle reinforces the bullish psychology in the market and helps push prices even higher.

Greed Stage

In the greed stage, the bullish sentiment reaches a feverish pitch and prices rise very rapidly. Every owner in the market is making money and most believe it will go on forever. As prices continue to climb, buyers become very enthusiastic about owning the asset, and they tell all their friends about their great investment. The word-of-mouth awareness and increased media coverage bring even more buyers to the market. Egomania sets in as everyone thinks she is a financial genius. Any intellectual analysis at this stage is merely a cover for emotional buying and greed. During the Great Housing Bubble, there were many instances of properties receiving a dozen or more offers the day they were listed, with many in excess of the asking price. Encouraged by realtors, some buyers wrote emotional letters to sellers to convince them why they should be bestowed with the honor of home ownership.

Most people who are bullish already own the asset, but for prices to continue to rise there must be more buying. For buying to occur, someone who was either bearish or ignorant of the rally must be convinced to buy. In other words, a greater fool must be found. Once everyone is made aware of the market rally and is convinced to buy, you simply run out of new buyers. Once there is a shortage of potential buyers, prices can only go down.

Denial Stage

When the limit of affordability is reached and the pool of available buyers is exhausted, prices start to decline. At first market participants are still overwhelmed by greed, and they choose to ignore the signs that the party might be over. In 2007 most real estate markets were in the denial stage as prices had not dropped enough to cause real fear. Denial is apparent in polls in mid-2007 where 85 percent believed their home would rise in value during the next five years, and 63 percent believe a house is a good investment. That is denial. It is also apparent in the number of homes purchased during the greed stage that are held for sale at breakeven prices-even if this is above market. When the inventory is large, and houses stay on the market for a long time, prices are too high. Sellers who refuse to lower their prices to take a small loss are in denial about the state of the market. They believe bids will increase and some buyer will come along and pay their price-after all, that is the way it was just a couple of years prior. Buyers who bought in the enthusiasm stage are still ahead, so they feel no urgency to sell. They have made good money already and they will hold on with hopes of making a little more. Since they believe the asset will appreciate again (and they have no exit strategy), this group of buyers does not sell. In contrast, the few traders who still hold positions liquidate and go back into cash. Successful traders recognize the emotion of denial as a signal to exit their positions to lock in profits or prevent further damage.

In the denial stage of a residential real estate market, many speculators are unable to obtain the sale price they desire. The accumulation of unrealistically priced houses starts to build a large inventory of homes “hanging” over the market. Overhead supply is a condition in a financial market when many units are held for sale at prices above current market prices. Generally there will be a minor rally after the first price decline as those who missed the big rally but still believe prices will only go up enter the market and cause a short-term increase in prices. This is a bear rally. It is aptly named as those bullish on the market buy right before the bear market reverses and quickly declines. For prices to resume a sustained rally, the overhead supply must be absorbed by the market. Once prices stopped going up and actually began to fall, demand is lessened by diminished buyer enthusiasm and the contraction of credit caused by mounting lender losses. With increasing supply and diminished demand prices cannot rally to absorb the overhead supply. The overall bullish bias to market psychology has not changed much at this point, because owners are in denial about the new reality of the bear market; however, the insufficient quantity of buyers and the beginnings of a credit crunch signal the rally is over and the bubble has popped.

Fear Stage

In the grieving process there is a shift from denial to fear when the reality being denied becomes too obvious to be ignored or pushed out of awareness. There is no acceptance of reality, just the idea that reality might be fact. The fact that an investment might turn out to be a very poor financial decision with long-term repercussions to the speculator’s financial life is generally very difficult to accept. The imaginings of a horrifying future creates fear, and this fear causes people to make decisions regarding their investments.

The most important change in the market in the fear stage is caused by the belief that the rally is over. Price rallies are a self-sustaining price-to-price feedback loop: prices go up because rising prices induces people to buy which in turn drives prices even higher. Once it is widely believed that the rally is over, it is over. Market participants who once only cared about rising prices suddenly become concerned about valuations. Since prices are far above fundamental values and prices are not rising, there is little incentive to buy. The rally is dead.

Another major psychological change occurs in this stage after people accept the rally is dead: people reassess and change their relationship to debt. During the rally, debt becomes a means to take a position in the housing commodity market. Nobody cares how much they are borrowing because they never intend to pay off the loan through payments from their wage income. Most believe they will pay off whatever they borrow in the future when they sell the house for more than they paid. Once prices stop going up, people realize they are simply renting from the bank, and the only way to get ahead and build equity is to pay off a mortgage. The desire to borrow 8 to 10 times income diminishes rapidly as people realize they could never pay off such a large sum. What started in the denial stage as an involuntary contraction of credit, in the fear stage becomes a voluntary contraction of credit as people simply do not want to borrow such large amounts of money.

In August of 2007, a more serious credit crunch gripped financial markets, and during the times that followed there was increased liquidation of bank held inventory. Banks tried to get their wishing prices through the prime selling season, but by the end of the year, there was pressure to get these non-performing assets off their books. The sales of bank foreclosures and the ongoing tightening of credit drove prices down an additional 5% to 10%. This caused some major problems for owners of residential real estate. Fear began to grip the market.

By the time a financial market enters the fear stage, greed stage buyers are seriously underwater. Comparable properties may be selling for 10% less than their breakeven price, and there is little hope that prices will rally. Some sell at this point and take a loss, but most do not. People who bought in the enthusiasm stage come up to their breakeven price and face the same decision the greed stage buyers faced earlier: sell now or hold out for a rally. Even though there is good reason to fear, most do not sell here. They regret it later, but they hold on. Speculators generally only sell an asset when the pain of loss becomes acute. The pain threshold is different for each individual, but there is no real pain until the investment is worth less than the purchase price, so few sell for a profit or at breakeven. Inventories grow in the fear stage because many would like to sell, but sales volumes are light because few are willing to sell at prices buyers are willing to pay.

Prices do not rally here because there are even fewer buyers in the market and a reduced appetite for debt due to the change in market psychology. There are more and more sellers either choosing to sell or being forced to sell, and since there are more sellers than buyers, prices continue to drop. During the fear stage, a majority of buyers during the rally go underwater on their mortgages and endure the associated pain and stress. In the past, since the bubbles of the 80s and 90s were largely built on conventional mortgages, people just held on. During the Great Housing Bubble, people used exotic loan financing terms, and they simply could not afford to make their payments. They borrowed from other sources until their credit lines were exhausted and they imploded in foreclosure and bankruptcy. During this stage many renters who would otherwise have purchased a home put off their purchase and save more money because they correctly see the decline in prices has momentum and prices should continue to drop further.

Capitulation Stage

The transition from the fear stage to the capitulation stage is caused by the infectious belief that the rally is over. There is a tipping point where a critical mass of market participants either decide to sell or are forced to sell. In residential real estate, people are compelled to sell by anxiety, and the mechanism for force is foreclosure. Once a critical mass of selling is reached, the selling causes prices to decline further which in turn causes more selling. This convinces even more people the rally is over yielding even more selling: a downward spiral. The same price-to-price feedback mechanism that served to drive prices up during the rally works to drive prices down during the crash. Collectively, everyone in the market accepts prices are going to drop further, and they need to get out: Now! Of course when everyone knows prices are going to drop, and everyone is trying to sell, there are very few buyers. Each market participant has a different threshold for pain. Some give up early; some give up later; some stubbornly try to hold on, but in the end, by choice or by force, everyone who cannot afford their home sells out and capitulates to the forces of the market. Each seller accepts the market rally was a bubble, and the frenzy of selling activity clears out the overhead supply. The capitulation stage is the counterpart of the greed stage. Sellers are everywhere and buyers are scarce. This puts prices into free-fall until a critical mass of buyers is ready to buy again.

Since buyers in the aftermath of a bubble tend to be the risk averse who did not participate in it, they will make cautiously low offers on properties. Buyer caution is reinforced by lender caution. In stark contrast to the days of bubble lending, large downpayments are suddenly required, appraisals are carefully reviewed, eligibility is tighter, and most exotic loan programs are gone. This cautious buying together with desperate sellers causes the market to drop below normal valuation standards. The market enters the despair stage. Here the market participants think nobody wants the asset, and nobody ever will again. Of course, nothing could be farther from the truth as those who recognize the fundamental value of the asset are buying it in preparation for the next cycle.

Despair Stage

From a perspective of market psychology, it is difficult to tell when the ca-pitulation stage ends and the despair stage begins. Both stages have an extremely negative bearish sentiment. It is called the despair stage because most who own the asset are in despair and wish they did not own it, and the general public is still selling. Most who still own their homes are able to afford the monthly payments, but realize they will face a large loss if they sell their house anytime soon. They feel like prisoners in their own homes because they are unable to relocate for a better job or any other reason. One distinguishing feature of the despair stage is the increased buying activity of investors-true investors, not the speculators who were wiped out during the price decline. Investors are not in despair during this stage. This is the time they were anticipating to make their purchases.

There is an extreme emotional toll paid by those who participated in the mania. Losing a home to foreclosure is devastating. The emotional ties to a home go beyond seeing it as an investment. A home is supposed to be a safe haven where people raise a family. It is a unique reflection of the family, adorned with mementos and family photographs. Being forced to leave the family home is difficult for reasons that have nothing to do with money. Unfortunately, this is often followed by personal bankruptcy, and the difficulties in bankruptcy have everything to do with money.

In some ways, those who endure foreclosure may be the lucky ones as they get to leave their debtor’s prison and go find an affordable rental. The income that used to go toward housing is now freed up to go toward living a life. Those homeowners who hang on, who are desperately underwater, and who are putting 50% or more of their income toward a house worth less than they owe on it, their circumstances are arguably even more dire. There is no light at the end of their tunnel; they must live with their pain every day.

The despair stage is not desperate for everyone. What makes the despair stage different from the capitulation stage is that buyers who focus on funda-mentals like rental savings or positive cashflow return to the market and begin buying. Affordability has returned to the housing market, and those who did not participate in the mania finally get their chance to become homeowners-at reasonable prices. These buyers are not concerned with appreciation; they simply want an asset which provides a savings or a cash return on their investment. They are not frightened by falling prices because their financial returns are independent of the asset’s market valuation. It is the return of these people to the market that creates a bottom.

Where are we now?

The psychological stage of the market here in Irvine is different for the various market segments. The high end of the market is still firmly in denial. The Immunity Syndrome is in full effect. In some of the beach communities, this denial is moving toward fear because the inventory is so large, but here in Irvine, denial rules the high end. The middle of the market is showing fear. The price reductions are more numerous, and the occasional property like today’s show the transition from fear to capitulation. As we have documented on many occasions, the low end has already capitulated.

Old Listing

83 Vermillion   Irvine, CA 92603  kitchen

Old Asking Price: $660,000

Income Requirement: $165,000

Downpayment Needed: $132,000

Purchase Price: $660,000

Purchase Date: 11/23/2005

Address: 83 Vermillion Irvine, CA 92603

Beds: 3
Baths: 3
Sq. Ft.: 1,553
$/Sq. Ft.: $425
Lot Size:
Property Type: Attached, Condominium
Stories: 3+
Year Built: 2006
County: Orange
MLS#: I09034944
Source: MRMLS
Status: Active
On Redfin: 142 days

Turnkey * * * Property is being sold as a Short Sale * * * Subject to lender
approval * * * Beautiful 3 bedroom, 2 bath home located minutes away
from Irvine Spectrum * * * Property features tri-level floorplan, like
new paint, carpet, granite countertops. Stunning Turnkey Townhouse in
Best Location Viewing Greenbelt. Fully Upgraded & Customized with
Cherry Hardwood Floors, Ceramic Tile, Premiu m Carpets & Neutral
Two-Tone Paints. Awesome Kitchen with Cherry Cabinets, Stainless Steel
Appliances and Granite Counters, Island & Backsplash. Large Great
Room w/ Fireplace & Ceiling Surround Speakers. Formal Dining Rm,
Computer Room w/ Built-ins, Inside Laundry Rm, Main floor BR & BA.
‘PERFECT’! HOA Pool, Spa, Gym, Fireplace & More,

Title Case

* * * asterisks * * *

New Listing

New Asking Price: $439,000

Income Requirement: $109,750

Downpayment Needed: $87,800

Purchase Price: $660,000

Purchase Date: 11/23/2005

Address: 83 Vermillion Irvine, CA 92603

Beds: 3
Baths: 3
Sq. Ft.: 1,553
$/Sq. Ft.: $283
Lot Size: 700

Sq. Ft.

Property Type: Attached, Townhouse
Stories: 3+
Year Built: 2006
Community: Quail Hill
County: Orange
MLS#: I09087780
Source: MRMLS
Status: Active
On Redfin: 1 day

Beautiful Quail Hill 3 story Townhome. 3 bedrooms 3 baths, fireplace.
Balcony off Living Room and a Balcony off the Kitchen. Granite counters
and upgraded cabinets in kitchen. Enter from street thru greenbelt.
Attached 2 car garage. Community pool/spa/park.

It is pretty rare to see a 33% price reduction, but today’s featured property manages it. Of course, they are playing the short sale bidding war game, but when you look behind the gambits and into the mind of the seller, you see capitulation. This seller is no longer going to obtain the fantasy price that would have avoided all pain from their mistake. Now it is only a matter of how bad the consequences are. That is capitulation.

Will other owners give up and capitulate? Will mass capitulation lead to the collapse of pricing like in Las Vegas? With our current buying frenzy, this doesn’t seem likely, but market conditions can change quickly, particularly if new supply is added to the market.

Lemming Migration Along the Norwegian Coast (

47 thoughts on “Psychological Stages of a Bubble

  1. granite

    “During this stage many renters who would otherwise have purchased a home put off their purchase and save more money because they correctly see the decline in prices has momentum and prices should continue to drop further.”

    As a former homeowner in the 90’s, I remember the despair of being underwater for years. That’s what keeps me from joining the recent frenzy of buying. There’s still way too much smugness.

    IR is not alone.

  2. winstongator

    The purchase date is ’05, which makes a difference to me in determining what the price today should be. How long was it listed @ 660k? How long has it been on as a short-sale? What is the difference in impact to your credit score or future homeownership for a short-sale vs. foreclosure?

    Unrelated – if someone defaults on an investment or vacation home, how often do they declare bankruptcy? Do the banks in an FC like that go after a defaulter’s other assets? Do the banks even care to find out that someone misrepresented the home as their primary residence in the mortgage app?

  3. cara

    You neglected to work into your story who is buying during the declining phases. I don’t think a picture of today’s market can be complete without acknowledging the large downpayments being made on the median property right now.

    I know you expect that we will run out of such cash at some point soon.

    I guess the joke now is how does a real estate investor buying in the downslide end up with $1 million, start with $3 million…

    1. tlc8386

      Take a look over in Nellie Gale there are two homes going into auction one was bought for 1.8 starting bid at 1.5–zillow has the fair price for the home listed at 2.6. It’s a 5k sq. foot home on a 15k sq. ft. lot. Anvil Circle—

      The house next door I once visited (in error) it was 3 million –never sold, took off market.

      Another house up for auction is for 1.29 should go for one million –over priced. Lost Colt dr.

      I also visited two homes in Laguna almost identical homes (same builder I pressume) one was for 1.3 and the other 1.9—600k difference–is the 1.9 insane?? Oh but the RE said it has new items in home–(if anything it had less)

      1323 dunning Drive and 1315 for those interested and the best thing next to 1323 a huge big unfinished home with no telling when it will have finance to finish building it.

      These people are drinking koolaid big time.

      Another one was 1.9 with a beauitful view in Laguna but NO upgrading had an old pool though–I told the RE agent they would be lucky to get 1.3.

      So the kool-aid is still bubbling by the beach–big time.

      Everytime I look I tell myself keep renting–!!!!

      1. AVRenter

        By my count a few days ago NellieG/MoultonR had 64 listings, eight of which were Short Sales (I didn’t check REO’s). I see 48 sales in the past year.

        Avg/Med Listing is $1.9m/$1.5m.
        Avg/Med 12-mo Sales $1.2m/$1.1m.

        Avg/Med Listing $/sqft is $397/394.
        Avg/Med 12-mo Sales $/sqft $325/306.

        Top-2 highest List are $6.2m and $5.2m.
        Top-2 highest Sold are $3.0m and $2.8m (from Sept and Oct 2008).

        Older money and older purchases appear to be selling at rates tracking inflation. A sampling of the last 9 sales indicate homes last purchased in ’00-’04 went up between 1%-7% per year(avg 3.6%). Homes last purchased in ’88 and ’91 went up 6% and 10% per year. The one sale with a last purchase of ’06 declined at -7% per year (25% total).

        I live here and every time I go for a run on the horse trails I smile at the $1000/month I’m saving over owning. It’s a lovely place to live.

  4. Geotpf

    For prices to fall further, there needs to be more inventory available. A lot more. Until the mythical shadow inventory, whether bank owned or just in default, actually shows up for sale en masse, I can’t see prices falling much further.

      1. Geotpf


        Obviously, shadow inventory of some sort exists. If it’s mostly stuff only in default, it may never show up for sale (that is, if the existing owners mostly get loan mods).

        Inventory, especially in low to mid priced areas, is at record lows. Inventory this low makes it really hard for prices to fall further.

        1. Loyal Follower

          I question whether many of the defaults are just home owners setting up for a loan modification with no intention of actually letting their homes go into foreclosure.

          An update on our situation: As a reminder, we received a foreclosure notice on the home we are renting. The PO said he was working on a loan mod and the FC notice was a misunderstanding. Nonetheless, we stopped payment on our August rent check. The PO recently called to say that they had cleared everything up with the bank and could they come by to pick up the rent check. We said sure, if you bring documentation that the NOD has been canceled. We haven’t heard from them again. We may show up at the courthouse this Tuesday to see for ourselves whether the auction takes place.

          1. houseonlegs

            The loan modification factor will start to vanish, the Federal Trade Commission, Dept of Justice and Attorney General have cracked down on the businesses operating as such, they have ceased most of them and are making it very difficult for even attorney’s to operate as offering loan mod services. Without these firms heavily advertising and promising results, less homeowners will have the sense to call their lenders and try to resolve themselves, the documentation requirements are quite lengthy and with unemployment at the rate it is, many will not qualify. I have seen cases where homeowners will get their NOD cancelled due to a loan mod and they will be right back in the same situation 6 months later, still unable to make payments. Loan modifications are a solution for very few and after lenders start to realize that payments are still not coming in, they will stop writing them. Again, we are just prolonging the inevitable.

        2. no_worries

          The rate at which homes are being brought onto the market doesn’t necessarily have to increase dramatically, if the rate at which they are being taken off the market falls.

          If the selling season winds to an end, the incentives wind down, the supply of first time buyers and investors wanes; the buying will slow dramatically. The inventory will build.

          Now add into that this shadow inventory, whatever size.

          Seems plausible that inventory will build again, even without a “wave”.

          1. Geotpf

            This would be true if inventory was balanced now. But well priced REOs will sometimes attract twenty of offers (or more) within a week. If half that demand goes away, well priced REOs will still attract ten offers within a week. The practical difference in terms of number of houses sold, minimal, although there might be a slight difference in final sale price.

          2. no_worries

            If by “well priced” you mean 20% below comps, yes. There is and will continue to be a large demand for below comp, low end homes.

            Are you inferring, then, that there is actually 20x the current demand “hidden” because of the competition of low supply (there can only be one sale for those 20 bids)?

            Again, let me remind you that it is the selling season, there are massive incentives to buy ($8k/5%/FHA 3.5%) right now, all of which will eventually go away. Probably sooner than later.

            Much of the demand you’re seeing is from people, first time buyers or investors, who think we’ve reached bottom. If its shown that we haven’t, the investors and first time buyers (that haven’t bought) will undoubtedly back off to wait again, don’t you think?

            I just don’t buy that this “demand” continue indefinitely. It’s not a natural demand.

      2. Alan

        Different market and circumstances (Florida), but some similarities also …

        From NYT: On the Map, Florida Wonders Which Way is UP

        “It is a mess of immense volume: In the first six months of this year, 268,064 properties in Florida received a foreclosure filing, up nearly 42 percent from the first half of 2008, making it the second worst state in total foreclosures nationwide behind California. And for those convinced that recent, positive sales figures signal a brisk recovery, consider this: foreclosures outpaced sales of houses and condos in the same period (99,010) by a factor of nearly three.”

        Will Irvine join this parade?

    1. IrvineRenter

      Brace for a Wave of Foreclosures, the Dam is About to Break

      A summary of Second Quarter 2009 Negative Equity Data from First American CoreLogic shows that Nearly One-Third Of All Mortgages Are Underwater.

      • More than 15.2 million U.S. mortgages, or 32.2 percent of all mortgaged properties, were in negative equity position as of June 30, 2009 according to newly released data from First American CoreLogic. As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity. Negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide.

      • The aggregate property value for loans in a negative equity position was $3.4 trillion, which represents the total property value at risk of default. In California, the aggregate value of homes that are in negative equity was $969 billion, followed by Florida ($432 billion), New Jersey ($146 billion), Illinois ($146 billion) and Arizona ($140 billion). Los Angeles had over $310 billion in aggregate property value in a negative equity position, followed by New York ($183 billion), Miami ($152 billion), Washington, DC ($149 billion) and Chicago ($134 billion).

      • The distribution of negative equity is heavily skewed to a small number of states as three states account for roughly half of all mortgage borrowers in a negative equity position. Nevada (66 percent) had the highest percentage with nearly two?thirds of mortgage borrowers in a negative equity position. In Arizona (51 percent) and Florida (49 percent), half of all mortgage borrowers were in a negative equity position. Michigan (48 percent) and California (42 percent) round out the top five states.

      There are some interesting tables and graphs in the article that inquiring minds are investigating. Here are some partial alphabetical lists.

      1. thrifty

        Interesting how many stats cluster in the mid 40 million range:
        – total mortgages: approx 47 million
        – total medicare beneficiaries: approx 46 million
        – total medically uninsured in U.S: approx 46 million

      2. tonyE

        42 percent in California?

        Isn’t that kind of high? Did 42% of the homeowners in California moved or refinance in the last six years?

        Somehow those numbers seem way too high for me.

      3. MalibuRenter

        Wait two years. The total market value of all single family homes will be below their 2007 loan values. The only way it won’t go to negative equity for the whole state is if enough homes are sold as short sales or REOs. Still, the whole state might barely be in negative equity based on the loans currently outstanding in 2011, even including homes with no mortgages.

    2. bigmoneysalsa

      Geotpf, I think your approach to looking at where prices are headed is overly simplistic. Yes, if you look at a snapshot of the market right this second it’s plain that prices won’t be collapsing immediately. But are you really saying anything of consequence with that statement? We all know that things change. It’s completely possible to have a very tight market at one time, and then two or three years later – *POOF* – prices are 30-40% lower accross the board. There are numerous examples of this as I’m sure you know.

      Let me use an analogy. IrvineRenter and other posters here who talk about shadow inventory, price to rent ratios, etc, etc are like weather forecasters. A good weather forecaster is not going to spend a lot of time telling you what the weather is like right now or will be like an hour from now because really, who the hell cares? People want to know what the weather will be like in a few days. If you want to acurately predict if it’s going to rain in the next few days, you can’t just go outside, look up at the sky and say “Well, there’s no rain clouds so I can’t see it raining anytime soon.” That’s not gonna work. If you want to make some kind of prediction that’s actually useful you have to look at data from weather satellites, barometer readings, and all that complicated stuff. Similarly with the housing market, if you care about what prices are going to do over a timespan longer than a few months (which any sensible person considering buying should) you really have to look at more than just a snapshot of the current inventory / sales ratio.

  5. IrvineRenter

    The Rentership Society

    From the Boston Globe: President shifts focus to renting, not owning

    The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.

    The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.

    “People who were owners are going to be renting for a while,’’ said Margery Turner, vice president for research for The Urban Institute, a Washington think tank that studies social and economic policy.

    “There is a housing stock that is sitting vacant. There is a real opportunity here’’ to use those homes as rental property and solve both problems, she said.

    This conversion of housing stock from ownership to rental units is already happening. Based on data from the Census Bureau, there have been over 4.3 million units added to the rental inventory since Q4 2004, far more than the 1.1 million new units completed as ‘built for rent’ since 2004. (see The Surge in Rental Units)

    And this conversion is ongoing. According to the Campbell Survey, 29 percent of all existing home properties in Q2 were purchased by investors – probably mostly for use as rentals.

    In addition, many of the modification programs are really turning homeowners into renters (or “debtowners”). Most mods just capitalize missed payments and fees, and reduce interest rates for a few years. Many of these “homeowners” will still have negative equity when the interest rate increases again, and this could be viewed as Single Family Public Housing.

    The Rentership Society.

    1. IrvineRenter

      From Mish:

      Collapse Of The “Ownership Society”

      Barney Frank The Hypocrite

      “I’ve always said the American dream should be a home – not homeownership,” said Representative Barney Frank, chairman of the House Financial Services Committee and one of the earliest critics of the Bush administration’s push to put mortgages in the hands of low- and moderate-income people.

      What a distortion of reality. Barney Frank was in the pocket of Fannie Mae and Freddie make and their biggest supporter for years. Now he plays on semantics in an unbelievable lie. He would have been better off keeping his mouth shut, but political hacks seldom if ever can.

      1. Perspective

        Barney Frank is one of those peculiar political creatures that enjoys a guaranteed Congressional district seat, but is so extremely left-of-center as to have no hope of any higher office. This provides him the freedom to do and say nearly anything he wants.

        Jon Stewart (Daily Show) asked Frank some tough questions about Frank’s hypocrisy a few weeks ago, but Frank didn’t answer the questions. He just weaseled out with some incoherent evasive responses.

        1. Geotpf

          Actually, if Kerry or Kennedy ever leave their Senate seats, Frank is considered a near shoo-in to replace them. If Kerry had won the presidency in 2004, Frank would have ran for, and almost certainly won, his Senate seat. Kennedy is in very poor health right now. He might die or resign for health reasons at any time.

  6. NewportSkipper

    Irvinerenter, you say 83 Vermillion was last sold in 2001, but Quail Hill didn’t exist then. And it looks like the going rate for 1,500 sf there is north of $500k.

    1. IrvineRenter

      The dates were in error, but I fixed them.

      Yes, this should sell for more than the short-sale asking price. They are trying to attract attention with the low price. This property will likely get 20 bids over the ask and sit there for 5 months while the lender figures out whether it wants to sell or not.

  7. tjwilliams

    Couple of things. How could this have been purchased on 10/31/2001 if it was built in 2006?

    Second, there is no way on earth this short sale goes through. They were underwater at $660,000 (obviously 100% financing) and they think the bank is going to accept $439,000? Crazy.

  8. cosmo kramerp

    Gov’t insanity knows no bounds.

    Great idea! Don’t rent the house out to qualified, responsible tenants. Go out of your way to rent to the same deadbeats who just jacked you out of a few tens of thou (in many cases much more) and probably lived rent free for 6 to 12 months already while waiting for the eviction notice from the bank.

    This will give deadbeats the trifecta. They lied on their mortgage app, they defaulted on the loan, and now they can keep living there and stop paying rent after a month or two. That’s what I call gaming the system. And the only losers are the honest, prudent among us. Is this a great country of what?
    (I apologise if this has been referenced already…haven’t had time to read all the previous posts)

  9. Property Owner

    Based on what I see, Irvine is still in denial and is starting to move into fear (maybe).
    With school starting up very soon, when are we oficially out of the ‘buying season’?
    I have another neighbor that just popped his house on the market so I believe now I have 4 neighbors within our little double circle (figure 8) street that are on the market. We barely had anyone on the market during the beginning of the season, so is this normal or could it be ‘fear’ setting in?

    Either way, the moving trucks are coming to my house this Friday to ship my behind out of Irvine and into storage. I got a killer price from the moving company so I am happy.

  10. avobserver

    As long as (1) short term supply is kept tight – thru accounting rule change, bank bailout, foreclosure moratoria, enforced loan mod, etc… and (2) short-term demand is manipulated to produce enough knife catchers – by squeezing savers and pulling demand forward (via Fed’s interest rate manipulation, first time buyer credit…), as for Irvine mid to high end market we will likely be stuck in “denial” stage (or perhaps early stage of “fear”) for quite some time.

    Never have we seen free market mechanism in housing being distorted to such an extent that it has become almost impossible to estimate the length of this downturn. I was in disbelief when I first read about Japanese RE market declining for 15 years straight after their bubble burst back in early 90’s. But I am no longer surprised. If gov’t and the central bank deploy enough “policy tools” to tweak demand/supply they can in fact stretch the price correction process out for many years. IMO it is no longer unthinkable that we won’t see a market capitulation until 2014-15.

    1. HydroCabron

      “…no longer unthinkable that we won’t see a market capitulation until 2014-15.”

      My thoughts lead in that direction.

      The cultural attitudes about real estate as an investment run so deep that there is, as yet, no actual acknowledgement that prices have really dropped, even for low-end housing. The only people who have admitted that prices can drop are those who have been forced to walk away.

      The easy-terms FHA stuff, complete with $8K tax incentive for first timers, will likely be extended. The government will not give up on this until forced to by some larger collapse.

      1. avobserver

        With mid-term election coming up next year I am sure our policy makers will have even greater urge to “do something”, anything, to prop up falling price. Measures worse than FHA loans (the new subprime mortgage) and tax credit for first timer could be dished out left and right.

  11. Sue in Irvine

    Property owner…what’s happening with your home search? Still no luck so now you have to go rent somewhere?

  12. Property Owner

    Hi Sue,

    We have offers on two homes right now. Of course one is a short sale and the other is an REO.
    Our Short sale offer has been accepted and we are in first position but it is now in the bank ‘pile’.

    For the REO, the two offers (including mine) have been sent to the bank for review and I was told it can take up to 40 days to receive a response.

    I did have an offer on a regular sale but the deal fell apart because the seller was not willing to negotiate the price at all. Their house is still for sale.

    So until then, we are moving in with the in-laws. Kind of a strange feeling having to move back in with the wife’s parental units not because we financially have to, but because we can’t find the right house! At least they have a huge house and their second floor is all ours to use.

    Now I need to hide from ‘e’ for talking about this stuff again on the blogs. 🙂

    1. thrifty

      Property Owner: for those who are not familiar with the short sale mechanism, what does it mean that your offer has been accepted and you are in first position in the bank pile?

      1. Property Owner

        Well, when you make an offer on a short sale, you actually need two parties to accept your offer. One is the owner of the home and the other is the bank which holds the mortgage on the home.
        It is usually easy and quick to get past the first step which is to get the homeowner to accept your offer. The majority of the time is spent waiting for the bank to accept the offer.
        So, banks usually do their step in one of two ways.

        1) Tell agent to collect a whole bunch of offers over time and then when they start to work on the property, they will pick the highest and strongest offer to accept.

        2) Tell the agent to only submit one offer at a time to them whether is it the first received or the best (highest and strongest) in the current offers received.

        We fell into scenario #2 so our offer has been accepted by the homeowner and the agent has submitted our offer for review by the bank. This puts us into the ‘first position’ of the offers submitted. Now the time it takes will be long (1 to 6+ months) for the bank to respond depending on how backlogged the bank is which puts us ‘in the pile’.

        That is the cliff notes version.

        1. thrifty

          Property Owner:
          That’s very helpful. It looks to me as if the only difference between method #1 and #2 is who holds the offers – the agent or the bank- until the bank decides to choose. Whether your first in line means nothing if the bank is “shopping your offer” to see if they can find a better one – in their own sweet time – after telling you yours is the best so far? right?
          Do you include a clause giving you the right to withdraw the offer immediately at any time for any reason?

          1. Property Owner

            Yes. Pretty much if you are in scenario #1, you are always in total limbo until you get the green light. In #2 that can possibly happen as well if the agent gets a wonderful deal and tries to get the bank to accept the much higher offer. Either way, the bank can still come back and demand more money if they feel the property is worth more.

            You always have the right to withdraw your offer. Just notify your agent.

  13. Craig

    The real shadow inventory is all the pent-up demand to sell, by homeowners who want out but don’t want to put their homes on the market now when they think prices are too low. When we actually reach the capitulation stage, there will be a lot more inventory coming online. Add to that the coming tsunami of Alt-A resets, and this summer will look like the biggest fool’s rally ever.

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