California Kool Aid

The belief in rapid home price appreciation is deeply held in California. Now with HELOCs to give access to this pot of gold, California Kool Aid has never tasted better.

108 TIMBERWOOD Irvine, CA 92620 front 2

Irvine Home Address … 108 TIMBERWOOD Irvine, CA 92620
Resale Home Price …… $399,000


Now you know it’s a meaningless question
To ask if those stories are right
‘Cause what matters most is the feeling
You get when you’re hypnotized

Seems like a dream
(They) got me hypnotized

Hypnotized — Fleetwood Mac

The belief in endless rapid appreciation took hold in the 1970s, and like a persistent disease of faith, it hypnotizes its victims with dreams of limitless wealth and spending power. Will the cycle ever end? Or will a few months of rising prices make kool aid as tasty again?

During the bubble, people borrowed their appreciation and spent it. The lenders and investors in mortgage-backed securities have absorbed most of these losses; therefore, we have a large population that was hugely rewarded when prices went up that has been spared the consequences of their stupidity. In my opinion, this moral hazard has made California Kool Aid more addicting. What incentive does our current system have in favor of prudence and responsibility?

108 TIMBERWOOD Irvine, CA 92620 front 2

Irvine Home Address … 108 TIMBERWOOD Irvine, CA 92620

Resale Home Price … $399,000

Income Requirement ……. $73,940
Downpayment Needed … $79,800

Home Purchase Price … $585,000
Home Purchase Date …. 2/14/2006

Net Gain (Loss) ………. $(209,940)
Percent Change ………. -31.8%
Annual Appreciation … -10.1%

Mortgage Interest Rate ………. 5.06%
Monthly Mortgage Payment … $1,725
Monthly Cash Outlays ………… $2,430
Monthly Cost of Ownership … $1,870

Property Details for 108 TIMBERWOOD Irvine, CA 92620

Beds 2
Baths 2 full 1 part baths
Size 1,442 sq ft
($277 / sq ft)
Lot Size n/a
Year Built 2001
Days on Market 4
Listing Updated 11/9/2009
MLS Number S595565
Property Type Condominium, Residential
Community Northwood
Tract Coll

According to the listing agent, this listing is a bank owned (foreclosed) property.

Corner unit 2 bedroom, 2.5 bath townhome across from award winning elementary and high schools. Direct two car garage access. Wrap around front patio. HOA includes two swimming poools, tennis courts, volleyball, built in BBQs and hiking trails.

What is a poool?

This REO was originally purchased for $585,000 on 2/14/2006. The owners used a $468,000 first mortgage. The information on any second mortgages has been wiped out. Late last year, they quit paying:

Foreclosure Record
Recording Date: 07/09/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 04/02/2009
Document Type: Notice of Default

The property is for sale at 31.8% off its 2006 purchase price. Ready to restart the cycle?

37 thoughts on “California Kool Aid

  1. Freetrader

    Great song, thanks for that. From, what, ’73, when Bob Welch was the leader of Fleetwood Mac. They were still sort of a blues band back then, before Buckingham and Nicks turned them into a pop band.

    The belief in endless appreciation of California real estate stems from both the frontier mentality of California and the belief of residents in its endless population growth. On one level, there is a bit of logic in the presumption that high quality real estate should offer a good rate of return over the long run, as California’s population and wealth has always been growing faster than the Nation’s as a whole, and aside from the various Bust periods, probably will continue to do so. Contrary to what some say, Coastal California IS special. That is NOT to say that simply because real estate should appreciate at a rate greater than inflation over the long run, that ANY PRICE you pay for real property is always valid — no, it is in the nature of the beast to go through boom and bust cycles, as the frenzy results in overappreication and ultimately, massive defaults.

    The question you ask frequently, both implicitly and explicitly, is where are we in the current boom/bust cycle? You have convincingly demonstrated that availability of credit without a requirement of buyer accountability had by 2006 inflated prices far out of range of the even peak of a normal boom and bust cycle. Accordingly, despite the record breaking fall in prices over the past 36 months, we should normally expect more pain and another 20% fall. But with the government continuing to monkey with the markets, and the credit taps wide open again, the market is still being artifically supported. How long can the post-bubble bubble last? Can it keep us afloat long enough for inflation to catch up (say, to 2021)? All I really know is, we ain’t in Kansas anymore.

    1. newbie2008

      Freetrader, You hit it on the nail. The USA markets have not been freetraded for ages. Article on stock market/credit market manupulation and the special 0.25% interest rates for the well connected to loan as credit card interest at over 20%. Too bad the common man can’t get credit at 4%.

      With FC taking over one year to process and $8000 credit for first time house purchase, the Feds have given the bubble more hot air. Essentially now money down, just consider the 3.5% down a low cost rent for a year or two years.
      3.5% on $450,000 = $15,750 for down payment
      12 month rent at $2100/month = $25,200 cost to rent.

      If you don’t pay as a renter, eviction will finish within 2 months with a judical process that will follow you for the $.
      If you don’t pay as a home owner, the process can drag out to 2 years and with the one action rule, not follow you for the $.

      The markets are rigged, but how to benefit and not be left holding the bag?
      How long can the govt keep up the Ponzi scheme?

      I think OC is at 7% for 90 day overdue, but prices are rising.

      “There is not going to be the political will to bail out the banks again.” The bailout funds have already been voted upon and approved, but not yet spent. BO has lots of room and cash to reward his good buddies, who financed his election.

  2. AZDavidPhx

    Mortgage delinquencies hit another record in 3Q

    Mortgage delinquencies peak again in 3rd qtr, but pace of growth slows for 3rd straight period

    By Eileen Aj Connelly, AP Personal Finance Writer
    On 6:50 am EST, Tuesday November 17, 2009

    NEW YORK (AP) — The pace at which people fell behind on their mortgages slowed during the summer for the third consecutive quarter, but the overall delinquency rate hit another record, a new report shows.

    For the three months ended Sept. 30, 6.25 percent of U.S. mortgage loans were 60 or more days past due, according to credit reporting agency TransUnion. That’s up 58 percent from 3.96 percent a year ago.

    The rate was up 7.6 percent from the second quarter. That’s a much smaller jump than the 11.3 percent rise in the second quarter from the first, and the 14 percent leap seen in the quarter before that.

    While the slowing growth rate is a positive sign, the increase shows there’s still a lot of problematic mortgages out there, said F.J. Guarrera, vice president of TransUnion’s financial services division.

    The company doesn’t expect the figure to start declining until the middle of 2010. (AZDavidPhx: LOL! Yes! We expect a “soft landing” from here on out! )

    Two things must get better before mortgage delinquency rates start reversing themselves, he said: home values and unemployment. “Until we see improvement in both of those areas, it’s possible that it will take longer for delinquency to improve,” Guarrera said.

    1. IrvineRenter

      The status was changed to “pending” which drops it from the IDX system we use. Redfin still has the details.

  3. AZDavidPhx

    The official word is in, folks. F.J Guarerwhatever has delivered his professional vice president of some financial institution (casino) and his assessment is that housing values need to “Get Better”.

    Well whoopty DOO! That was some great analysis there. I can see why they keep him around there to figure all this complex stuff out and deliver everyone a nice unhealthy serving of misinformation.

    Don’t you love the nice subtle deception in his intentional ambiguity?

    As far as I can see, prices on houses are getting better whereas equity for existing debtors is declining. What F.J is really saying is that bubble prices need to be reinflated in order to fix the default rate. Brilliant F.J, brilliant. What a self serving statement – I hope FDIC raids his casino and shuts his propaganda printing press down.

    If you want to help the delinquincy rate, lower prices, and less leverage seems like a great step in the right direction. Sucks for people like F.J, but oh well.

  4. Sue in Irvine

    It looks like they have two dishes. I’ll bet the condo association wrote them up on that. Plus the condo rules usually want them up on the roof. Gotta keep the place looking Irvine pristine.

  5. Lee in Irvine

    This sums up what’s going on in Orange County right now. From Mark Hanson, aka Mr. Mortgage:
    Mid-to-High End Mortgage & Housing Market – A Slower Moving Train Wreck

    One market segment that will not catch fire from anything being done is the mid-to-high end (MTH). This is where the next crisis is building right now. Only significant house price depreciation and sustained low rates can spur sustained sales in this market segment.

    Contrary to a growing recent popular opinion that the MTH homeowner is feeling great, it remains my strong opinion that the negative wealth-effect across the MTH homeowners remains powerful, increasing especially over the past few months as end-of-season price dumping and increased short sale activity continued to push prices lower.

    The reason why the MTH has not tumbled in the same fashion as the lower price bands is simply because this group of Jumbo Prime, Pay Option and Interest Only borrowers have a) much more leverage-in-finance with loans such as the Pay Option ARM making up a large percentage of the total b) loans that were structured with interest only or neg-am teasers that typically last a minimum of 5-years vs 2-years on a Subprime loan c) more options available to them such as cashing in retirement to keep kicking the can d) more stable employment e) a better chance of qualifying for a mortgage mod.

    Bottom Line – the MTH is a slower moving train wreck, which in the macro may be worse than the way Subprime imploded. Subprime borrowers who got wiped out a couple of years after getting their 2/28 are way down the de-levering road — renting a property and living within their means, which is when spending can begin again if they chose. At the end of the day, defaults and foreclosures across the MTH will be in the double digits with a respectable number in front, but stretched out over a longer period of time pressuring this housing and borrower segment for the duration.

    The Mid-to-high end collapse will keep its borrowers financially strung out for years, as conscientious home owners sell other assets or cash in retirement to keep making payments while others opt for a pro-bank mortgage mod in which most of their disposable income each month goes to repay their massively underwater monument to stupidity. Some that simply bought at the wrong time with larger down payments, perhaps most of their savings — and who have seen all of their equity evaporate — will opt to earn their way out of it, which is a long process during which spending is restrained. Still, many will choose the route of default and foreclosure because with negative-equity so extreme in the MTH, they are renters anyway, unable to refi, sell or re-buy, and foreclosure is the fastest road to household balance sheet recovery.

    Read more here

    1. AZDavidPhx

      A very very slow moving trainwreck. Can you believe that we are about to go into 2010? I remember those economic stimulus checks for 600.00$ like they were yesterday’s government scam. We have come a long way since then.

      I can’t wait to see what they try to pull out of their hat next year. MTH is coming due… You can feel the tension in the air.

      1. Lee in Irvine

        All you have to do is take a stroll through South Coast Plaza on a Saturday or Sunday, to see something is very wrong. Look in the Louie Vuitton and/or the Rolex store … EMPTY.

        1. Major Schadenfreude

          Just cruise down PCH for crying out loud. Lots of beach front commercial space available for rent. Kind of spooky.

        2. Happy Not In Cali

          Well, no doubt the California economy is taking a beating, which I wouldn’t describe as “good”. At the same time I don’t know that it’s “very wrong” that people aren’t throwing their money away on Louie Vuitton and Rolex junk that is no more functional than your average watch or handbag.

          Personally if I were to acquire a status symbol I would make sure it runs the quarter mile in the 12s.

    2. mike in irvine

      I agree that it is a slow moving train but the train wreck will not result in a massive decline in Irvine home prices because( i would prefer lower prices period)..
      a) low inventory…as the article mentions people who purchased high will hunker down and kill the other parts of the economy before selling their house at a loss.
      b) loan mods will continue to happen at a slow pace which will result in pushing the can down the road.
      c)FCBs and CB’s are still in the market and jump at any decent property. They get a good deal due to the cash offer but it is not resulting in an overall price decline due to the lack of inventory.
      d) Chinese cultural center and the islamic center at northwood, this convenience and proximity to a cultural center prompts migration from other parts of Orange county or LA to Irvine (not trying to be a racist here..this is my observation based on talking to the people in the area)
      e) The Irvine school bubble which is a self perputating myth that his not going to burst soon. I have heard of people who stay in other cities but rent/buy a single bdrm appt just to maintain residency in irvine so that their kids can go to school here.

      1. Lee in Irvine

        I wish I could jump on that theory with you Mike, I’d probably contact one of my realtor business associates, and buy a house before yearend. But unfortunately, your theory is just wrong. In fact, after looking at a default map on my computer monitor, it is apparent that home prices in Irvine CA are going to decline significantly in the future. That is, unless all these home-debtors are presently playing chicken with their mortgage company, anticipating a reduction in their loan balance.

        At this current time of the housing cycle (unwinding), Irvine is clearly one of the worst offenders in the county when it comes to per capita default rates … much worse that those highly affluent, sought out, desirable communities like Stanton, Buena Park, Garden Grove and Santa Ana.

        1. Tech Dude

          Where are these “default maps”? I searched on-line, etc. and cannot find them. Is this a paid site?

          1. Lee in Irvine

            It’s all public information, and of course, Google does the best job in providing it to the public (free) in an efficient manner.

            Follow these steps:
            1) Go to Google Maps
            2) Click on “show search options”
            3) On the pull down menu select “real estate”
            4) Type a city or zip or street address – Irvine, CA is a good start
            5) Click on “search maps”
            6) From the menu on the left side, deselect “for sale”, then select “foreclosure”
            7) Zoom in and out to see the firework show.

  6. LongTime Reader

    I have a feeling we are going to see foreclosures accelerate. The government cannot change the fundamentals which is supply and demand.

    The reason for the acceleration is two folds. First the current administration is going to have a huge wake up call during the next elections. People are afraid of the debt that is piling up. There has been comments about how the debt level is too high and they need to remedy it from this administration. The GSE are out of cash.

    Secondly, the commercial real estate market has already collapsed and banks are going to have to raise money. They are going to get rid of there non performing asset. There is not going to be the political will to bail out the banks again.

    1. IrvineRenter

      Your reasoning is sound, and I hope you are right. The real estate sector will not improve as long as there are so many assets in the hands of people who either aren’t using them (banks) or aren’t paying for them (defaulting borrowers).

      1. Soapboxpolitico

        Hi all! I’m back after a self-imposed break in an effort to quell rising blood pressure … proved only moderately successful. 🙂
        My latest crusade would be an effort to gather up a pitchfork and tar & feather brigade and head to WallSt. for some well deserved come-uppance.

        Anyhoo … I felt compelled to comment. I agree that we must see foreclosures continue to hit the market here in Irvine/OC as the aptly described “slow train wreck” continues. As we’ve said many times before, fundamentals … no matter what the financial “geniuses” cook up, the fundamentals will always dictate what happens. The facts remain the same, houses are still overpriced using median income over median price and no amount of financial hocus-pocus will ever change that fact. Until those two curves come more closely in line, distressed properties will continue to dictate the market.

        With that said, I will never again underestimate the power of stupid people with money (err, debt). Although not a well formed theory, I personally believe what is happening here is a kind of collective hold-your-breath strategy. The home-debtor is hanging on in the hopes that soon enough, the dumb money will again re-enter the housing market and save them from their colossal greed and stupidity. The Fed and banking industry are slowly inhaling, hoping to effect a kind of soft landing. By this I mean, if they can slow the flow of distressed properties onto the market long enough, once again the financially retarded will enter indentured servitude to “own” a home. It’s a sort of hope and pray attitude that, with enough time in between, the collective short memory will kick-in and the bubble will remain relatively permanently inflated.

        In short, if it drags out long enough, enough skeptical people will become convinced enough by the Kool Aid purveyors that of course it’s smart to devote 60% or more of your gross income to housing payments because your house will make you rich in the long run.

        Just my two cents. Cheers!

    2. AZDavidPhx

      They cannot change the fundamentals, but they can cheat by inflating the money supply and leave the little people holding the bag.

      The people in charge are not stupid and it would be extremely unwise to underestimate them even though we all like to complain about the seemingly idiotic decisions being made.

      I am convinced that interest rates will not be increased next year. I say zero is here for awhile. I also bet the money supply will be expanded again to save FHA and FDIC.

      I had originally thought that 2009 would be the most painful, but the actions taken so far have been to kick the can down the road in exchange for a quick sugar high and instant gratification.

      I imagine the crew of the Titanic telling 3RD class to remain in their quarters. I know which class I am in as far as they are concerned.

      1. AZDavidPhx

        And you can rest assured that when it does become a problem, they will all be right there crying along side all of us and incredulously tell us that nobody could have seen it coming…except themselves who ditched all of their dollar investments years ago.

      2. so what if

        So what if you lose 10% or so of your purchasing power? Isn’t that better than losing jobs and thus, possibly, 100% of purchasing power?

        1. newbie2008

          That’s the scare tactics that have been proven useful with every cycle and bailout. That’s the reasoning for the Mexican fund bailout for funds in the 1990’s — only the special interest funds got that money.

          With the admission on the jobless recovery from George Bush senior to B.O., the bailouts directly help one class of people.

          If they really wanted to stimulate the consumer economy, give $10000 credit for purchase US consumable products to every citizen. It would of been cheaper than the bailout of the bank/bonus.

          1. Freetrader

            I respectfully disagree. There are too many conspiracy theories going around here — the banking crisis of 2008, the Asian crisis of 1997, etc., those were real crises. If we are lucky, we may be able to stumble through this one until next time. Maybe rich people were the most obvious beneficiaries, but they weren’t the only beneficiaries — without employers, there are no employees. We all seem to take a functioning economy and banking system for granted — believe me, we should not.

            I hope that IR is right in that there won’t be another bailout. But we had better all hope that there isn’t the NEED for another bailout.

          2. Waterdog

            Let’s not and say we did. Free money was given to home buyers and all that did was create a bidding war leading to higher prices. If large sums of money were handed out, prices would rise and your actual purchasing power would be flat. The government however would be increasing its debt while de-stabalizing the economy. That being said, it is a better path than the one that they have committed to.

        2. AZDavidPhx

          Where did you get 10% from? You do realize that the money supply was doubled to pay for all these schemes that we have going on to save the wealthy.

          My logic tells me that doubling the money supply takes away 50% of your cash.

          I see no reason why minimum wage could not double in the next Five years as politicians start trying to ‘help’ out struggling workers and create higher paying jobs…a

        3. AZDavidPhx

          I also don’t buy into that scare tactic that losing 10% is better than losing your job altogether.

          That is a false dilemma.

  7. Mattman

    Hey, IR – minor logistical note: I read your blog daily via RSS, and the RSS links have been bad over the last few days. eg.

    Note the link leads to an error page. I can still go to the IHB homepage & load up pages, but just wanted to let you know some links are not working.

  8. LowRider

    What about Fascist Island? Is it the same story there, or is it doing well because there are so many people nearby with money to spend?

    1. Tech Dude

      Here are my observations around the Newport-Irvine area (note that I sometimes entertain on business):

      – I have been to several high-end restaurants over the past few months and they are PACKED: Flemmings, Ruth’s Chris, Roy’s. You can barely get in.

      – The mid end places – PF Changs and such – 45 minute waits. Lots of families in line. The last time I was at the Spectrum I could barely get a table anywhere in there and there was little parking left.

      – Stores at the middle of the day – packed.

      – Traffic? Packed. I did a round-trip day trip to San Diego and had wall-to-wall traffic both ways the entire way.

      – Fashion Island parking lot on the weekends – packed. Can barely find anything. Then if you want to grab a bite to eat at the real casual places – like Wahoos – line out the door. I don’t know about the South Coast comment above, but I do know I will be avoiding it during Christmas season due to traffic and parking congestion.

      So I don’t know what is going on. I do see the empty office buildings and the published numbers and it worries me. But then I look at the above examples and I see economic activity. So either people haven’t slowed down yet, the people who aren’t hurting overweigh the people who are (and technically, we are at 90% employment), or this particular area has so much money it just plugs along.

      1. newbie2008

        SCPM is a ghost town. Zombie shopper — low to no purchases.

        Last time at Spectrum lots of shoppers, but not much purchasers. But the eatting places looked as if they weren’t as busy but still had customers.

        Some JP are doing brisk business while as a whole they are doing well.

        Many eateries are heavy discounting and eating if the final cut. I would rather spend my money on eating that clothes, new car, drinking, etc. Most eateries profit comes not from food but drinks, but people price out the place by the cost of the meal, but may double the cost on drinks.

      2. Soapboxpolitico

        Tech Dude – interesting observations and I have to say, for the large part, I agree with your assessment. Like you I can’t quite figure out why the shopping activity “appears” to be brisk while all economic indicators show that the consumer is still largely absent.

        I have a couple of pet theories, one of which was mentioned elsewhere in this string that there are lots of “shoppers”, few buyers. My other pet theory is that all this shopping is a form of “whistling past the graveyard”. In other words, it acts as a kind of psychic salve to just walk around F.I. or the Spectrum and look rich or successful while largely buying nothing. Remember there are a fair amount of people around here that subscribe to that bullshit credo … to be successful one must look successful.
        (The extension of this is the “Newport Beach-Irvine Credo – Spend money you don’t have, on things you don’t need to impress people you don’t like.)

        Of course the other thing that could be happening is none of those shoppers have made a mortgage payment in months and are so far in debt they figure they might as well live it up while they can before they get booted from their home. Maybe it’s all of it.

  9. Offer in Compromise

    No matter what the statistics say, the short sales and foreclosures will continue to mount. The government only wants to help buyers with tax credits, but until we do something more to help keep homeowners in their homes this real estate market has little upside.

  10. Homes Alexandria VA

    Nice looking home, I like the 3 car garage ( I have a fetish for) and the tile roof! Nice! 🙂

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