IHB News 12-19-2009

I hope you are enjoying your pre-holiday weekend. Are you finished shopping for the holidays? Spend or save — what’s an American supposed to do?

41 GILLMAN St Irvine, CA 92612 kitchen

Irvine Home Address … 41 GILLMAN St Irvine, CA 92612
Resale Home Price …… $510,000


The battled starts adversaries
We bathe in our blood
The worst is yet to come
We’ve reached the covenant
To kill what we have started

Escape the Fate — The Guillotine

IHB News

When I first started writing for the blog, there was no set format or template for anything, so each post was made from scratch or with a little cut and paste. Over time, with the desire to improve accuracy, deliver more information, and do it quickly (and still have a life), I developed an Excel Spreadsheet I use to create the structure of a post.

Each week I sit down to select properties and write my posts for the week (yes, I batch them). My first task is to look up the average APR on a 30-year fixed-rate mortgage and put it into my template. Each property I evaluate will be using the same interest rate assumption, and as long as the post isn’t delayed too long, the rates are current. I use the average APR instead of the average interest rate because I want to look at the true cost of financing instead of the rate that gets attention.

For each post, I need 6 specific data points plus the data dump from the MLS. The key data points are (1) address, (2) asking price, (3) original purchase price, (4) original purchase date, (5) Mello Roos fees, and (6) HOA Fees. Information below the property details is cut and paste from the IDX so there are no inaccuracies in typing.

The cool part is how much calculation goes on in the background to generate the tables of numbers.

The Income Requirement started out as a simple 25% of purchase price. I wanted to emphasize to people back in 2007 to the fact that house prices bottomed at 4-times income, and if you go back to traditional financing, you need much larger incomes to support the prices at the time. Well, that served its purpose, but to give a more accurate vision of the financing picture, I created a formula that takes traditional underwriting standards to calculate the income it takes to support the asking price at current interest rates. People can judge for themselves if a property is affordable or desirable.

The Downpayment needed used to be a simple 20% of the purchase price. Again, back in 2007, I wanted to emphasize to people who were not accustomed to 20% downpayments that these monsters were coming back, and the sticker prices on houses was going to have to adjust to the fact that nobody has a downpayment (cue FHA). Now, the formula I use is more nuanced; it displays 20% down for any property over $417,000 (a somewhat arbitrary cutoff), and it displays 3.5% down for any property under $417,000. The assumption is that lower priced properties are probably first-time buyers using FHA financing, and their financial picture is different than the 20% down buyer.

I used to get out a hand calculator and type the details of each transaction to calculate the total profit and loss. I am amazed I did not make more mistakes. Now it is in a spreadsheet, and I accurately represent the amount the owner (or lender) netted after sales commissions. A benefit of this is that I can accurately measure the financial performance of the “trade” — since so many are obsessed with making a fortune in real estate, it seems appropriate to see the truth, good or bad.

The calculation of annual appreciation is the most complex of the ones I make. It is really an internal rate of return calculation where I assume the purchase price was spent in period 1, and the proceeds come back later. The calculation is difficult because the holding period for houses can range from a few months to 30 years so getting a stable number of periods that did not crash the calculation was tough. I finally duplicated the formula in three different time periods, and I take the result of the most precise time period that does not return an error… I think this is probably only interesting to Excel buffs, but…

The Mortgage Payment, Monthly Cash Outlays and the Monthly Cost of Ownership are directly from our fundamental value reports. I don’t display it in the post, but my spreadsheet has the complete breakdown of the cost of ownership including the Mello Roos and HOA fees. I investigate those for each property, but I don’t directly post the result. I can if people are interested, but I want to keep the size of the posts manageable and the content relevant.

So that is where we are with the post information and presentation. Sometimes the interesting part of the post is in these numbers, and sometimes it is not. Either way, the data is always available, and I try to make it as accurate as possible.

Housing Bubble News from Patrick.net

Luxury-House Owners in U.S. Walk Away More Than Others (bloomberg.com)
Debtor’s Dilemma: Pay the Mortgage or Walk Away (online.wsj.com)
Shadow inventory looms over housing market (centralvalleybusinesstimes.com)
Federal government is selling lots of houses in South Florida (sun-sentinel.com)
More People Remaining Unemployed Longer (courant.com)
Spend or save — what’s an American supposed to do? (latimes.com)
Banks walk away, while telling you not to! (market-ticker.denninger.net)
Citigroup to stop admitting losses for 30 days (usatoday.com)
More foreclosures on horizon in LV (lvrj.com)
Housing’s Treacherous Path: From 44% Houseownership to 70% (financemymoney.com)
Many counties in California are still overpriced. Massively overpriced. (doctorhousingbubble.com)
Foreclosure buyer demand dips as supply mounts (reuters.com)
Realtor: “All the CRAZIES are out there buying now” (healdsburgbubble.blogspot.com)
Underwater Houseowner Should Have Waited Longer To Buy (online.wsj.com)
The Fed will hike rates — in 2011 (money.cnn.com)
The biggest real estate flops of 2009 (finance.yahoo.com)
Luxury house markets show bigger % price cuts (lansner.freedomblogging.com)
California house values likely to be down in 2010 (nctimes.com)
Nearly 650,000 are long-term jobless in CA (economy.freedomblogging.com)
Another wave of Phoenix-area foreclosures forseen (google.com)
Why a 35% Decline in Housing Values Would Be Good for the Nation (Charles Hugh Smith)
Weathering the Downhill Slope of Recreational Real Estate (nytimes.com)
Fannie Mae Losses May Exceed $200Bn (housingwire.com)
America’s municipal-bond market: State of pay (economist.com)
How buying a house is gambling (seekingalpha.com)
Los Angeles-area foreclosure rate increases in October (latimesblogs.latimes.com)
California housing market will face another bad year in 2010 (doctorhousingbubble.com)
Foreclosures fall, but banks bracing for next big wave (csmonitor.com)
U.S. House rejects mortgage “cramdown” measure (news.yahoo.com)
Goldman Trades Shouldn’t Get U.S. Aid, Volcker Says (bloomberg.com)
Interest Rates Are Low, but Banks Balk at Refinancing (nytimes.com)
There is no “Free Market” Housing Solution (newgeography.com)

Housing Bubble News

Payback For Bernanke

ForbesJoshua Zumbrun‎Dec 17, 2009‎

Worse, he denied that the housing bubble was a concern, and as a highly-regarded Harvard- and MIT-educated economist, who went on to chair the economics

Which Bubbles Should The Fed Pop?

Atlantic OnlineDaniel Indiviglio‎Dec 14, 2009‎

The tech bubble of the late 90s, for example, didn’t hurt many people who lived outside Silicon Valley or didn’t own many tech stocks. The housing bubble

FHA Troubles Are Likely to Curtail Demand

Monthly ReviewDean Baker‎Dec 12, 2009‎

It seems that many policymakers even now have not come to the grips with the housing bubble. They fail to recognize that the surge in house prices from 1996 .

41 GILLMAN St Irvine, CA 92612 kitchen

Irvine Home Address … 41 GILLMAN St Irvine, CA 92612

Resale Home Price … $510,000

Income Requirement ……. $105,721
Downpayment Needed … $102,000
20% Down Conventional

Home Purchase Price … $265,000
Home Purchase Date …. 8/31/2001

Net Gain (Loss) ………. $214,400
Percent Change ………. 92.5%
Annual Appreciation … 7.5%

Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $2,193
Monthly Cash Outlays ………… $2,800
Monthly Cost of Ownership … $2,240

Property Details for 41 GILLMAN St Irvine, CA 92612

Beds 2
Baths 2 baths
Size 1,594 sq ft
($320 / sq ft)
Lot Size 6,608 sq ft
Year Built 1965
Days on Market 85
Listing Updated 12/8/2009
MLS Number S598344
Property Type Single Family, Residential
Community University Park
Tract V1

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Beautiful single level home, 2BD/2BA + den. Nicely upgraded, well maintained, wood flooring throughout. Spacious kitchen. Bright, open floor plan. Fireplace in living room and den. Large lot which includes a spacious back yard and an enclosed front yard. Walking distance from association pools/club house. Conveniently located in University Park, top schools. This unit is a must see unit.

When I first saw this property listed as a short sale, I figured it was a familiar story; Irvine homeowner more than doubles mortgage and ends up walking away. This one is not quite so clear. From my data source, it shows about $310,000 in mortgage debt and about $90,000 in mortgage equity withdrawal. There may be an mortgage or refi that isn’t showing up in my data source to explain why this would be a short sale.

28 thoughts on “IHB News 12-19-2009

  1. MalibuRenter

    Maybe this property also has other liens that take priority over the mortgage. Maybe it has tax liens.

  2. tkaratz

    Ah, I just came back to IHB for a visit. I see you’ve shut down the forums.

    Always new you never had the best interests of anyone but yourself in mind.

    1. mike23w

      IR’s contributed this blog, the rent-to-own calculator, his knowledge packages as a library of resources, his foreclosure radar information, among others. All generously offered for free.

      He’s enabled us to decide when it’s the right time for each person to purchase a home. For some of us, that means having saved more money, and holding off on a home purchase that in most likelihood has greatly dropped in price the last 2 or 3 years.

      tkaratz, what have you contributed?

    2. k.o.

      Wow, IR still uses the same old crappy image when he cannot debate someone and wants to marginalize them. Glad to see there are still some disciples on the site to defend him!

    1. dafox

      This commentary, albeit quite long, is absolutely fascinating. He makes some very good points about how the Fed/Government has painted themselves into a corner here.
      Definitely good weekend reading.

  3. stupid clothes

    There are a few threads discussed Fed policies’ and their impact to housing market.

    IMHO, to know the hoousing bubble and how Bernanke gets his Fed chainman position, this all need go back to Greenspan famous speech: “it is impossible to spot a bubble in advance; the role of monetary policy is instead to protect the real economy once the bubble bursts.”

    It’s Bernanke, as Fed member strongly endorse this speech, IMHO, I’ll interpret this with 5th grade language as: “it is hard to tell a giraffe from a deer only after a giraffe get a new born, we can tell from the new born” (and then we wait for the grandchildren ?).

    But who heard this? Wall St. heard it, Bush heard it, so we have debt-driven prosperity and Bush got reelected in 2004 and AG is re-nominated next.

    The important is why Bernanke endorsed it? He endorsed AG’s speech, not for AG but for Wall St. for Bush and for future presidents to head it. And the Chosen One heard it too.

    Now it is 2001, Alan Greenspan is strongly supporting Bush’s 2001 tax cut that set up for 2004 election. Bernanke again strongly endorsed the plan.

    How to interpret this, IMHO, this is a typically “The Emperor’s New Clothes” story, But who heard it, Bush head Ben, Wall St heard it, and Chosen One heard it.

    The Fed set monetary policies and as president of U.S.A, a totally loyalty Fed chain is a must step for 2nd term election.

    Now, Bernanke will be approved by Congress next month, but who else heard his speech?
    Japan, China, India, Russia and all over the world heard it.

    What they will think about the “The Emperor’s New Clothes”. (Please just see what these countries said to US recently).

    BTW, the Chosen One give himslef a B+ for the first year as president, this is a joke, with 10% jobless rate, over $12 trillion debt and 0.1% interest rate, a president is thinking about his rating?

    Yes, all this is for 2012, the world heard it too.

    1. zubs

      The choices back in the end of 2008 was 10% unemployment or great depression 2….He gave himself a B+ because he put us into Japan’s 20 yr no growth economy to avoid the great depression 2.

      It was the only way…and best possible outcome.

  4. Fletcher Jones

    Bad news for those of us on the sidelines waiting for this WTF pricing to come back to reality. A coworker told me yesterday that his remod was approved for his condo that he bought durring the peak using an exotic loan. He’s set up now to only pay the monthly principle plus two percent. The two percent includes both interest and property tax.

    1. Chris

      And this was a surprise? It was mentioned on money.cnn.com.

      No biggie…eventually they’ll just pay the principle with 0% down like they do with cars 🙂

  5. newbie2008

    Fletcher Jones,
    At least he’s paying.
    Principle plus 2% including the 1% PT. So 1% actual interest. Is that a negative amortization loan?

    If so, taxpayer will wish that your friend has a sizable down payment. But with the current leaders increasing the crazy loans, I wouldn’t be surprised with almost no or negative equity for 1 to 2 years. By then the loan could be repackaged and liability transferred to Freddie or Fannie.

    Two case history with BoA house loans. Refinance to lower rate took half year for 70% existing equality loan (over 15 years with same govt job and house loan). New FHA backed loan with 3.5% down took 3 weeks. The former was sold off within one month, then in 3 months to Fannie. Banks don’t seem to want to move unless its in their benefit. The FHA loan is high risk loan with only 3.5% down, but approved within two weeks. The refin. took 6 months. Guess BoA didn’t want to loss 2% lower interest of a half year, but BoA lost a long-time customer on the retail banking side (checking, etc.) over being jerked around and juiced. Also the loan’s principle was increased during the repackaging. Only $30 to get a verification of the principle owned.

    3 cheers to IrvineRenter for this blog and his educational service for buyer to make an informed decision.

    1. IrvineRenter

      Bernanke misspoke in the recent TIME magazine interview:

      TIME: Do you have a mortgage?

      Bernanke: Oh, yes, we refinanced.

      TIME: Oh, perfect. When?

      Bernanke: About 5%. A couple of months ago.

      TIME: Good time.

      Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.

      TIME: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information. (Laughter.)

      Bernanke: Thirty years fixed rate at a little over 5%.

      Bernanke did have an adjustable rate mortgage, but it did not “explode”.

      First, Dr. Bernanke is the Fed Chairman and “exploding” ARMs are a very important mortgage issue. So I think this topic is relevant and newsworthy (and Bernanke mentioned it).

      Second, “explode” has a very clear meaning when discussing mortgages; it means that the borrower’s mortgage payment has increased sharply. An ARM can “explode” for two reasons:

      1) The interest rate can reset to a much higher level. This isn’t much of a concern right now because the most common indexes like LIBOR are at very low levels and most loans are resetting lower.

      2) The loan can recast. From Tanta on resets and recasts:

      “Reset” refers to a rate change. “Recast” refers to a payment change. … “Recast” is really just a shorter word for “reamortize”: you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.

      Neither applied to Bernanke. From the WSJ: Looking a Little Deeper at Bernanke’s Floating Rate Mortgage

      The Fed chairman was in an adjustable rate mortgage with a rate that started at 4.125% in 2004 and adjusted after five years to a rate that would be 2.25 percentage points above one-year Libor, which as of the first reset date in June was a little more than one and a half percent. That suggest his costs wouldn’t be exploding now, as the interview suggested. In fact, they’d be going down.

      So Bernanke refinanced into a loan with a higher interest rate and with a larger mortgage payment for the security of a fixed rate. This suggests he thinks fixed mortgage rates have bottomed (otherwise he could have paid less on his mortgage, at a 3.75% interest rate, and then refinanced next year). He did not “have to do it”.

  6. IrvineRenter

    Stupid is as stupid does:

    Short taste of economic recovery

    If we have indeed reached an economic turning point, economic policies won’t be what puts the business climate seriously back into high gear.

    Rather, it will be risk-taking — big and small.

    We’ve seen giants take the plunge. Famed investor Warren Buffett, a summer-home owner in Laguna Beach, announced large bets on real estate brokerages and railroads. We’ve seen Orange County land baron Don Bren say his Irvine Co. will self-finance a 2010 homebuying push in Irvine.

    And there’s small fry like Isabelle and Randy Bart, a young couple from Foothill Ranch, who are staking out their own slice of the risk spectrum as the economy shows brief hints of recovery.

    The couple just bought a home — through a discounted, bank-aided “short sale” — just down the road from their current residence. They’re part of a wave of shoppers who led Orange County home sales to a pace that’s topped year-ago homebuying in 16 of the last 17 months.

    “It has everything we wanted,” said medical product manager Isabelle Bart of the 5-bedroom, 2,500 square-foot home. “And it was such a good deal.”

    Critical phrase here: somewhat easily.

    In mid-October, the Barts made an offer — what amounted to $670,000 — on what became their new home. They knew their chances were good because the seller had been “pre-approved” by their lender for the short sale. The home had previously been bought in 2003 for $670,000, according to public records. The Barts had been told that due to additional borrowings against this home, there was roughly $900,000 in debt tied up in this short sale.

    One big catch in the process was that the Barts could not make their bid contingent on selling their current home. So, that meant they’d own two homes for a while — a risk the couple was willing to take.

    As is often the case, short-sale buyers get tossed a few curves. Not only did the bank accept their bid within days – it had been previously common for short-sale bidder to wait months for replies, often rejections — but the Barts were told they had to close the deal quickly to forestall the home’s official foreclosure. That would have wrapped the home up in another legal process and make a purchase unlikely.

    Plus, just before closing the deal, the Barts learned of unpaid taxes on the home. The bank was selling the home “as is” — so extra funds have to be found elsewhere to pay off that debt.

    But the Barts feel that despite the frantic sales process, and now adding — albeit temporarily — an extra home to their real estate portfolio, they got a seriously good deal. They claim similar homes are listed on the market for $100,000 or more than what they paid.

    Even if they don’t get the $579,000 they’re asking for their current residence, acquired in 1993, the Barts like the discount they just on a house that gets the family two extra bedrooms and 800 additional square feet of living space.

    And when asked if the extra mortgage could prove burdensome, Randy Bart replied that while it will test the household budget, “we live pretty below our means.”


    Moderation of economic decline is not a recovery.

    And there’s healthy dose of ugliness in the latest Big Orange report.

    For the year, The Big O was off 7 percent, a number that would have seemed cataclysmic if it hadn’t followed an 11 percent loser in 2008.

    You don’t need to build your own economic index together to sense the ugliness of the local employment picture. For example, while we’re talking property, the real estate and financed jobs tracked by The Big O run at a level last seen at the start of this decade.

    Want more evidence of weakness? Local hotel revenues run down 17 percent a year; business starts are falling at an 8 percent rate; and local incomes are down, too, off 1 percent.

    Even bright spots come with question marks. The Big O consumer index has been driven higher, in good part, by a rising stock prices. That market rally seems in jeopardy. And The Big O banker index, another riser, is helped by moderating foreclosure rates. It’s another positive trend with questionable durability.

    Seemingly none of the economic calamity ruffles the Barts, though, who surprisingly expressed zero doubts about their real estate gambit. Their thesis is simple — and it’s a mantra followed by other bargain hunters of this era: Mistakes of the now-fizzled boom create opportunity.

    Says Randy Bart: “You’d be crazy not to take advantage of it.”

    1. tonye

      Actually I see the point the Barts are making and I agree with it.

      I assume their home of 16 years is not encumbered with lots of debt, hence they can sell at a real market price and take the cash out of it to help out with the larger home.

      The larger home is selling now at a price where they can swing the payment easily and they are looking for a home, not an investment so for them it would seem that (a) they have a need for a bigger home; (b) they like the neighborhood and (c) they are looking long term.

      Their other option is the add on their house. Which is a royal pain but typically the natural option for (a) people who are adventurous, creative, thick skinned and sufficiently organized; (b) when the market is exploding so that the cost of upgrading is costlier.

      What the Barts are doing is exactly what the move up market is supposed to be like. That market was effectively broken in the RE bubble because financially responsible homebuyers were frozen in.

      1. Lee in Irvine

        “I assume their home of 16 years is not encumbered with lots of debt, hence they can sell at a real market price and take the cash out of it to help out with the larger home.”

        Why would you assume such a thing? I don’t know if The Bart’s prostituted their home or not, but after everything I’ve seen firsthand the last 8-years, I assume the home is encumbered with debt.

        1. tonye

          They said: “we live pretty below our means.”

          So, let me flip the question to you and make bear the brunt of the question: “What makes you think they prostituted their home”?

          After all, you yourself said that “you don’t know if the Bart’s prostituted their home”..

          Hence, your assumption is unsupported by your own statements. Huh?

          Let me tell you… NOT everybody drank the KoolAid.

          It’s true that the people that bought at the peak got hosed price wise but NOT everybody has a mortgage that far exceeds their home’s value. Not even those who bought at the peak at the newest, most overpriced McMansion developments.

          Some of those folks likely sold their previoud homes at the peak as well and thus moved their equity forward into the new home.


          1. Lee in Irvine

            “What makes you think they prostituted their home”?

            Reread my sentence … I say “I don’t know if The Bart’s prostituted their home or not”.


            Jeez is right …

      2. LC

        In that area, if you build an addition, you would have just a bigger house in the midst of many lower priced homes. A move up the hill is probably a better option.

  7. tonye

    OK, let’s talk about this home in UP.

    I think it’s attached? In any event, I like the neighborhood but adding on is very hard, I think. There aren’t many large homes there.

    This home is reasonably sized, 1500 sq feet is fine for a family. BUT, it only has 2 bedrooms, it needs at least 3 to make it as a family home.

    So, I figure it’s cheaper than many condos so for a starter home for a couple, or empty nesters or even a rental, it may make sense.

    However, the kitchen remodel is abysmal. Take a look at the area above the pantry and the refrigerator. What the hell is that missing area for? When I see such an obvious gap, such a big time screw up I start to think to worry about what kind of screw up await hidden in the walls?

    1. Geotpf

      This is a SFR; it’s not attached. The listing says 2 plus a den, so probably it’s close to being a 3 bedroom, but I’m going to guess what they are calling a den doesn’t have a closet-if so, that’s easily converted to a bedroom, IMHO.

      As for the kitchen, they probably either decided that the space above the fridge was completely useless because it was so high-so why buy a cabinet you can’t use, or maybe there was a taller fridge there at one point in time. Does look ugly, but I would call it a taste issue as opposed to a screw up.

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