People concoct all variety of foolish plans to make riches in real estate. Most of them involve some form of appreciation dependency. When their plans fail, what happens to them?
Today's featured property is a short sale likely going to trustee sale on April 1.
Irvine Home Address … 95 Mission, Irvine, CA 92620
Ah, look at all the lonely people
Ah, look at all the lonely people
Eleanor Rigby picks up the rice in the church where a wedding has been
Lives in a dream
Waits at the window, wearing the face that she keeps in a jar by the door
Who is it for?
Father McKenzie writing the words of a sermon that no one will hear
No one comes near.
Look at him working, darning his socks in the night when there's nobody there
What does he care?
Eleanor Rigby died in the church and was buried along with her name
Father McKenzie wiping the dirt from his hands as he walks from the grave
No one was saved
All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
The Beatles — Eleanor Rigby
There is a deep sadness in emotional impoverishment and loneliness. There is a tragic sadness in foolishness that leads to financial destitution. By seeing what these people did wrong, we can avoid the same mistakes.
By Stephanie Armour, USA TODAY
When Jennifer and David Wakefield bought their home at the end of 2005, they believed its value would rise. After all, the couple they'd bought it from made a $100,000 profit in just three years.
But instead, the housing market foundered, and the house in Oviedo, Fla., that the Wakefields bought for about $230,000 is now worth just $115,000. Jennifer Wakefield says she's put off hopes of moving to a larger home. She once thought she could use a home-equity loan to help cover the $30,000 cost of adopting a child, but now there's no equity to tap into.
"We're in the middle of adopting our first child and would have loved to have used a home-equity loan to borrow from — if we had home equity," says Wakefield, 32. "Now, we're faced with coming up with $30,000."
This woman fully expected her house to provide her the money to have a child. The house pays for the children? I had it figured the other way around; shouldn't the ability to shelter the child come first?
Gone are the days when households relied on their homes' ever-rising values as family piggy banks that would pay for everything from new cars to college tuition. Legions of borrowers who once thought they could count on equity in their homes as a financial safety net are finding there's nothing there. Instead, they're discovering it may take years before their homes are worth as much as they owe on them.A typical borrower who is "underwater" won't see positive gains in equity until 2015 to 2020, depending on the market, according to a study of 10 major metro areas by First American CoreLogic for USA TODAY.
"It's a rude awakening. There's a total change in thinking going on," says Amy Bohutinsky of Zillow.com, a real estate website. "People got caught up in the idea you could borrow against your homes, but they no longer think of them as savings accounts. We're going through a big psychological shift. Will this recession change how we think about our homes? Are they an investment vehicle or a place to live?"
I wrote about Our Changing Relationship to Debt back in July of 2008. "By 2010, people will realize the thought patterns of the bubble, the religion of real estate, are no longer operative. As this slow process of change grinds forward, people will start thinking in terms of taking on manageable debts with an eye toward paying it off to build equity the old fashioned way through retiring debt. This will be a big change for the market."
'What if I want to move?'
At 39, Tage Woehl already fears for his family's financial future.
Woehl, of Eastlake, Calif., is about $80,000 underwater on a home he and his wife, Imelda, bought for $430,000 in 2003. He's locked into a 5.99% fixed-rate mortgage that no bank will refinance.
To hold down other expenses, the Woehls go without cable TV, and he's holding onto his 1999 Dodge Intrepid, which has 188,000 miles on the odometer. The Woehls' daughter, Nika, is only 4, but Woehl, an accountant, already is worrying about how he'll afford college tuition in 13 years. He says he feels like he's lost his financial life jacket: "It's not too comforting."
Woehl says it sometimes feels unfair that other homeowners who don't pay their mortgages on time get federal bailout assistance in the form of mortgage modifications and lower monthly payments.
"I'm the one who's paying every month, and when all is said and done, I'm scraping by," he says. "We can't refinance. We're upside-down now. What if I want to move? I'd like to be closer to my job."
Another side of moral hazard; the responsible get screwed, and they are pissed about it. As a renter, I could move anywhere in the country in 60 days. The millions who are trapped underwater couldn't move in the next 60 months. How many house debtors are enduring long commutes when they could be renting a nicer property nearer work for less money?
But it's also older borrowers without young children who are frustrated by their financial situation and feel stuck because they are underwater on their homes.
Vicky Dicristo, 64, bought her home in Soquel, Calif., in 2006 for $535,000 with plans to fix it up, live in it awhile, then sell and buy a nice retirement home in Arizona, where she has family. She bought the home with a five-year, interest-only, adjustable-rate mortgage at a 5.9% interest rate.
Her home is now worth $350,000, according to the local assessor's office. And Dicristo, who was laid off nearly two years ago from her job as a mortgage loan underwriter, has lost the $135,000 she put down on the house as well as the more than $15,000 she put into renovating the home with new floors.
"I lost $150,000," Dicristo says. "I haven't been able to make payments, either. I thought I was going to be able to sell it and move to a less expensive area. That had been my plan when I bought it, to move to someplace like Arizona and pay all cash. But that whole plan fell apart."
Whether this woman recognizes it or not, she is a retail property flipper. She planned to ride the equity wave into a free property. The fact that people like her thought this was possible amazes me. She, and millions with the same faulty plan, helped drive up prices. This plan only works if property values where you are flipping are going up at a much faster rate than where you want to be. California really is a magical place, right?
For Dicristo, losing equity in her home has meant losing the cash she sank into it and losing much of her retirement dream.
"Emotionally, this has had a very big impact on me," she says. "It's changed how I view housing."
The Unceremonious Fall from Entitlement. Her plan was not based on reality, and her "dream" of retirement was simply a dream, a fantasy created in her own mind. If she doesn't create the fantasy — if prices had never bubbled — she would not have filled her head with silly ideas about a retirement not to be, and she would not be suffering right now.
When foreclosure looms
Losing equity has also cost Henry Oviedo, 75, an engineer, his retirement dream.
He bought his home in 2005 in Owings, Md., for $642,000. It did not have a complete basement, so he spent nearly $100,000 to put in an office, a small theater, a bathroom, a fitness room and a big living room. He took out a five-year, adjustable-rate mortgage at 5.85% interest.
He pimped the place out and now he can't afford it.. Stupid.
When he went to refinance recently, his home was appraised at $590,000.
Oviedo says he has been unable to get his home refinanced because he is upside-down. Nor has he been able to get his mortgage modified. Oviedo is now paying $3,200 a month, but come November, he could face higher payments when the 5.85% rate on his mortgage will be adjusted.
He must retire this year, and Oviedo says his Social Security check won't be enough to pay his mortgage. His wife, Giselda, is unemployed.
This guy took on $642,000 in debt about six years prior to retirement? That was his plan? Was the house going to be his breadwinner? How do you retire with $642,000 in debt?
"I am very worried," he says. "I put $100,000 into the house. It's very uncertain what is going to happen. I would have liked to have had this as my home in retirement, but I am going to have to go into foreclosure."
If this fool would not have put $100,000 into the house, he would still have $100,000 for his retirement, albeit in a house a bit less pimped out. The lower payment might have been affordable to him.
The problem of negative equity is getting worse. The average equity amount that an underwater borrower was in the hole for in the fourth quarter of 2009 was $70,700, up from $69,700 the previous quarter.
Without equity in their homes, many homeowners no longer have collateral for personal loans that financed new cars, vacations, home improvements and college educations before the housing bust.
Home-equity lending has plummeted. Lenders made $77 billion in home-equity loans or lines of credit in 2009, down from $430 billion during the housing boom in 2006, according to Inside Mortgage Finance.
"That's not likely to change any time soon until equity picks back up," says Guy Cecala, CEO of Inside Mortgage Finance.
HELOCS are dead
Many people buying today believe they will have HELOC riches soon. This will change slowly. As interest rates go up, HELOCs — if they are still made widely available — will be much less desirable.
If you locked in to a first mortgage at 5% and your house has gone up $100,000 in value, are you going to open a HELOC at 7% and take on the added payment? You see, falling interest rates that allowed first-mortgage refinancing at ever-decreasing rates allowed many borrowers to increase debts without increasing payments. That ability goes away when interest rates creep up. When people open HELOCs in the future, they will not be refinancing their first mortgages, and the HELOC debt is an additional payment that eats into monthly cashflow. HELOC borrowing is dead for the foreseeable future.
The negative equity problem also is threatening future inheritances. Many homeowners who counted on their home equity as a substantial part of the estate they'd pass on to their heirs are now worrying about the welfare of their spouses and children after they die.
Bob Riley had thought the equity in his home would provide for his wife, Dawn, and provide an inheritance for his three adult children. Now he fears it will just be a financial albatross for them.
Equity is never an albatross; debt is an albatross. If he wanted to provide an inheritance, he should have worked to pay off the debt.
His home is one of the 2.2 million in Florida with negative equity. He and Dawn, of Tallahassee, spent $220,000 five years ago and took out a fixed mortgage on their four-bedroom, one-story home that backs up to a lake and includes a 1-acre yard for their two dachshunds.
A nearly identical home across the street recently sold for about $180,000, and Bob guesses they're at least $20,000 underwater on their house. He used to work as a concrete salesman but is currently out of work. Dawn sells insurance.
It's frustrating, Bob says, because there's a home they'd like to buy with more square footage that's newer, but they'd have to write a check just to get out of their house. He says they've paid off all their bills and are now trying to decide whether to continue paying the mortgage.
"It'll take years for the equity to get back," he says.
Four or five other homeowners in his neighborhood, he says, have simply walked away and left their properties to the bank. And there are other hard realities to come to terms with.
Bob, 60, says he'll have no home value to pass on to Dawn or his three grown children.
He had thought he could take out a reverse mortgage on the home. That's when a homeowner who is older than 62 borrows money from his or her home. It isn't paid back until the owner dies, sells the home, or permanently moves out.
"I can't retire. I'm looking for work," Bob says. "I thought whatever we'd have, I'd pass away and leave the house to her, and she'd have a reverse mortgage to live off of. Now we don't know what we're going to do."
Reverse mortgages are a financial cancer. If this man's plan was to leave his wife a reverse mortgage, he was planning to leave her with a financial cancer which would have consumed the house and left her trapped and penniless. Downsize and diversify before taking on financial cancer.
What will become of all the foolish people?
Each of the people mentioned in the article made foolish plans. What will become of them? The young may recover, but the old will almost certainly endure a fall from entitlement. The lifestyles they enjoyed or envisioned are gone.
These cases are sad but instructive.
Irvine Home Address … 95 Mission, Irvine, CA 92620
Home Purchase Price … $749,500
Home Purchase Date …. 12/29/2005
Net Gain (Loss) ………. $(211,812)
Percent Change ………. -23.7%
Annual Appreciation … -6.3%
$572,009 ………. Asking Price
$114,402 ………. 20% Down Conventional
5.00% …………… Mortgage Interest Rate
$457,607 ………. 30-Year Mortgage
$118,440 ………. Income Requirement
$320 ………. Special Taxes and Levies (Mello Roos)
$48 ………. Homeowners Insurance
$270 ………. Homeowners Association Fees
$3,590 ………. Monthly Cash Outlays
-$550 ………. Equity Hidden in Payment
$222 ………. Lost Income to Down Payment (net of taxes)
$72 ………. Maintenance and Replacement Reserves
$2,914 ………. Monthly Cost of Ownership
$5,720 ………. Furnishing and Move In @1%
$5,720 ………. Closing Costs @1%
$4,576 ………… Interest Points
$114,402 ………. Down Payment
$130,418 ………. Total Cash Costs
$44,600 ………… Emergency Cash Reserves
$175,018 ………. Total Savings Needed
Baths: 3 full 1 part baths
Home size: 2,110 sq ft
($272 / sq ft)
Lot Size: n/a
Year Built: 2006
Days on Market: 75
MLS Number: S601797
Property Type: Condominium, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
SPACIOUS THREE BEDROOM END UNIT, attached only on one side and very private. Painted throughout, very clean and spacious. Has a front courtyard off the dining room and small courtyard off of downstairs bedroom. Huge MASTER BEDROOM, with handsomely done master bath. Twin vanities, huge tub and LARGE WALK-IN CLOSET. Spacious kitchen with modern cesearstone countertops and stone backspash. Has a wine captain, stainless appliances including a refrigerator. Custom fans throughout. Windows have formal casing and the master bedroom has plantation shutters. In an excellent Woodbury location: WALK TO ELEMENTARY SCHOOL, the resort The Commons' with 5 private pools, private tennis courts, incredible amenities. Photos soon.
I didn't think a loan owner who bought at the peak would be able to squeeze out a few pennies, but then again, I constantly underestimate lender stupidity. On 9/25/2006 the owners obtained a $640,000 first mortgage and a $150,000 stand-alone second. The got $40,500 out of their nine months of ownership before the music stopped. Once the cash cow stopped giving milk, they stopped paying and found a new way to milk it. They haven't made a payment in well over a year.
Recording Date: 03/09/2010
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Recording Date: 05/20/2009
Document Type: Notice of Default
The margins on the more desireable properties are certainly smaller. With little or no time or cost required to fix these properties up, flippers are merely arbitraging the cash and resale markets. It isn't rocket science.
|Comparable Trustee Sales||Auction Date||Amount|
|92 TOWNSEND — A 0 bed Condominium — 0||12/3/2009||$ 451,000|
|68 TOWNSEND — A 0 bed Condominium — 0||2/3/2010||$ 501,000|
|84 TOWNSEND — A 0 bed Condominium — 0||9/23/2009||$ 502,200|
|89 WINDING WAY — A 0 bed Condominium — 0||2/10/2010||$ 515,597|
|53 CHANTILLY — A 0 bed Condominium — 0||10/21/2009||$ 523,100|
|Comparable Resales||Resale Date||Amount|
|115 Spanish Lace — A 3 bed 1,960 SF CONDO — 2006||12/09/2009||$ 550,000|
|84 Townsend 1 — A 3 bed 2,100 SF CONDO — 2005||12/22/2009||$ 594,000|
|81 Mission — A 3 bed 1,960 SF CONDO — 2005||8/28/2009||$ 560,000|
|57 Flamenco — A 3 bed 2,165 SF CONDO — 2005||1/07/2010||$ 598,000|
|53 Chantilly — A 3 bed 1,960 SF CONDO — 2006||12/31/2009||$ 625,000|
|Comparable Rentals||Rental Date||Amount|
|62 Shadowplay — 3 bed SF CONDO — 2,146||33||$ 2,900|
|28 Pink Sage — 3 bed A SF CONDO — 1,745||66||$ 2,800|
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,