Clueless Academic Wonders, "Was It Really a Bubble?

I have great respect for many in academia. Some of them actually know what they are talking about. However, I am dismayed whenever I read poor reasoning and a faulty interpretation of data by someone passing themselves off as an expert. It tarnishes the image of academics everywhere.

Irvine Home Address … 27 STARVIEW Irvine, CA 92603

Resale Home Price …… $2,999,000


I practice every day to find some clever lines to say

To make the meaning come true

But then I think I'll wait until the evening gets late

And I'm alone with you

The time is right your perfume fills my head, the stars get red

And oh the night's so blue

And then I go and spoil it all, by saying something stupid

Frank Sinatra — Something Stupid

When economists who have no idea what they are talking about get published, it diminishes the entire profession. The gentleman I am picking on today simply has no concept of the underlying causes and motivations of real estate market participants. To start, I want to show one example of his lack of understanding with a paper he wrote about commercial real estate.

Was There a Commercial Real Estate Bubble?


A few economists have likened the commercial real estate market of the last 10 years to the housing cycle. In fact, the commercial and housing markets were fundamentally different.

As recently as last week (see also here), Paul Krugman claimed that the commercial real estate market followed a bubble much like that of the housing market, and thereby concluded that the housing bubble could not be blamed on anything unique to the housing sector.

Mr. Krugman observed that real estate prices went up, and then came down, in both the residential and nonresidential sectors. For example, he has presented the chart below comparing the Case-Shiller index for housing prices with a commercial real estate price index from Moody’s.

In Mr. Krugman’s view, both “bubbles” had some of the same determinants. For example, lenders were hungry for risk, and they fed their appetites by investing in a variety of assets, like houses and office buildings. Thus, he takes comfort in his observations that the two sectors had real estate prices that moved roughly together.

For the record, Paul Krugman is correct. The commercial real estate bubble was caused by the same stupid lending as the residential real estate bubble. There are differences between the two markets which is why their correlation is not perfect, but the severity of the price declines in both markets were a direct result of stupid lending.

I have long disagreed with his interpretation, arguing instead that the housing and commercial real estate cycles had very different determinants. Housing boomed for residential-specific reasons, such as technical change biased toward homes, home-buyer optimism or lax home-mortgage standards.

The housing price boom led to a jump in home construction, which pulled resources (workers, materials and land) away from the commercial sector. Commercial real estate construction was low during the housing boom and began to recover only after 2005, once housing busted and construction workers and other resources were free to work on commercial projects. (The commercial recovery in 2009, however, was limited by conditions in the wider economy, like the fact that fewer businesses were hiring and therefore in less need of space in which their employees could work).

Here is an example of the author not knowing what he is talking about. Commercial and residential construction workers are not interchangeable. In fact, very few commercial construction personnel at any skill level go back and forth between the two. The skills required to build commercial construction differ from those required in residential. The office work is also very different. A developer of commercial projects is not going to hire a residential specialist to analyze the deal, supervise the construction, or perform other tasks related to the project.

If Mr. Krugman were right, construction activity should have boomed (and then busted) at more or less the same time in housing as in commercial real estate.

Why? He is making a bad, straw-man argument here, and simultaneously displaying his lack of understanding of the relationship between commercial and residential development. Commercial spending always lags behind residential spending. Look at retail for example; if developers want to build a shopping center, they wait until there are sufficient customers living in an area before proceeding. Commercial developers will tell you that rooftops drive demand. Residential development must come first and commercial follows. What is the first type of construction you see in the hinterlands? Housing. Once there is enough housing, retail and office follow. That is how development works.

Thus, one way to distinguish my hypothesis from Mr. Krugman’s is to look at construction activity separately by sector. The chart below displays monthly private residential and nonresidential construction spending from January 2000 to October 2009.

Of course, housing construction spending increased dramatically during the housing boom (2002 through 2006), and collapsed during the bust.

The charts he calls evidence of his hypothesis are actually evidence of his ignorance. The lag between residential and commercial can be traced back through many cycles. Any good economist would know that.

Apparently, Mr. Mulligan is trying to position himself as an outsider. From his writing, it appears he believes in the efficient markets hypothesis. That may explain much of his ignorant drivel.

Was It Really a Bubble?

May 5, 2010

Casey B. Mulligan is an economics professor at the University of Chicago.

Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago. This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.

Whoa. Wait a minute. A hidden erroneous assumption is in play here, and it undermines everything that follows. The foundation of this professor's argument is built on a false premise: the housing market has not bottomed. What you are about to read from Mr. Mulligan is based entirely on the assumption that house prices have bottomed, and worse yet, they have bottomed because prices have found support in market fundamentals. Both assumptions are wrong.

Inflation-adjusted housing prices and housing construction boomed from 2000 to 2006 and crashed thereafter. Commentators ranging from President Obama to Federal Reserve Chairman Ben S. Bernanke have described that cycle as a “bubble,” by which they mean that, at least in hindsight, the housing price boom was divorced from market fundamentals.

But maybe there was a good, rational reason for housing prices to increase over the last decade.

Let’s consider first what it means to believe that the spike in prices since the late 1990s was unwarranted — the so-called “bubble theory.”

Do you read a subtle condescension in his statement? I do. Perhaps I should refer to his so-called market bottom and so-called market fundamentals.

According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest.

Now that the bubble is behind us, people today should be no more willing to pay to own a house than they were in the late 1990s. (It’s true that population has grown since the 1990s, but population growth is nothing new and should not by itself increase real housing prices. Don’t forget that greater population also means more people available to do construction work.)

Eureka! He openly states his false assumption. The bubble is not behind us. Notice how he slipped it in as an unimportant preposition at the beginning of his argument as if the idea were accepted fact.

Bubble theory also implies that the technology for building homes and providing housing is not very different today from what it was in the late 1990s, and so you couldn’t blame the spike in prices on changing building technologies either. In other words, the bubble theory blames rise in prices on animal spirits, and not on any “legitimate” increase in building costs.

Meanwhile, bubble theorists also say that today America is “overbuilt” as a result of the bubble. With too much housing and no additional demand to be supported by market fundamentals, real housing prices should, according to the bubble theory, be lower today than they were in the late 1990s.

Wrong again. Inflation adjusted prices may or may not be lower when we really do reach the bottom, mostly due to financing terms and interest rates. If we had interest rates to match 1997, we would almost certainly bottom at prices at or below inflation adjusted levels of the late 1990s. Further, as someone who writes frequently about bubble theory, I haven't read any prominent bubble theorists make the assertion he says we do. In short, he is setting up the straw man.

A reasonable estimate, based on bubble theory, is that housing inventory is about 3 or 4 percent above what it would have been without the bubble and without the temptation to overbuild. In order to make these excess homes worth buying, prices need to fall further; economists would generally estimate that an extra 1 percentage point of housing inventory requires a matching 1 percentage point decline in price to make those excess homes look like a good deal.

So if we believe we had 3 or 4 percent more homes than we really needed last year, based on market fundamentals, that means that housing prices would eventually be about 3 or 4 percent below what they were before the bubble, to make those extra houses worth purchasing.

What economists have made such a correlation? I haven't read it. Of course, I don't spend my days reading drivel from economists, but I see no reason such a correlation would hold true. Prices need to fall until they are affordable. Once they are affordable, lowering price further would stimulate some additional demand, but it would take prices to drop to cashflow investor levels to really bring in money to mop up the mess. The linear relationship he describes isn't reality. Again, the remainder of his analysis is built on a straw man argument.

I’ve plotted this path out in the blue series in the chart below. It shows the housing price path one might have expected for 2009 and beyond if housing demand had returned to about where it was before the housing boom.

A note: Here housing prices are measured according to the Census Bureau index, which dates back far enough to observe previous cycles, and adjusted for inflation using the Bureau of Economic Analysis’s price index for personal consumption expenditures. The index is normalized so that it is 100 in 1994-97. In other words, a value of “100” for today would mean that inflation-adjusted new home prices were no different today than they were then.

According to the blue series, created using the “bubble theory” premises, real housing prices would be 3 or 4 percent lower now than they were before the housing boom (a value of about 97 for the index) if in fact housing demand were no different, because the “overbuilt” inventory of houses is supposedly 3 or 4 percent greater now than it was then.

This path approximates what some bubble theorists were expecting last year. For example, during the first half of 2009 Professor Robert Shiller (the same Shiller from the Case-Shiller housing price index) forecast that housing prices would fall further.

Yes, the path he outlines in blue is what would have happened if we didn't have massive government intervention including a plethora of bailouts, tax incentives, loan modification programs, and direct purchase of mortgage debt by the Federal Reserve. Do those measures strike you as "market fundamentals" that put a durable floor under pricing?

Of course, our population continues to grow, so the housing boom’s excess inventory will not last forever as new households form. But this process takes a while, which is why the blue series in the chart shows real housing prices returning to normal (a value of 100 for the index) only slowly after 2010.

Now let’s turn to the black series in the figure, which shows actual housing prices.

Contrary to the blue “bubble theory” series, actual housing prices have risen slightly over the last four quarters, so far remaining well above what they were before the housing boom. Although real housing prices are sharply off their highs, today they appear high by historical standards.

That is accurate. It is also the best evidence of the fact that the housing bubble has not deflated yet.

Bubble theorists might say that some unfounded optimism lingers in the market place, and that Professor Shiller was just a little early in predicting that real housing prices would soon be significantly below what they are now.

But another interpretation is that a large fraction of the housing price boom was justified by fundamentals (and next week I’ll consider some of the specific fundamentals that may have permanently increased housing demand in the 2000s). If so, we are probably asking too much of the Federal Reserve and other regulators to accurately disentangle bubbles from fundamentals the next time that asset prices rise.

I am eagerly awaiting Mr. Mulligan's next installment. It will be difficult to come up with a worse analysis than the one he provided in this article, but I have faith in his inability to grasp the problem or to correctly identify market funamentals. But since I am a nice guy, I will give him forewarning on what market fundamentals are.

  1. Income. People make housing payments from their wage income. If prices rise faster or slower than incomes, it is due to the influence of other market fundamentals, but wage income is the basis.
  2. Debt-to-Income Ratio. When lenders calculate how much they will loan someone based on their income, they apply a debt-to-income ratio to calculate the affordable monthly payment. Experience with lenders has shown that DTIs in excess of 32% are prone to very high default rates. Do you remember the first round of loan modifications done at 38%? All of those people redefaulted. The latest round is down to 31% because lenders know this level to be high but stable.
  3. Amortization method. Loans must amortize and be paid off over time. Option ARMs were among the first casualties of the credit crunch, and interest-only ARMs were finally discontinued in 2010. These are Ponzi loans, and they are largely responsible for the bubble.
  4. Interest Rates. Once lenders know a monthly payment, they apply a market interest rate to calculate the maximum loan balance they are willing to loan. As we all know, interest rates are at historic lows, and we are just on the backside of an unprecedented Federal Reserve program to lower mortgage interest rates. Back in the late 90s, interest rates were 7% to 8%. Now they are at 5%. Is that a change based on fundamentals?

I consider the above list to be fundamentals because each of these variables directly impacts the individual borrower, and it is the collective action of individual borrowers that creates a market. Prices rise to the level of aggregate loan balances. I also favor these as fundamentals because they are measurable. This isn't a vague idea about animal spirits that cannot be measured.

Irrational exuberance is certainly real, and as a motivator, it did cause the housing bubble. Fortunately, rather than being an abstract and unmeasurable factor, the results of irrational exuberance show up in debt-to-income ratios and amortization methods. Borrowers are stupid, and they will borrow money under very unfavorable terms. For evidence of that look at pay-day loans. Lenders are supposed to control borrower's animal spirits. When they don't, we inflate massive housing bubbles.

I could see Mr. Mulligan's next installment being full of fancy macroeconomic charts and graphs for what he will call fundamentals. Things like GDP growth, household formation, vacancy rates or any of a number of interesting but completely useless housing market indicators. An argument can be made for nearly any measure of economic activity as being a housing market fundamental because most of this will in some way impact the real fundamentals I outlined above.

Mr. Mulligan needs to take a mulligan, this study is a complete do over.

Pretending in style

Sometimes I wonder what borrowers had to do to induce lenders to give them so much money. It must be a convincing story when lenders shell out a couple of million dollars.

Based on the HELOC abuse, anyone could have temporarily made the payments from the borrowed money. It wasn't very difficult to live like a Ponzi in these high-end properties. It didn't require any wage income.

  • Today's featured property was purchased on 11/22/2005 for $2,514,000. The owners used a $1,500,000 first mortgage and a $762,207 HELOC, and a $251,793 down payment.
  • On 8/23/2006, the owners refinanced with a $2,240,000 first mortgage and obtained a $250,000 HELOC. At that point, they had withdrawn all but $24,000 of their down payment.
  • On 2/13/2007, Countrywide gave them a $500,000 HELOC.
  • Total property debt is $2,740,000.
  • Total mortgage equity withdrawal is $477,793.
  • Total squatting time is at least 8 months.

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/08/2010

Document Type: Notice of Default

It will be very tempting to buy a really high-end property with liar loan next time around. Once your in a property like this one, they won't throw you out because lenders are loathe to take a loss. Plus, when a high-end property appreciates, a 10% gain is much larger in absolute dollars than a normal property. Therefore, the more you extend yourself, the more HELOC money you get to spend.

The extra spending money and squatting in luxury are powerful inducements to do something totally financially irresponsible.

We are all learning the lessons of the Great Housing Bubble.

Irvine Home Address … 27 STARVIEW Irvine, CA 92603

Resale Home Price … $2,999,000

Home Purchase Price … $2,514,000

Home Purchase Date …. 11/22/2005

Net Gain (Loss) ………. $305,060

Percent Change ………. 19.3%

Annual Appreciation … 3.9%

Cost of Ownership


$2,999,000 ………. Asking Price

$599,800 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$2,399,200 ………. 30-Year Mortgage

$625,930 ………. Income Requirement

$12,982 ………. Monthly Mortgage Payment

$2599 ………. Property Tax

$567 ………. Special Taxes and Levies (Mello Roos)

$250 ………. Homeowners Insurance

$420 ………. Homeowners Association Fees


$16,818 ………. Monthly Cash Outlays

-$1911 ………. Tax Savings (% of Interest and Property Tax)

-$2846 ………. Equity Hidden in Payment

$1190 ………. Lost Income to Down Payment (net of taxes)

$375 ………. Maintenance and Replacement Reserves


$13,626 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$29,990 ………. Furnishing and Move In @1%

$29,990 ………. Closing Costs @1%

$23,992 ………… Interest Points @1% of Loan

$599,800 ………. Down Payment


$683,772 ………. Total Cash Costs

$208,800 ………… Emergency Cash Reserves


$892,572 ………. Total Savings Needed

Property Details for 27 STARVIEW Irvine, CA 92603


Beds: 5

Baths: 5 full 1 part baths

Home size: 6,070 sq ft

($494 / sq ft)

Lot Size: 13,429 sq ft

Year Built: 2005

Days on Market: 262

MLS Number: S586104

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Lacm


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

This property is in backup or contingent offer status.

PRICE FOR QUICK SALE!!!!!!Spectacular home!!! gorgeous and functional floorplan on grand scale, oversized living room and dinnig room bring back the grace of entertaining, luxurious executive home upgraded with wood floor through-out first floor, granite counters, marble baths,lots of built-ins,wrought iron staircase, 3 indoor fireplaces, exotic outdoor living with cooking island, beautiful garden, fireplace, patio,gazebo,foutains and much more!!!

dinnig? foutains?

This asking price is WTF too high, but we are to believe it is priced for quick sale? Give me a break. The agent is very excited as evidenced by the numerous exclamation points.

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,

Irvine Renter

40 thoughts on “Clueless Academic Wonders, "Was It Really a Bubble?

  1. winstongator

    I would add another ‘fundamental’ – the elimination of ‘owner-occupancy’ requirements for most residential mortgages. Allowing 5-10% DP’s, low-interest rates, and I/O or pick-a-payment amortization schemes makes things ripe for speculation. The role of 2nd home buyers, while less in Irvine, cannot be ignored in the bubbliest locales. 85% of condos in Miami sold in 2005 or 2006 went to people who didn’t plan to live there, but were investments. 1/3 of all home sales nationwide that same year were ‘investment properties’. How many were bought with ‘owner occupant’ mortgages?

    I think this guy gets voice in the NYT because they want a Chicago market fundamentalist to parry any criticisms of a liberal bias.

  2. winstongator

    Great post – there was way more actual thought in your single post that doesn’t have the backing of the Times name than Mulligan’s two articles combined.

    Cut him a little slack – Geithner didn’t even realize prices had fallen when he listed his house.

  3. Bill Fulton

    The four market fundamentals listed above are spot on. However, I also believe that as we move forward, the tax rates will depress home values in the same way that interest rates do.

  4. Geotpf

    I disagree strongly with the statement that prices have not bottomed. Prices have, in fact, bottomed in almost every area. (Look at any pricing chart for proof.) Now, there might be a double dip once things like the tax credits are withdrawn and if more REOs are released to the market. But there most certainly has been a bottom and a recovery. It’s possible that the recovery is false and temporary-but it’s also possible that it is real and permanent. Even if it is false, there certainly was a bottom, if not the bottom.

    1. IrvineRenter

      You really need to research what a bear rally is. I can show you many charts of many different markets that put in temporary bottoms only to reach new lows later. A temporary bottom is the beginning of a bear rally, not a permanent bottom in pricing.

      In your market, prices may have reached a bottom. It certainly has reached a temporary bottom because the banks are not foreclosing on properties and selling them. Riverside County has more than 100,000 properties where the owners are not making payments. How that situation is resolved will determine if the bottom is temporary or permanent. It has little to do with fundamentals.

      1. Planet Reality

        A bear market rally can change where a bottom ends up, or put another way extend and pretend impacts market pricing for a long time changing the nominal bottom.

        We are at fundamental DTI and rental parity, now it’s just a matter of what happens to interest rates and incomes for buyers. If interest rates stay pretty flat we may have been at the bottom last year. If interest rates get juiced down, then 2009 was definitely the bottom. Either way I don’t see prices changing much over the next 5 years.

        I expect monthly payments on your standard 20% down mortgage will go up even if prices fall.

        1. IrvineRenter

          I have found myself agreeing with your comments over the last few days. Scary….

          1. Planet Reality

            When people disagree with me it’s usually because they are reading into some imagined agenda. My comments are usually pretty bland, but vague enough to sometimes initiate a visceral response. It’s all in good fun, everyone here agrees and is here for the distraction.

            I hope to help people understand that a 5% total increase in price in Irvine over the next 5 years is a bearish view.

          2. Eat that!

            Indeed 5% is bearish. But if you’re right then what’s the rush? Why not just see what happens? Unfortunately, our society and economy are geared more toward a quick buck and scams than working and saving. If fact we encourage everyone in our society to get out there and waste money and take uneducated risks. And now that we’ve had 3 decades of this type of financial mental is everyone suppose to believe that we’ve had this collective ‘come to Jesus’ moment about being frugal. I say, emphatically, no. We are destined to destroy ourselves through are hyperconsumptive desires.

          3. matt138

            Econ 101 (not the harvard version): Interest rate is the price of borrowing money. Prices are dictated by supply and demand curve. We (as a nation) have borrowed all of our money and are now borrowing the rest of the world’s money. Much of this money is being spent unproductively. I feel we will all be shocked by how high interest rates ultimately go. This will put massive downward pressure on house prices, not just from a mortgage payment standpoint, but from a “consumer credit driven economy” standpoint.

            The leaders are hell-bent on inflating their way out of this mess and this makes prices very hard to predict. That being said, my boss isn’t exactly ready to give everyone pay raises next year, is yours?

      2. Geotpf

        I agree with this. I think the biggest factor here is the speed at which REOs are released in the marketplace. If they continue to be released very slowly, or even a little bit faster than now, prices will not fall further but will continue to recover slightly or be stable. If somebody (BoA?) really does push the panic button and flood the market all at once, prices will fall significantly. But that hasn’t happened yet. Until it does (or does not, with them continuing to be foreclosed and released as REOs slowly), there’s no way to know whether this is a false bear rally or a true recovery.

          1. Geotpf

            IMHO, there is probably a 50% chance that prices have bottomed and will not again fall below that bottom in non-inflation adjusted dollars. That is a “true recovery”.

            Of course, that also means there is a 50% chance that prices will fall further. Yes, I’m acting like the weatherman who says there’s a 50% chance of rain tommorow, but everybody here seems to be saying there’s a 100% chance of rain.

            If you are making the argument that it’s not a “true recovery” because the government is manipulating things, let me clue you in to a little secret-the government always manipulates the economy. Always has, always will. This is nothing new. In fact, I would argue the amount of government involvement in the economy today is less than it was from 1930-1980. Nixon instituted price controls. The government directly regulated airline prices and routes until the 1970’s. The maximum income tax rate for much of that period was 80-90%. The government nationalized almost every industry during World War II.

          2. chage

            isn’t it too simplistic to base your argument in such a general statement. it’s not whether the government have manipulated the economy but manipulated what and to what degree. when was last time the government practically nationalized housing mortgage industry. may be during the great depression? i don’t see how fixing airline price have anything to do with housing market.

          3. matt138

            Point taken. “True recovery” would imply all gov/t props will stay right? I feel confident saying 85% chance of rain.

  5. christian

    “Here is an example of the author not knowing what he is talking about. Commercial and residential construction workers are not interchangeable. In fact, very few commercial construction personnel at any skill level go back and forth between the two. The skills required to build commercial construction differ from those required in residential. The office work is also very different. A developer of commercial projects is not going to hire a residential specialist to analyze the deal, supervise the construction, or perform other tasks related to the project.”

    The two types of construction are not very interchangeable, yes but during the boom we had everyone working on housing Residential and Commercial. L.A., San Diego and San Francisco had commercial projects in the form of historic renovations of office buildings to residential lofts and condo high rise building all these projects were built with commercial construction resources.

    1. es

      Great catch. My girlfriend is in commercial construction management- her skills are completely irrelevant when it comes to residential stuff. Luckily she does retrofits of existing properties for new tenants and not new building construction. Doubt there’s any job security there.

    2. newbie2008

      The construction “trades people” especially union will inter change between commerical and residential work. They much prefer commerical because of the pay and duration of the job. Managment interchange is another kettle of fish.

      In commerical RE, can the business make money in that location? Downtown may have very little houses, but it has lots of foot traffic and other business. Look at the local hospital/medical parks — not much houses within walking distance, but worth the drive if your ill.

  6. Sac_Boomer

    I think a major factor is the ability to purchase without a down payment. This has drawn forward the supply of buyers into upside down loans, effectively eliminating their participation for years to come.The supply of eager savers ready to plop down their savings on a falling asset are reasonably few, leaving cash buyers at rental parity or investors at cash flow fundamentals.

    “According to the blue series, created using the “bubble theory” premises, real housing prices would be 3 or 4 percent lower now than they were before the housing boom (a value of about 97 for the index) if in fact housing demand were no different, because the “overbuilt” inventory of houses is supposedly 3 or 4 percent greater now than it was then.”

    From where did he pull his one to one correlation between percent overbuilt and housing prices? That is about as non-linear as I can imagine. Once there is an over supply, prices fall back in an accelerating fashion. Don’t forget the dissipated supply of buyers. Today is a furlough Friday in Sacramento. There will be a few thousand less cars on the road. The freeway will appear empty.Where’s my one to one correlation?

    1. es

      I make this point at least 3x a week on this comment board: Imagine if some congressman or senator introduced legislation requiring at least 10% DP on a house and banned “stated income” loans to at least slow the inflation of the bubble. The clamor would have been outrageous. COMMUNISTS! FASCISTS! SOCIALISTS! THEY’RE TAKING OUR PROPERTY! THEY’LL COME FOR OUR GUNS NEXT!

      One person I know recently told me… and I quote… “FEMA taxed me out of buying my house.” HUH?

      Turns out he was buying a house in Stockton for $87K (one that was recently listed in the 400s). His mortgage broker required him to buy flood insurance, because, you know, Stockton is a flood plain. His mortgage broker told him FEMA offers low cost flood insurance (or subsidies, I’m not sure). He couldn’t afford the extra $100/ month or so in flood insurance, yet he was about to BUY REAL PROPERTY with basically zero income headroom. So those steps in logic turned into “FEMA taxed me out of buying my house.” America, this is you.

      So *just imagine* the uproar if Congress would have moved to stop inflation of the bubble…

      1. matt138

        Had government not socialized the mortgage market we would not have to hear you make this mute point blaming “those opposed to more government” for the housing bubble.

        Most wanted the party to keep going because they felt “this economy is humming”, so the politicians let it.

        We don’t need legislation to force prudence. We need free market consequence.

        1. newbie2008

          The too big to fail will likely continue to get a pass on the consequences of their mistakes and the consequences of the market. The profits will still be privatized.

          The smaller business who don’t have the hacks in their back pocket will continue to reep their rewards and pay for their mistakes.

          This has been happening all my lifetime, my father’s life time, his father’s lifethime…. I just have to figure how to join the club or be able to profit from my right decisions.

          1. matt138

            We can profit definitely. But we can also vote for people who have the guts to take the pass away. And not vote for people who don’t.

            You must agree that this current path is destroying the economy and if more people become educated they will see the connection and sooner or later get fed up. It will have to get pretty bad for that to actually happen.

            the internet is our greatest asset. the trick is sounding educated and not insane.

          2. newbie2008

            FDR used social security to appease the middle class and poor. Best to buy them off with a little, while giving industrial and bankerster backers almost unlimited funds through sweetheart deals and loans. Backers of the opposition were given criminal investigations, black balling on govt. contracts, villifying in the press. This is just the way those in power remain in power. Just too bad when the bill comes due.

            Very few US politicians comes out of office lossing money. I only know of one or two of them.

  7. theyenguy

    You relate: Sometimes I wonder what borrowers had to do to induce lenders to give them so much money. It must be a convincing story when lenders shell out a couple of million dollars. Based on the HELOC abuse, anyone could have temporarily made the payments from the borrowed money. It wasn’t very difficult to live like a Ponzi in these high-end properties. It didn’t require any wage income.

    Honestly, before I started to read your blog about two months ago, I never knew that HELOC lending, Alt-A lending and Option Arm lending, enabled one to live a ponzi lifesytle.

    I’ve been naive and ignorant most of my life; not good, because one gets clobbered in many ways for being a simpleton.

    During my reading I read of one migrant worker who obtained a stated income home loan from Washington Mutual for $750,000 in Riverside County. The greed of commissions offerred at WaMu, Countryside, Wachovia, Citi, Bank of America, Lehaman and others has destroyed our nation beyond repair.

    The only outcome of toxic lending and HELOC abuse will be a sharp evaporation of credit liquidity much like what happened yesterday May 6, 2010 where there was a violent exit from yen carry trades, including but not limited to the Aussie, the Loonie, the Peso, the Rand, the Ruble, and the Rupe, as investors bought the Yen, FXY, which rose a spectacular 3.8% to close at 109.77. The Euro, FXE, fell to 125.96. The US Dollar, $USD, rose to a 14 month high to close at 84.85. Currency traders sought safety, if it be called that, in the US Dollar.

    This one day violent extinguishment of carry trades was a repudiation of investment risk. The Aussie Yen carry trade, FXA:FXY, fell to its 250 day moving averge. In one day, currency carry trade investment fell back seven months, to the early October level when gold broke out. This extinguishment of carry trades represents a “vaporization of investment liquidity”, and places one’s investment capital in brokerage accounts and money market accounts at risk. Then interest rates will jump and home loans will not be available; one will lease or rent not buy; property values will fall.

    Perhaps one might enjoy the financial reading on my linked blog article.

    I think of all the things I could have experienced had I had the insight to obtain one of those stated income loans and then simply walked away. Would it have been wrong to do so? Well many, many, many Americans have and are doing just that.

    1. matt138

      Greed is not the problem. Stop blaming greed. Lack of fear is the problem. Greed will always exist. People work and invest because of it. Lack of Fear and lack of consequence is where the problem lies.

  8. John Schussler

    “Ezra Solomon (1920-2002) was a professor of economics at Stanford University. As a member of the President Nixon’s Council of Economic Advisors (1971-1973), Solomon contributed to the change in monetary policy that saw the United States end the gold standard of U.S. currency. By at least 1985, Solomon was credited with this quote: “The only function of economic forecasting is to make astrology look respectable.” By the 2000s, however, the quote was misattributed to economist John Kenneth Galbraith (1908-2006).”

  9. alan

    15 years ago I interviewed for a position at medical clinic at Stanford U. The physicians were all on salary and they showed me a paper they published showing how primary care could never make any money. Then it turned out that Stanford owned the building these turkeys were practicing out of and was billing the primary cares rent at more than 5 x what I was paying in So Cal per sq ft. I told them of course you can’t make any money at those rents. I thought they were complete idiots. Of course, they didn’t hire me…..

    Just goes to show that academics anymore is more about getting your name in print than actually doing any real research.

  10. John


    Why is this house a short sale (according to Redfin) when Total property debt is $2,740,000 and listing price is $3 mil.?

    1. IrvineRenter

      I was wondering the same.

      It is possible that the $500K HELOC was a third mortgage and that the $250K HELOC that preceded it is still there. Ordinarily, when you see increasing HELOCs, the previous ones are absorbed. If the $500K is indeed a third mortgage, then the total property debt is almost $3M.

      It may also be that the seller knows they have very little negotiating room before it is a short sale and is preemptively telling would-be buyers that a low offer requires short-sale approval.

  11. Flyovercountry

    I’d love to see a followup on this property in a month. If it is in “backup offer” status, that means that there is an accepted offer, right?

    If that deal goes through, I’d like to know what it is… because at 19% over the 2005 price, that is a real WTF asking price. That would essentially be what the property would have gone for at the peak, isn’t it?

    1. Geotpf

      19% above 2005 prices seems crazy, but Redfin’s “Nearby Similar Sales” says it’s worth $3,085,624, even more than asking ($2.999k), so they might just get it, or close to it.

  12. John

    Everyday when IR profiles a home that still lists with WTF price of the bubble years, particularly a high end home, and there’s a back up offer, I always wonder

    1. who are these buyers?

    2. what are they thinking? what went through their mind when they buy a house with such an inflated price?

    3. Do they know they’re buying with inflated price and have a great chance of being the bag holder?

    IMO, for someone to buy at that price and don’t care about inflated price, along with heavy tax, mello roos, HOA, insurance…, they must be FILTHY rich to not care about throwing hundreds of thousands away (I’m talking about someone with net worth of hundreds of million)

    But for some reason, I doubt it these people are that rich. I have a feeling that these are well to do folks but no where near the filthy rich (probably income of around $500,000/yr). If my gut feeling is right, then I can’t imagine the ignorance, the risks, the stomach for leverage these people have.

    Sorry everyone for my rambling, but just need to vent my frustration 🙂

    1. IrvineRenter


      I read this comment after spending part of the afternoon feeling that same amazement and frustration. I have a post coming out tomorrow where a high-end home is asking well above peak pricing. It’s as if the bubble never touched the high end. I don’t see how that lasts.

      1. Joe R

        I’ve been saying for quite a while in here that there will be a different profile for high end property than for low end property. It’s like that Bugatti that just sold for umpteen million dollars. Really rich people from around the world want property in high end California neighborhoods and they will pay for it regardless of the economic viability of the price. It is a form of money laundering. Irvine has a few neighborhoods with this international reputation, but there are other areas that may have a greater cachet.

        The few wannabes in the rich areas with HELOCs or liar loans are just providing an opportunity for outsiders to get in at what seem like reasonable prices. Merely upper middle class areas won’t get this boost, and could fall a little more when programs to keep liar loaners and drastic situational income loss folks in their homes fail.

        But the fall will never match that in the working class areas due to deeper pockets of most residents.

  13. Soylent Green Is People

    Is it me, or do the front of house photo’s appear “shopped” a bit? At $2,999,999 and a short sale, they must be squeezed for cash and couldn’t pay for interior photos.

    My .02c

    Soylent Green Is People.

  14. newbie2008

    One of my UCB Econ. Professors said that the study’s sponsor know which well know economist to hire for the desired outcome. In other words, the models used and prejudices of the economists will drive the data to a forgone conclusion.

    Those in power promote a school of thought that support their positions and not likely the general welfare of the country.

    Plain common sense is boring to most people. They want to have their ears tickled with some new thought that’s only available to the select or avant guard.

  15. Apartments In Irvine

    Almost $500 per square foot? I don’t think so. It’s a nice home. But this is a wishing price. Knock off 50% and you’d be in business.

  16. spiderman

    Let me ask one question about Woodbury homes (new ones). What is it about Woodbury homes which make people pay so much premium for these houses? I can see certain advantages, such as the Woodbury houses being new and new ones such as Montecito having good floor plans, but paying IMO close to $100,000 plus higher price than Northwood homes and paying Mello Roos tax and higher HOA fees doesn’t make any sense to me. Besides, I think the location is more inconvenient. Am I missing something here? Would like to hear opinions from others.

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