Apparently the high end of the market never declined in price. Today's featured property was purchased at the peak, but it has appreciated since then. WTF?
Irvine Home Address … 66 FANLIGHT Irvine, CA 92620
Resale Home Price …… $1,680,000
But what a fool believes he sees
No wise man has the power to reason away
What seems to beIs always better than nothing
And nothing at all keeps sending him …
Doobie Brothers — What a Fool Believes
The way we talk about real estate has changed dramatically in the last few years as the collective sentiment has shifted from euphoria to panic. No one would dare to say "the only way is up" or "the easy money is in flipping" anymore. Here are a few other phrases that once seemed just as true.
- "Location doesn't matter."
Housing was appreciating so rapidly in seemingly every market that some people thought that no matter where you bought, you'd soon make a fortune.
It's hard now to believe that anyone was promoting such a myth. After all, even people who claim to know nothing about real estate can rattle off the famous adage, "location, location, location." More than anything else, where a home is located determines its long-term value. A state-of-the-art kitchen can quickly become outdated, but a nice part of town can remain that way for generations.
Even some places that seemed like great locations turned out to be terrible bets. Stephen Smith reported in an American RadioWorks documentary that Las Vegas went from having job growth four times the national average and attracting 4,000 to 5,000 new residents a month to being dubbed "Foreclosure City."
- "You don't need a down payment."
Traditionally, the purpose of a down payment is to reduce the bank's lending risk. It shows that the borrower has enough self-discipline to save up 20% of the purchase price of a home.
More importantly, it means that the borrower is likely to keep making his mortgage payments even when times are tough because he has already put a lot of his own money into the house.
When banks started giving people mortgages that didn't require a down payment, buying a home started to feel more like leasing an apartment. Even owners with fixed-rate mortgages had little home equity since most of the mortgage payment for the first few years is interest.
When housing prices dropped, owners started sending jingle mail to their lenders. So what if they could still afford the monthly payments? It didn't make logical sense to keep paying for a depreciating asset that they owned so little of, borrowers reasoned. The sting of a credit score ruined by foreclosure wouldn't last as long as the burn of paying $500,000 for a $300,000 home.
The lack of down payment is also one reason why so many homeowners ended up underwater. If you purchase a home for $200,000 with no down payment and the market value of your house drops to $160,000, you can't sell the house because you can't pay off the mortgage (unless you have $40,000 sitting in the bank). If you purchase a home for $200,000 with a 20% down payment and the market value drops to $160,000, you still have the option to sell at a loss. Most people who didn't make down payments didn't have money in the bank, though, and when they needed to get out of their homes, they were forced into credit-damaging short sales and foreclosures instead of having the option to sell.
- "You can refinance before your rate goes up."
How many people who took out adjustable-rate mortgages (ARMs) heard this line? But since prices were headed nowhere but up, many people, especially subprime borrowers, assumed that in the three or five years before their ARMs reset, they would be able to improve their credit enough to qualify for a fixed-rate mortgage or see their home appreciate so much that they would have no trouble refinancing. Another reason many people took out ARMs and other risky mortgages was because they planned to flip the house and wanted to spend as little as possible on mortgage payments in the meantime.
When the real estate market crashed, people went underwater and couldn't sell their homes for enough to pay back the money they owed on the mortgage. Not only did they become trapped with the home, they became trapped with an unpredictable and generally much higher housing payment. Because of the poor economy, many of these people also lost their jobs, making it nearly impossible to pay the mortgage.
- "Just get a home-equity loan."
During the boom, money trees were suddenly sprouting up in people's backyards in the form of home equity loans (also known as second mortgages) and home equity lines of credit. Homeowners were able to take advantage of the appreciation in their home's value to borrow money – lots of money. Whatever you wanted to pay for, whether it was your kids' college educations or a new kitchen, the home equity loan was the answer.
Unfortunately, the collateral for these loans is the home itself. Even people who bought homes at reasonable prices and had affordable mortgage payments got sucked into the housing crisis when they borrowed money based on what would soon become unrealistic values for their homes. The loans they took out reduced the equity they had built up and increased their monthly payments. Many people who borrowed against their home equity ended up in the same position as people who took out bad mortgages or mortgages they couldn't really afford.
The Bottom Line
The next time we find ourselves in an asset bubble – and there will be a next time – perhaps the lessons we've learned from the housing crisis will cause us to consider what we hear and say a little more carefully.
I want to wish my wife and my mother a happy mother's day. Thank you for all you do.
Housing Bubble News from Patrick.net
Fri May 7 2010
Freddie Mac asks U.S. for $10 billion as losses pile up (washingtonpost.com)
Republicans seek vote on future of Fannie, Freddie (reuters.com)
Cronyism and gambling of financial sector (doctorhousingbubble.com)
Stock market trouble, Fed impotent (patrick.net)
Greece bailout just the beginning? (edition.cnn.com)
Land rezoned for 800,000 more houses than needed in Ireland (independent.ie)
As England Votes, Economic Clouds Hover (nytimes.com)
Bailed out homebuilders collect fat paychecks (reuters.com)
Big mystery is economists' failure to see housing bubble (interest.co.nz)
Was It Really a Bubble? (Economist still in denial!) (economix.blogs.nytimes.com)
ML-Implode Wins Reversal In Court Case; Re-Posts Censored Materials (blog.ml-implode.com)
Prior restraint (en.wikipedia.org)
Real Estate Rescue Scammers Tortured (laweekly.com)
Va. launching portable housing for aging relatives (washingtonpost.com)
Free Trial of the Landlord's Bargain Finder
Thu May 6 2010
You Would Have to Be Fool to Buy a House Now (theaffordablemortgagedepression.com)
Foreclosure is hitting well-off families, too (moremoney.blogs.money.cnn.com)
Drowning in mortgage debt (money.cnn.com)
US Government Now 96.5% of the Mortgage Market (smirkingchimp.com)
Rich farmers get most cash (news.yahoo.com)
What Washington Needs To Learn From Greece (finance.yahoo.com)
Budgets full of pain (theautomaticearth.blogspot.com)
Congress members bet on fall in stocks (finance.yahoo.com)
Oakland California Bankrupt (Mish)
Massive bank fraud still unacknowledged (dailybail.com)
Disorganization at Banks Causing Mistaken Foreclosures (propublica.org)
The Fed: Bubble spotting (economist.com)
Fed transcripts stoke debate on rates (goupstate.com)
Red flags over China's hot property market (business.asiaone.com)
Don't fall victim to a lying house seller Amy Hoak's House Economics (marketwatch.com)
Property Forum now includes street view, prices, rents (patrick.net)
Wed May 5 2010
Why aren't Fannie and Freddie in Reform Bill? (voices.washingtonpost.com)
Geithner: Housing Reform To Come AFTER Wealthy Get Their Money Out (imarketnews.com)
Ron Paul: I Think They're Going To Destroy The Dollar! (youtube.com)
Six Degrees of Leverage (old but good – makingsenseofmyworld)
Australia's Central Bank Signals Higher Bar for Rate Increases (bloomberg.com)
Mortgage Bond Spreads at Widest in Five Months (bloomberg.com)
Billionaire says "Vote For Me, I Shorted Your House" (blogs.wsj.com)
What if other businesses were like Goldman? (salon.com)
30,000 people a month can pay their mortgage but choose not to (doctorhousingbubble.com)
San Clemente takes back house seized in deed scheme (ocregister.com)
Volcker Says U.S. Unemployment Will Be Too High for Too Long (bloomberg.com)
Anger brews over tax appeal fee (lansner.freedomblogging.com)
Jay's Tiny House Tour (youtube.com)
Welcome to SurvivaBall: Promotional Program (survivaball.com)
Tue May 4 2010
Low Interest Rates – As Destructive as Usury? (old but good – makingsenseofmyworld)
Greenspan Wanted Housing-Bubble Dissent Kept Secret (huffingtonpost.com)
The bubble makers (network.nationalpost.com)
What the Federal Reserve should have done (washingtonpost.com)
Was There A Plan to Blow Up The Economy? (informationclearinghouse.info)
Despite 2009 restrictions, mortgage and appraisal fraud spiked (washingtonpost.com)
How Widespread Mortgage Fraud Toppled the U.S. Housing Market (realestatechannel.com)
Banks Buying Treasuries Instead Of Lending (bloomberg.com)
Housing market will implode, warns Edward Chancellor (perthnow.com.au)
House price implosion claims ridiculous, says Australian economist (heraldsun.com.au)
China May Crash in Next 9 to 12 Months, Faber Says (bloomberg.com)
The sky's the limit for Israel housing bubble (jpost.com)
Sen. Dodd's financial bill ignores Fannie and Freddie (knoxnews.com)
Senate Financial Bill Misguided, Some Academics Say (dealbook.blogs.nytimes.com)
Ethics of Real Estate Strategic Default (biggerpockets.com)
The Morality of Strategic Default (PDF – patrick.net)
Long-Awaited Baby Boomer Die-Off To Begin Soon, Experts Say (theonion.com)
Mon May 3 2010
Foreclosures mounting in wealthier neighborhoods (ocregister.com)
House Buyer Tax Credit Costly Failure (realestatechannel.com)
Tax dollars siphoned as credits go unchecked (azcentral.com)
Buy vs Rent Takedown (bayarearealestatetrends.com)
Buy Real Estate Now or Wait? (buygoldandsilversafely.com)
How financial reform could kill the ratings agency business (money.cnn.com)
The U.S. Needs Real Financial Reform (forbes.com)
Limits to Australia's housing bubble (anz.theoildrum.com)
America Needs to Get Over Its House Passion (theatlantic.com)
The hidden costs of houseownership (latimes.com)
Housebuyers still don't research mortgages (bizjournals.com)
Suddenly, bank account was gone (ajc.com)
Gosh, no one could have forseen the housing crash! (patrick.net)
Power, Transparency and Debt (theautomaticearth.blogspot.com)
Bought at the peak
This couple bought at the peak, yet their house has appreciated while the market has collapsed around them. If the greater fool steps up and buys this property, this family has hit the lottery.
Irvine Home Address … 66 FANLIGHT Irvine, CA 92620
Resale Home Price … $1,680,000
Home Purchase Price … $1,415,500
Home Purchase Date …. 9/6/2006
Net Gain (Loss) ………. $163,700
Percent Change ………. 18.7%
Annual Appreciation … 4.6%
Cost of Ownership
$1,680,000 ………. Asking Price
$336,000 ………. 20% Down Conventional
5.07% …………… Mortgage Interest Rate
$1,344,000 ………. 30-Year Mortgage
$350,638 ………. Income Requirement
$7,272 ………. Monthly Mortgage Payment
$1456 ………. Property Tax
$417 ………. Special Taxes and Levies (Mello Roos)
$140 ………. Homeowners Insurance
$105 ………. Homeowners Association Fees
$9,390 ………. Monthly Cash Outlays
-$1591 ………. Tax Savings (% of Interest and Property Tax)
-$1594 ………. Equity Hidden in Payment
$666 ………. Lost Income to Down Payment (net of taxes)
$210 ………. Maintenance and Replacement Reserves
$7,082 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$16,800 ………. Furnishing and Move In @1%
$16,800 ………. Closing Costs @1%
$13,440 ………… Interest Points @1% of Loan
$336,000 ………. Down Payment
$383,040 ………. Total Cash Costs
$108,500 ………… Emergency Cash Reserves
$491,540 ………. Total Savings Needed
Baths: 3 full 1 part baths
Home size: 3,541 sq ft
($474 / sq ft)
Lot Size: 5,007 sq ft
Year Built: 2006
Days on Market: 3
Listing Updated: 40304
MLS Number: S615843
Property Type: Single Family, Residential
Honey Stop the car!!! Fanastic quiet corner cul-de-sac location. Amazing custom fine cabinetry throughout. The attention to detail is unchallenged, from the curb to the back yard. This is a custom home with over $200,000 in upgrades. Gourmet stainless kitchen/42' cooktop with six gas burners/2 convection ovens microwave refrigerator, Island, Great Room/custom fireplace/built-in TV/surround sound. Formal Dining Room. One bedroom down/3/4 custom shower. Mastersuite, Jacuzzi tub mirrors/custom walk in closets/custom shower++3 bedrooms up. Two of the bedrooms have the jack & jill bathroom. One bedroom is a small master/private full bath/walk in closet ++loft/custom 3 station desk. Travertine,carpet,shutters, Baseboards, Crown Molding, canned lights, house is wired with Cat-5e Data wire, Low-E dual glazed windows, 75 gal. water heater, inside laundry room upstairs, finished garage, cabinets, energy efficient throughout, custom low maintance landscape, near award winning Woodbury elementary.