IHB News 5-8-2010

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 be

Is always better than nothing

And nothing at all keeps sending him …

Doobie Brothers — What a Fool Believes

Real Estate Boom Phrases That Went Bust

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 A state-of-the-art kitchen can quickly become outdated, but a nice part of town can remain that way for generations.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.

Writer's Corner

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)

Obama Backs Financial Reform Except Where It's Needed Most (Mish)

President Obama's Cooper Union speech and the Goldman case (nypress.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)

Mortgage interest deduction not healthy for housing market (cnbc.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)

Mortgages Could Be Free If Interest Rates Were High Enough (PDF – Vince Loughnane) book cover

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)

Fed Privately Lobbies Senate to Kill Audit; What You Can Do! (Mish)

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)

Australia poised to lift interest rates for 3rd month running (smh.com.au)

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)

Plunge in state revenue dashes hopes of an easy budget fix (latimes.com)

Anger brews over tax appeal fee (lansner.freedomblogging.com)

Small bungalows made American dream of house ownership possible (latimes.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)

China State Media On Corruption and Cooling Off The Real Estate Market (sinocism.com)

The sky's the limit for Israel housing bubble (jpost.com)

Goldman Fraud Case: The Only Email Worth Reading (fool.com)

Sen. Dodd's financial bill ignores Fannie and Freddie (knoxnews.com)

Senate Financial Bill Misguided, Some Academics Say (dealbook.blogs.nytimes.com)

Foreclosure Bargains Hurt by Chinese Drywall (pbs.org)

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)

Foreclosure Woes Loom As Housing Stimulus Ends (npr.org)

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)

"Brown Chip" Investing; Bubble Pricing in Vancouver (Mish)

Empty new houses in Ireland should be sold at low price, not demolished (news.bbc.co.uk)

Australian Housing bubble to burst? History says 'yes' (smh.com.au)

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)

The trillion-dollar fraud: Why is the Fed so opposed to being audited? (salon.com)

Small-time counterfeiter had room overlooking BIG counterfeiter (latimes.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

Property Details for 66 FANLIGHT Irvine, CA 92620


Beds: 5

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

Tract: Wdmf


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.

15 thoughts on “IHB News 5-8-2010

  1. thrifty

    The coastal areas of Orange County thus far have been essentially immune to significant price drops. I’ve been following San Clemente for several years. Currently selling prices for 30 yr old condos and even older homes are double what they were in 1999-2000 in defiance of long term real estate appreciation rates roughly equaling inflation. Historical inflation norms would place current selling prices about 25% above 1999-2000 selling prices.
    I think it will take 2 more years (prime loan recasts will be finished) to get a reasonable idea of where the bottom is assuming no further artificial manipulation of prices by govt.
    Who are the current buyers? My guess is retirees who have cash or sellers who have owned long enough to make very large down payments. I would be surprised to find out that there is a significant number of people under 40 buying in San Clemente (or Irvine) who don’t fit into those categories.
    Undoubtedly, someone will note that their new neighbors are under 40. If they aren’t retired, age alone would be incomplete without also knowing how big their down payment was and whether they are getting continuing financial help with carrying costs. Again, significant numbers is the operative adjective.
    Meantime, rents are relatively cheap.
    Have a nice weekend!

    1. spiderman

      Yes, I also noticed that most of the current sellers who have owned their homes for long time are putting their homes on sale. And a few of the homes listed appear to be pretty reasonable in terms of rent price. For example, annual rent for 4 bedrooms in Irvine might be $3,000, which would make it $36,000 per year, and some 4 bedroom houses are listed at around $730K, so it seems to me if you buy (assuming you have the financial means) the house for around $700K, it’s not too bad.

      I noticed that some houses in Valencia, CA that go for $720K will go for around $900K in Irvine, which makes me think there must be some things that are considered to be “better” to most people who buy homes in Irvine than in Valencia. I did notice that weather was a little dryer and hotter in Valencia than Irvine, but Valencia homes were newer. If I had to drive to Los Angeles frequently, I would live in Valencia. What do you think?

      1. thrifty

        I can’t comment cogently on Valencia vs Irvine. The summer temps run about 12 degrees hotter and can get into triple digits. Irvine rarely seems to get over 90. Both have evening temps in the low 60s so there is respite from heat in either place. I’ve driven to Pasadena from Palm Springs several times during morning traffic on the 210. If you don’t get past the 605 eastbound by 6 a.m. your dead in the water. The 10 is even worse. Can’t comment on Irvine to L.A. traffic. In the mid 70’s my accountant was in Encino and lived 5 minutes from work. He thought he had died and gone to heaven having done away with the morning commute – and thought the home price premium at that time was a small price to pay.
        As for rents vs buying, the rules-of-thumb seem to vary but a multiplication factor of about 150-185 x mo. rent seems reasonable. At $3000/mo. rent, price should be $450K-555K.
        Any higher would make renting the better choice.

        1. ElvisInMiami

          I follow the rule of thumb that I pay no more than $1000/month in rent for $200K in value. If I pay less that is great, but I am realistic to know what real fees are required on the backend even if the property is 100% paid off.

          I guess the real question comes when there is a disagreement on the property value. Zillow gets a good ballpark number.

  2. OrangeRenter



    It’s long, but worth the read. I wish I had Hollywood connections as this would make a fantastic movie (think: Resevior Dogs or The Usual Suspects, etc.).

    I think this story captures EVERYTHING about the 00’s perfectly – including all the players from the housewife right on up to the top banks – and would be looked back on by future generations that want to know WTF happened… Damn, I wish I knew how to write a $creenplay.

    1. OrangeRenter

      Oh, and if you can read this story and favor ANY of the “bailouts”, you are a moron 🙂

    2. Laura Louzader

      Orangerenter, Thanks for linking this unbelievable story. Would it be that the great James M. Cain were alive to have witnessed the past twenty years- he would have grist for another dozen spectacular Morality Play of the sort he was so gifted at writing. This reads like one of his novels, except that the characters here lived yet have not learned their lessons, and even a genius like Cain couldn’t have written a better morality play than this one,one that more beautifully illustrates the consequences of the lapses in morality, responsibility, and ordinary good judgment that made the credit rampage of the noughties possible.

      The only things missing are the collapse of the people at the top of the financial system who drove it all and profited from it the most. They, unfortunately, are still living in their $80M mansions in the Hamptons and braying about doing “God’s Work”. When these criminals are at last arraigned for their crimes and are forced to live in flophouse poverty, and are considering suicide, then the morality play will be complete.

  3. newbie2008

    From the loan officer’s perspective:
    Case situation is loaning the money with nothing down, no chance of borrower paying back.
    Authorize or Don’t Authorize the loan

    Don’t authorize the loan:
    1. Do get the 0.5% bonus/ commission
    2. Fail to reach target (boss angry and year end bonus not met)
    3. Client is mad, boss is mad and both log complaints.
    4. Bank makes record profits, stock goes up, exec. and analyst are giddy with $^$.
    5. Save the bank money in the long run but get fired.
    6. GS can’t make money and govt is mad.

    Authorize loan:
    1. Get the 0.5 % bonus/commission
    2. Surpass target and get big bonus
    3. Client and boss are happy.
    4. Bank may loss in the long run, but house is sold so loan will not be bad or bad loan is passed on to the taxpayer.
    5. I might be laid off, when SHTF, but that’s better than being fired.
    6. GS can short while tell others how great the market is and get another round of $$.

    The people involved all have more reasons to make bad loans than to deny the loan.
    Zero down was better that 20% for the borrowers. Just do the math. For the taxpayers, it a whole lot different.

    Lesson, the bigger you are the less personal negative consequences of bad business decisions — the middle and lower class pays. It’s creating a situation the Marx/Lenin wanted for their revolution and CP state led terrorisms.

    When is commercial RE going to collapse or is the overall rents covering the interest payments and expenses less depreciation?

  4. Joe R


    I’m not sure that this neighborhood qualifies as a Super Rich or even merely Rich neighborhood. If they can get this price, considering the current lending climate, maybe it does qualify.

  5. GrewUpInIrvine

    Hey, this is a bit off topic, but can this site consider taking a look at small business rents in Irvine? My favorite local pizza place (also in the same zip code as this 1.6m house) is apparently going out of business because Irvine Company rents are too high… which really makes me mad. As the name might suggest, I’ve lived in Irvine since the mid-80s, and it seems that very few “small businesses” last more than a couple of years. It would be really awesome if this site could do an in-depth discussion of “why” this happens… and maybe highlight a couple of businesses that have suffered…I mean, even in a recession, people buy pizza…so I am inclined to believe the rumors that outrageous rents are to blame…since Obamacare hasen’t got up and run off with our wallets just yet.

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