Monthly Archives: May 2010

Future House Prices – Part 3

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Price Decline Influences

There are a number of factors that will influence the timing and the depth of the price decline. There are a number of psychological factors and technical factors in play. [1] These include:

  • Smaller Debt-to-Income Ratios

  • Increasing Interest Rates and Tightening Credit

  • Higher Unemployment

  • Foreclosures

  • Decrease in Ownership Rates

  • Government Intervention

Smaller debt-to-income ratios impact the market because buyers tend to put a smaller percentage of income toward housing payments during price declines. Increasing interest rates decrease the amount borrowers can finance and use to bid on real estate, and tightening credit decreases the size of the borrower pool and thereby lowers demand. A deteriorating economy and higher rates of unemployment means there are fewer buyers with the income to purchase homes, and more homeowners are put in financial distress. High rates of financial distress caused by unemployment or the resetting of adjustable rate mortgages in a higher interest rate environment leads to more foreclosures. Large numbers of foreclosures adds to market inventories and works to push prices lower. The ultimate unknown factor is the meddling of the US Government in the financial markets. A bailout program for homeowners or lenders could radically alter the course of price movement.

Debt-to-Income Ratios

The debt-to-income ratio is a measure of how far buyers are “stretching” to buy real estate. Buyers have historically committed larger sums to purchase real estate when prices are rising in order to capture the appreciation of rising prices. Conversely, buyers have historically committed smaller and smaller percentages of their income toward buying real estate when prices are declining because there is little incentive to overpay. Some may look at this phenomenon as a passive effect of the rise and fall of prices, but since buying is a choice, the fluctuation in debt-to-income ratios is an active force on prices in the market.

Figure 55: National Mortgage Obligation Ratio, 1980-2007

This change in buyer behavior based on the trend in house prices is apparent in the national mortgage origination ratio. This statistic kept by the Federal Reserve Board is a measure of the total national mortgage debt service as a percentage of gross income. Since over 30% of houses in the United States are owned outright, this national percentage is far lower than the debt-to-income ratio of most individuals who have a mortgage. In the coastal bubble rally of the late 80s, people took on larger debts to buy homes, and when prices began their decline, people did not stretch to buy. If people had continued to put a high percentage of their income toward housing, prices would not have fallen as far as they did. The Great Housing Bubble witnessed a 30% increase in the average mortgage debt ratio on a national basis as people bought out of fear and greed in order not to be priced out forever and capture the capital gains of home price appreciation. If history repeats itself, this ratio will decline as house prices decline.

Table 12: National Payments and Prices at Various Debt-to-Income Levels

$ 244,900

National Median Home Price

$ 47,423

National Median Income

$ 3,952

Monthly Median Income

6.0%

Interest Rate

Payment

DTI Ratio

Value

+ 20%

$ 1,107

28.0%

$ 184,561

$ 230,701

$ 1,186

30.0%

$ 197,744

$ 247,180

$ 1,462

37.0%

$ 243,884

$ 304,855

Table 13: Irvine Payments and Prices at Various Debt-to-Income Levels

$ 722,928

Irvine Median Home Price

$ 83,891

Irvine Median Income

$ 6,991

Monthly Median Income

6.0%

Interest Rate

Payment

DTI Ratio

Value

+ 20%

$ 1,957

28.0%

$ 326,487

$ 408,109

$ 3,495

50.0%

$ 583,013

$ 728,766

$ 4,334

62.0%

$ 722,936

$ 903,670

House prices are sensitive to small changes in debt-to-income ratios when interest rates are very low as they were during the Great Housing Bubble. For instance, a 2% increase in the debt-to-income ratio can finance a loan that is 10% larger. Each borrower deciding to put a little more of their income toward housing can bid up prices very quickly. Prior to the bubble rally, lenders would limit DTIs to 28%, but during the bubble rally the only limit to DTIs were the degree to which borrowers were willing to exaggerate their income on their stated-income loan application. The debt-to-income ratio in Irvine, California, in 2007, was 64.4%. Even if it is assumed every buyer was putting 20% down (which they were not), the DTI ratio is 50.1%. This is gross income; as a percentage of take-home pay, the number is much higher. Most financed these sums through some combination of “liar loans” and negative amortization loan terms. Since these two “innovations” have likely been eliminated forever, bubble buyers who used these techniques are not going to be bought out by a future buyer using the same financing methods and thereby using the same debt-to-income ratio.

Higher Interest Rates

Another key factor impacting the fundamental value and thereby the bottom is interest rates. Interest rates went down during the price decline in the early 90s. That softened the impact and made the decline take somewhat longer. When interest rates are declining, bubbles take longer to deflate, and the bottom is at a somewhat higher price point. When interest rates are increasing, bubbles deflate faster, and the bottom is at a lower price point. Mortgage Interest rates during the Great Housing Bubble were at historic lows so a repeat of the steady decline in rates witnessed during the 90s is not very likely. Higher interest rates translate into diminished borrowing, lower prices and a lower bottom.

The lowering of the fed funds rate to 1% during the bubble prompted the lowering of mortgage interest rates to 5.8% by driving down the yield on the 10-year Treasury bill. [ii] The difference between the 10-year Treasury bill and mortgage interest rates is due primarily to the risk premium which was near historic lows during the Great Housing Bubble. As lenders and investors in Mortgage Backed Securities (MBS) lost money during the decline, they demanded higher risk premiums. This increased the spread between the 10-year Treasury bill yield and mortgage interest rates. The spreads for jumbo and subprime both became larger, and the funding for many exotic loan programs dried up.

Figure 56: Mortgage Interest Rates, 1972-2006

As the FED lowered interest rates, the increased risk premiums demanded by lenders and MBS buyers drove up mortgage interest rates along with the heightened inflation expectation the lower FED funds rate caused during the cycle. Unless the FED wants to start paying people to borrow by lowering rates below 0%, base rates cannot go much lower. If all three parameters that make up mortgage interest rates were at historic lows during the bubble rally, there was little or no hope of mortgage interest rates falling below 5.8% in the bubble’s aftermath. The combination of a higher FED rate, higher inflation expectations and larger risk premiums could easily push interest rates back up to near the 8% historic norm or even much higher. An increase in interest rates from 6% to 8% would reduce buying power 18%, and an increase to 10% would reduce buying power 32%. This would be disastrous for housing prices.

Mortgage interest rates have been on a slow but steady decline since the early 1980s. Interest rates were at historical highs in the early 80s to curb inflation, and the decline from these peaks to the 7% to 9% range was to be expected. This initial decline in interest rates coupled with low inflation caused house prices to begin rising again in the late 80s culminating in the bubble that burst in 1990 leading to six consecutive years of declining prices.

Table 14: Impact of Rising Interest Rates on Prices

$ 244,900

National Median Home Price

$ 47,423

National Median Income

$ 3,952

National Monthly Median Income

28.0%

Debt-To-Income Ratio

$ 1,106.54

Monthly Payment

Interest Rate

Loan Amount

Value

Value Change

4.5%

$ 218,387

$ 272,984

18%

5.0%

$ 206,127

$ 257,659

12%

5.5%

$ 194,885

$ 243,606

6%

6.0%

$ 184,561

$ 230,701

0%

6.4%

$ 177,046

$ 221,307

-4%

7.0%

$ 166,321

$ 207,901

-10%

7.5%

$ 158,254

$ 197,818

-14%

8.0%

$ 150,803

$ 188,503

-18%

8.5%

$ 143,909

$ 179,886

-22%

9.0%

$ 137,522

$ 171,903

-25%

9.5%

$ 131,597

$ 164,496

-29%

10.0%

$ 126,091

$ 157,613

-32%

Note: An increase in interest rates will have a strongly negative impact on house prices.

During the early 90s while prices were declining, interest rates were also declining from 10.6% in 1989 to 7.2% in 1996. These 30% declines in interest rates made housing more affordable and helped limit the price declines in the early 90s. If interest rates had not declined, house prices certainly would have dropped further than they did. It is not very likely that interest rates will decline 30% from the 5.8% they were during the bubble down to an unprecedented 4.1% to match the debt relief of the early 90s. The actions of the FED could not and did not keep house prices from falling.

Figure 57: Mortgage Interest Rates, 1986-2006

Future Loan Terms

One of the primary mechanisms for inflating the Great Housing Bubble was the widespread use of exotic loan terms including interest-only and negative-amortization adjustable rate mortgages. The appeal of interest-only and negative-amortization loans is the lower payments they offer, or their ability to finance larger sums of money with the same payment. Adjustable rate mortgages are very risky; it is a risk that has been forgotten, ignored, or not understood by a great many buyers. In an era of steadily declining interest rates, the risks of adjustable rate mortgages do not become problems and many forget (or never realized) the risks were there. Once prices decline to a point where the loan balance is greater than the value of the property, mortgage holders are unable to refinance when their mortgage reset comes due. Most often this will result in a foreclosure. In fact, this is the primary mechanism of the decline, and it will also prevent any meaningful appreciation for years to come.

Of all the factors that contributed to the inflation of the Great Housing Bubble, the negative amortization loan with its offers of extremely low initial payment rates was the primary factor that pushed prices higher than anyone could previously imagine. Toxic loan products, or as the lending industry likes to call them, affordability products, distort the traditional measure of the debt-to-income ratio. The debt-to-income ratio is calculated with an assumption of a 30-year fixed rate mortgage, when in reality, borrowers were using interest-only and negative amortization loans to keep their debt-to-income ratio to manageable levels.

Table 15: Loan Amounts based on Amortization Method and Debt-to-Income Ratio

$ 722,928

Irvine Median Home Price

$ 83,891

Irvine Median Income

$ 6,991

Monthly Median Income

6.0%

Interest Rate on 30-Year Fixed-Rate Mortgage

5.0%

Interest Rate on 5-Year ARM

3.8%

Payment Rate on Option ARM

Payment

DTI Ratio

30-Year Fixed

Interest Only

Option ARM*

$ 1,957

28.0%

$ 326,487

$ 469,790

$ 618,144

$ 2,289

32.7%

$ 381,831

$ 549,425

$ 722,928

$ 3,012

43.1%

$ 502,410

$ 722,928

$ 951,221

$ 4,334

62.0%

$ 722,928

$ 1,040,236

$ 1,368,732

* Negative Amortization loans (AKA Option ARM)

The table above illustrates the impact of various amortization methods on the debt-to income ratio and the resulting loan amount. The first line shows the typical debt-to-income ratio of 28% prior to the bubble and the amounts this payment would finance using a 30-year fixed, an interest-only and a negative-amortization loan. The fact that this payment amount, even using exotic financing does not reach the median sales price is testament to the high debt-to-income ratios utilized by bubble buyers. Using an Option ARM (negative amortization) it takes 32.7% of a median household’s gross salary to purchase a median home; using interest-only takes 43.1%, and using conventional financing takes an astounding 62% of gross income. The widespread use of Option ARMs in Irvine is not surprising. Irvine, California, is the center of the subprime lending universe, and many mortgage brokers who strongly believed in the viability of this product live and work in Irvine and used them to purchase their primary residences.

Since adjustable-rate mortgages of all types performed poorly during the collapse of house prices, and in particular the negative amortization loans, it is likely these loan terms will be curtailed or eliminated in the future. These loans are inherently unstable and prone to high default rates due to the escalating payments that can, and often do, result from their use. The widespread use of these loans destabilizes home prices by detaching them from fundamental valuations. The use of these loans creates the very conditions in which they poorly perform. People who purchased during the bubble rally at inflated prices using these loan terms were risking that these terms would always be available to buyers in the market because without these terms, future buyers would not be able to finance the inflated sums necessary to allow a bubble rally buyer to get out with a profit. Without these exotic loan terms the bubble could not stay inflated.

Unemployment

Figure 58: National Unemployment Rate, 1976-2008

Prior to the Great Housing Bubble, house price declines had only been associated with economic downturns and increases in unemployment. [iii] When the economy softens, wage growth slows down as employers are less able to pay higher wages and the competition for available work makes people less able to demand higher wages from their employers. The economic slowdown is thereby responsible for slower rates of house price appreciation. If the downturn is more severe, rising unemployment serves to push prices lower because the unemployed cannot afford to make their house payments, and their houses often fall into foreclosure. As unemployment increases so does the number of foreclosures, and since there are fewer buyers in a recession, the number of foreclosures cannot be absorbed by the market without a lowering of prices to meet diminished buyer demand.

There is evidence that housing market downturns may actually be the cause of many recessions. [iv] There is a strong correspondence between the times when the country enters and exits a recession and when the times when residential construction spending drops off and picks up. The recession of 2008 was clearly caused by the problems in the credit markets and the resultant slowdown in consumer spending related to the collapse of house prices during the Great Housing Bubble. The result of this recession is unknown as of the time of this writing. If the unemployment rate rises significantly, people are out of work and unable to make their housing payments. This will lead to many more foreclosures even among people who did not take out exotic financing or extract all of their home equity for consumer spending.

Figure 59: California Unemployment Rate. 1976-2008

Many layoffs came to Irvine and Orange County, California, in 2007. New Century Financial went bankrupt along with numerous other subprime lenders based in Orange County. Real Estate related employment went from 15% of the workforce to 18% during the bubble. Most of these workers were laid off when the housing market slowed significantly. Many of the realtors and mortgage brokers in Orange County, California, and Irvine in particular, made hundreds of thousands of dollars a year off real estate transactions during the bubble. Most of these workers were not W-2 employees counted in regular government statistics. Transaction volumes declined 80% from the peak in 2005 to the end of 2007 in Orange County. Prices declined 15% as well. This resulted in a decline in income for realtors and mortgage brokers which put many of them in financial difficulty. Also, many if not most of these members of the real estate industry invested heavily in real estate and acquired multiple properties. Faced with the near elimination of their income, an inability to borrow more money and payments far in excess of any potential rental income, many of these individuals financially imploded and let all of their properties go into foreclosure.

One of the largest contributors to the Irvine, California, economy also does not show up in the unemployment statistics: people’s houses. Median house prices went up in value an amount equal to or greater than the median household income for 5 consecutive years from 2002-2006. It was as if every homeowner had another breadwinner in the family. With home equity withdrawal, this money could be taken out at any time without IRS withholding. On a cash basis, a family’s house was actually contributing more cash to spend than the household wage income. Not everyone took out this money and spent it, but a great many did. When prices fell and credit tightened, the mortgage equity withdrawal spigot was shut off. Imagine the impact on the local economy when half of its “workers” lose their incomes.

With the diminishment of wage income, commission income, and mortgage equity withdrawal, many businesses in Orange County began to suffer. This had ripple effects through the local economy. The lower income began to show up in weakening rents and higher vacancy rates at the major apartment complexes, but the major problem for the housing market was the unemployment. As the unemployment numbers went up, so did the number of foreclosures.

Foreclosures

The wildcard in this analysis is the impact of foreclosures. The number of foreclosures will affect both the timing and the severity of the drop because it is foreclosures that drive prices lower quickly. Foreclosures control the timing of the crash because they directly impact the must-sell inventory numbers: the greater the number of foreclosures, the greater the rate of decline in house prices. By early 2008, the markets in Southern California had already surpassed the peak set in the price decline of the early 90s of Notices of Default and Trustee Sales (foreclosures).

Lenders faced high foreclosure rates in the early 90s because they were too aggressive with their lending practices in the rally of the late 80s: it was their own doing. Lenders overheated the market then, and they got burned. Apparently, they did not learn the lesson of history. One of the problems with the collapse of a financial bubble is the causes get incorrectly identified. When the housing market in California collapsed in the early 90s, the recession and job layoffs were blamed for the problems with the housing market. The recession and layoffs came after the housing market was already in trouble. Unemployment slowed the recovery and added to the foreclosure problem, but it was not the primary cause of the entire pricing downturn. The ultra-aggressive lending practices of the Great Housing Bubble caused a huge spike in foreclosures by early 2008. [v] Just as in the early 90s, the increase in defaults and foreclosures is being caused by the past sins of the lenders: karma on grand scale.

Figure 60: NODs and Trustee Sales as a % of Total Sales,

San Diego, CA, 1990-2007

The importance of the foreclosures cannot be overstated: sellers do not lower their prices voluntarily. Prices do not drop without massive numbers of foreclosures to push them down. The entire “soft landing” argument boils down to one supposition: the number of buyers in the market is able to absorb the must-sell inventory on the market. If this is true, prices do not drop. If this is not true, prices do drop until enough buyers are found to purchase the foreclosures. There are always a number of buyers when prices are declining; some are long-term homeowners who are present in any market, but many are speculators betting on the return of appreciation. These people are few in number, but they buoy the market if there are not many foreclosures. If foreclosure numbers really spike, prices fall until Rent Savers and Cashflow Investors enter the market and absorb the excess. If current trends continue, the number of foreclosures will be too great for long-term owners and speculators to absorb. Foreclosures also control the depth of the decline to some degree. Once prices fall down to their fundamental values, new buyers enter the market and begin to absorb the inventory. If there are not enough buyers at this price level to absorb all the foreclosures, prices could overshoot fundamentals to the downside; in fact, this does tend to happen at the bottom of the real estate cycle.

Figure 61: Projected NODs and Trustee Sales as a % of Total Sales,

San Diego, CA, 1990-2012

Decrease in Home Ownership Rates

There is a strong correspondence to the growth of the subprime lending industry and an increase in home ownership rates. [vi] This is a direct result of lending money to those borrowers previously excluded from the housing market either because the borrower did not have the downpayment, or they lacked good credit. The collapse of the subprime lending industry in 2007 and the subsequent foreclosures on the millions of subprime loans caused a decrease in home ownership rates. Foreclosures are associated with bad credit; those with bad credit are eliminated from the buyer pool until their credit improves. Therefore, people who lose their homes to foreclosure move into a rental, and the previously owner-occupied home often enters the rental pool. (A popular misconception is that rents will go up. The number of rentals will increase along with the number of renters).

Prices fall below rental parity in conditions of decreasing home ownership rates because Rent Savers, who are typically owner occupants, are not numerous enough to absorb the foreclosure inventory, hence the decline in home ownership rates. This means a significant number of the houses due to hit the market due to foreclosure will be purchased as rentals. This is the Cashflow Investor support level. Prices often fall below fundamental valuations at the end of a speculative bubble due to short-term supply and demand imbalances. If this occurs at the bottom of the price cycle of the Great Housing Bubble, the measures of house values may all be lower than the projections and estimates provided herein.

Figure 62: National Home Ownership Rate, 1984-2005

Doomsday Scenario

The analysis presented in this section is intended as a conservative estimate of the magnitude and duration of the decline and recovery following the Great Housing Bubble. Due to the relatively extreme declines contained in the projections, it does not appear as conservative as it really is. When bubbles collapse, they often drop lower and last longer than most can imagine. Few thought the NASDAQ would drop from 5200 to 1200 from 2000-2003, few thought house prices in California would drop from $200K to $177K from 1991-1996 in the deflation of the last coastal real estate bubble, and few thought real estate prices in Japan would drop 64% between 1991 and 2005. [vii] The Doomsday Scenario is an examination of what could happen if all the potential problems for the real estate market negatively impact price levels. It is not likely this scenario will come to pass, but it is certainly a possibility.

Appreciation rates are not fundamental laws of physics. They are dependent upon a solid economy to provide income growth and the willingness of people to put money toward housing payments from their income. If the economy slows and if people choose not to spend large percentages of their incomes toward housing payments (or if people are not permitted to by tighter lending standards,) house prices are not supported. The projection of a worst-case scenario shows the impact of an economic recession and a slow recovery due to tightening credit and a reduced willingness on the part of borrowers to take on new debt.

Figure 63: National Doomsday Scenario

The primary mechanism of the decline is the high rate of foreclosures. This is caused by rising unemployment and the resetting of adjustable rate mortgage payments to much higher amounts due to higher interest rates and the inability of people to refinance into affordable payments, and the inability to make further home equity line of credit withdrawals to make mortgage payments. There are trillions of dollars worth of mortgage obligations in adjustable rate mortgages due to reset by 2011. When many of these borrowers are unable to refinance or make their payments, they will lose their homes to foreclosure. The impact of all these foreclosures will drive prices down quickly, and the depth of the decline may overshoot fundamental valuations due to the temporary imbalance between demand and supply. As each of these borrowers succumbs to the weight of his housing payments, the rate of recovery will be slowed until the bad loans are purged from the financial system. If this scenario becomes reality, on a national basis prices will decline 33% or more from their peak bottoming out at a median price of $165,000 in 2012 or later. The slow recovery at historic appreciation rates will not bring national prices back up to their peak again until 2024.

In Irvine, California, and other extreme bubble markets the forecast is even grimmer. The doomsday scenario would see a 51% decline from peak to trough with prices bottoming at a median price of $351,000 in 2012. Prices will not recover to the previous peak until 2030. Price declines of this magnitude are not likely, but the scenario is not unrealistic. The only requirement is the confluence of all the negative forces working on the market.

Figure 64: Irvine, California, Doomsday Scenario

Lingering Problems

As with any illness, the recovery is often plagued by symptoms of the disease and unwanted side effects. The recovery from the Great Housing Bubble will be no exception. The main problems will be experienced by those who bought at peak prices and did not go through the cleansing foreclosure process. As painful as foreclosure is to those who must endure it, foreclosure is the cure to the disease of the market. After foreclosure, a borrower is no longer burdened by high housing payments, and is free to move to find new work and spend income on consumer goods.

Houses will become America’s new debtor’s prisons. By the end of 2008, anyone who purchased between 2004 and 2007 will be underwater. Everyone who is underwater and making crushing home payments will be stuck in their homes until values climb back above their purchase price. Since there are a great many people in these circumstances and since each of these people are in at a different price point, each one will have a different term in debtor’s prison, but when their sentence is up, many will opt to sell to get out from under the crushing payments. Each of these people selling their homes keep prices from rising. This is the impact of overhead supply. It is also why the market will not see meaningful appreciation without capitulatory selling. People trapped in their homes cannot move to accept promotions or advancements in their careers, and people who are making large debt service payments have less discretionary income to spend. In an economy heavily dependent upon consumer spending, the impact of this loss of spending power will serve as a drag on economic growth. [viii] Aside from the broader economic ramifications, the heavily indebted will need to adjust to a lifestyle within their available after-tax and after-debt income. This will be a disheartening adjustment to many, particularly those who had become dependent upon mortgage equity withdrawal to sustain their lifestyles.

Summary

During the decline of house prices in the deflation of the Great Housing Bubble, price levels will fall to fundamental valuations of historic levels of appreciation, price-to-rent ratios, and price-to-income ratios. The nominal price declines may be impacted by inflation and monetary policy of the Federal Reserve, but inflation adjusted prices will fall precipitously. As people put less money toward housing payments either by choice or by tightening lender standards, prices will not be supported at inflated levels. The combination of unemployment, higher interest rates and the elimination or severe curtailment of exotic financing terms will make refinancing more difficult and the resulting unaffordable mortgage payments will put many borrowers into foreclosures adding large amounts of must-sell supply to the market, driving prices lower. If prices follow their historical pattern, they will fall down to their fundamental valuations by 2011. There are a number of variables which will influence the depth and timing of the decline, and most of the risks are to the downside. There will likely be an overshoot of fundamental valuations at the bottom. Despite all the nuance and analysis, everything comes down to one simple indicator: to paraphrase James Carville and Bill Clinton, “It’s the Foreclosures, Stupid!”

So what implication does all of this have on a future buying decision? Buyers should not count on appreciation. If a buyer needs to factor in appreciation to make the math work on a home purchase, she will buy too early, and she will pay too much. When the cost of ownership is equal to the cost of rental it is safe to buy. Even if prices drop further–which they might–buyers will not be hurt because they will be saving money versus renting. If buyers are counting on increasing rents or house price appreciation to get to breakeven sometime later, they will probably get burned.

Buyers should think about what terms and conditions a future buyer will face. During the bubble prices were bid up to unsustainable heights. Prospective buyers should not purchase when conditions are not favorable. If interest rates are low, debt-to-income ratios are high, and exotic financing is the norm, it is a bad time to buy. It seems counter-intuitive, but a wise buyer wants to purchase when credit is tight and values are depressed. Buyers should be patient and wait for the conditions to be right because a future buyer can pay more when credit is loose and prices are inflated. A house is only worth what a buyer will pay for it.

[1] One of the factors not included on the list of those that may negatively impact the housing market during the decline of the Great Housing Bubble was the potential problems created by the aging of baby boomers. In the study Aging Baby Boomers and the Generational Housing Bubble (Myers & Ryu, 2008), the authors explore the potential impacts of baby boomers selling their homes and downsizing from their McMansions. The impact of this group, though potentially significant, is very difficult to model and understand. There is no way to know what this generation will do and when they will do it. To speculate that this group would undergo a massive change in their habitation during the collapse of a major housing bubble does not seem plausible, although it is possible. It seems more likely that the baby boomers will not start retiring and potentially downsizing until the crash is past, and any changes in their housing situation will be spread out over many years rather than being concentrated in a short timeframe. The retirement of the baby boomers could serve to depress appreciation in those areas the baby boomers move out of, but it may also stimulate another construction boom in the areas they move in to.

[ii] The Federal Reserve has very little control over long-term interest rates. In an unpublished paper from the University of Washington, the authors examined the correlation between the 10-year Treasury Note and long term mortgage rates. They found the correlation to be greater than 95%. However, when they checked for correlation between the Federal Funds Rate and long-term mortgage rates, the correlation dropped to 35%. The most recent example occurred when the Federal Funds Rate when from 2% in June 2004 to 6.25% in October 2006, and the contract mortgage rate barely budged moving from 6.29% to 6.36%.

[iii] Karl Case and Robert Shiller concluded price declines could only come through an economic downturn (Case & Shiller, The Behavior of Home Buyers in Boom and Post-Boom Markets, 1988). This theory was disproven by the Great Housing Bubble. There has also been research suggesting that housing downturns are actually the cause of economic downturns (Leamer, Housing Is the Business Cycle, 2007).

[iv] A paper by Edward Leamer (Leamer, Housing Is the Business Cycle, 2007) draws strong parallels between residential construction spending and the beginning and ending of economic recessions.

[v] The foreclosure chart was drawn by taking the notices of trustee sales and the notices of default and dividing these figures by the monthly sales rate. Since there is considerable variability in these numbers from month to month, the figures have been averaged to smooth out the noise in the data and reveal the underlying trends.

[vi] In the paper Accounting for Changes in the Homeownership Rate (Chambers, Garriga, & Schlagenhauf, 2007), the authors concluded 56% to 70% of the increase in home ownership rates was due to “innovations” in the lending industry, in particular the lowering of downpayment requirements. Much of the remainder they attributed to demographic factors. The increase in home ownership among younger households was almost entirely driven by new financing terms, while changes among older households were much more to do with increasing income.

[vii] One of the issues not discussed in this writing is the potential impact of generational shifts in housing. A model for generational changes presented in The Baby Boom: Predictability in House Prices and Interest Rates (Martin, 2005) resurrects the early theories of Mankiw and Weil (Mankiw & Weil, The Baby Boom, the Baby Bust and the Housing Market, 1989)in which they predicted the collapse of housing prices in Japan in 1990 and the ongoing disruption in their housing market caused by the decline in population from the Baby Boom demographic bubble. In their 1988 paper Mankiw and Weil famously and incorrectly predicted the same phenomenon would occur in the United States. Instead, the United States witnessed the Great Housing Bubble. It is the author’s opinion that the differing impacts in the Japanese market and the United States market has far more to do with the degree of asset inflation and other macroeconomic impacts than it does with generational demographic factors. While it is certainly possible that the aging of baby boomers will have a negative impact on the United States housing market, it is not clear what impact baby boomers will have. It is assumed they will downsize their accommodations, but this may not be the case. Many may chose to retire and live out their lives in the houses where they lived pre-retirement. If this occurs there will be no mass selloff of homes depressing housing prices.

[viii] In the paper Housing and the Business Cycle (Davis & Heathcote, 2003), the authors document the strong relationship between residential investment and the general economy. Residential investment is much more volatile than the swings in the general economy, but it moves in the same direction. In a later paper obviously drawing for this paper’s title (Leamer, Housing Is the Business Cycle, 2007) the author goes a step further and postulates that the housing market is a driving force in the economy. Previously, conventional wisdom was that housing followed economic cycles and did not drive them. These findings are also bolstered by a report for the Federal Reserve Bank of San Francisco (Krainer, Residential Investment over the Real Estate Cycle, 2006). All the reports reach the same conclusion: residential investment is closely linked to the economic cycle. In another related study on the fallout of financial bubbles, (Helbling, Conover, & Terrones, 2003) Chapter II: When Bubbles Burst. The authors note the financial drag caused by the decline in asset prices.

IHB News 5-15-2010

I hope you are enjoying this beautiful weekend. I have a nice middle-class overpriced Irvine property for you to look at.

Irvine Home Address … 34 DEER Spg Irvine, CA 92604

Resale Home Price …… $699,000

{book1}

It was 1989 my thoughts were short my hair was long

Caught somewhere between a boy and man,

She was 17 and she was far from in-between

It was summertime in Northern Michigan

Splashing through the sandbar, talking by the campfire,

It's the simple things in life like when and where

We didn't have no Internet but man I never will forget

The way the moon light shined upon her hair

Kid Rock — All Summer Long

Writer's Corner

I am planning a vacation to Central Wisconsin in late June. It got me thinking about my life and times there, and Kid Rock came quickly to mind.

After writing about real estate for more than three years, I have covered much ground (pun intended). What I find as I build a library layer upon layer is that I find new richness and new connections within the subject matter. I have half a dozen or more ideas for posts floating around in my mind at one time or another. I rarely run out of ideas.

I have become attuned to my own writing process. The posts where I am reacting to a news story or commentary can be written as a train of thought, but I have to think about more complex posts for a few days before I start writing it. I have a major post in my mind on Las Vegas that I hope to birth this week. I am never quite sure when I will get it done. The more complex posts take more time to write, and they take some time to age.

Lately, I have been enjoying the time I spend with images and comics the most. I still enjoy writing the posts, but I am most entertained when I am working on a silly graphic. Don't know why, that's just the way it is.

I get a great deal of creative release from writing this blog. I get to explore funny ideas and interesting themes more completely than I would ever do on my own if others didn't read it. The fact that so many of you stop by each day to read is very motivating. Nobody wants to leave the stage.

During the week, often while I am driving, I have these profoundly meaningless insights that I want to share in the writer's corner. I lose most of these ideas, and many are better off lost. I may share a few more next week as I plan to do a better job at capturing them.

Strange encounter

Friday night I was walking with my son through the Irvine Spectrum. We were following twenty feet behind two women talking. I saw some papers fall out of one woman's pocket, so I called out to her. She didn't hear me, so I sped up, still holding hands with my son, and as I closed in on the papers on the ground, I was still ten feet behind these women who didn't acknowledge me.

When I was almost there, I realized the papers were cash. I grabbed the cash and raised my voice enough to get the women's attention, and I gave her the money — But for a moment, I didn't want to. The thought goes through my mind, "are you stupid? This is cash. It's found money. If you wouldn't have seen her drop the money, you would keep it. Forget what you saw!" Funny how the mind works, isn't it? She's lucky she didn't drop any big bills….

And now for some great satire:

Have No Fear, More Bailouts Are Here

By Ron Coby May 10, 2010

Monday morning, President Obama makes his way to the podium to give a very important message to citizens everywhere after last week's mini market crash. It will probably go something like this:

My Fellow Americans, as you know, my administration inherited an economy on the brink of an economic depression. And we took quick and decisive action to repair a global financial system that was on the verge of collapse. After spending trillions of dollars getting this economy going, it appears that a new crisis is developing in Europe with Greece leading the way. Unfortunately, this crisis is now spreading to Portugal, Ireland, Italy, and Spain (the PIIGS). Unlike the previous administration, my administration will take speedy steps to prevent another financial crisis like that of 2008. In order to prevent this new economic disease from spreading to our markets, I've sent an urgent request to Congress. A new law should immediately be passed by both the house and the Senate: Prices of stocks and homes will no longer be allowed to fall, they can only rise.

My fellow Americans, let me make this clear so there's no confusion: It's okay if the stock market goes sideways as long as stocks don't fall. We're going to set 10,000 Dow Jones as our new floor. I want Americans to feel very confident that they can invest their money into the stock market without ever losing another dime again. Also, every 1,000-point rise in the DJIA will become a new floor so that all investors will be protected and feel confident that they can secure their retirement by investing in the market.

My fellow Americans, I want to make something very clear. This country, along with all major industrial countries around the world, are fighting a debilitating war. This is an economic war and the enemy is deflation. As you know, I reappointed Ben Bernanke to be the commander and chief to fight this war. Mr. Bernanke not only has an unlimited supply of ammunition (dollars) to fight this war but also to win it. He has the willingness along with the full backing of my administration to deploy all monetary ammunition against this very powerful and dangerous enemy. I'm highly confident that Mr. Bernanke will create as much money, out of thin air, to defeat falling prices. My administration will no longer tolerate falling prices and I believe I have the right man at the right time to win this historic battle. And remember, they don’t call him “helicopter Ben” for nothing.

Next, I have also urged Congress to lift the debt ceiling of the United States from 14 trillion to infinity. I will no longer put up with any hindrances to fighting this war on deflation. This will provide my administration an unlimited amount of fiscal ammunition to continue battling falling prices. To stop the decline of falling prices of homes everywhere, we'll buy 95% of the remaining supply of homes to stabilize the very weak housing market. The US government is already backing 95% of all mortgages from our first phase in this economic war. Make no mistake, this administration — and really every administration — is built upon one word: BAILOUT.

I want every person and every company to know that there's no such thing as “too big too fail." I also want every country around the globe to know that their will be no nation “too big to bail” and that, of course, includes Greece and the other PIIG nations that will soon get slaughtered. I've instructed my commander and chief to immediately deploy a fleet of government helicopters filled with bales of newly minted $100 bills. We'll soon have thousands of those government helicopters dropping dollar bills all over the globe, so please don't worry. Greece, Portugal, Ireland, Italy, and Spain — we'll be there to bail you out right along with California and all the other bankrupt US states. This great nation has an arsenal of unlimited amount of dollar bills so there are plenty of them to go around.

In summary, I know that many of you will worry that a victory in this global battle will bring on a new enemy — inflation. I want to reassure any detractors of my new plan that we've already taken decisive actions to make sure inflation doesn’t result in rising interest rates. The Federal Reserve has been ordered “to keep rates low for an extended period of time,” and that extended period of time is forever. Any government bonds that aren't purchased by investors or nations will simply be bought by my great Fed Chairman. Don't for a second doubt that this great and powerful nation will use all means at its disposal to win this global war on deflation. My mission is clear: This country — in fact, no country — should ever tolerate falling asset prices again.

May God continue to bless America.

Housing Bubble News from Patrick.net

Fri May 14 2010

U.S. House Seizures Reach Record as Recovery is, uh, "Delayed" (bloomberg.com)

Recovery? Show me the Money (Mish)

41 percent of Minneapolis area single-family houses believed 'underwater' (minnpost.com)

Hawaii foreclosures way up again (google.com)

Houseowner left with big bill, trashed credit, after rejection for federal loan modification (nctimes.com)

A bank that only lends to walk-aways? (snl.com)

Banks Ignore Delinquent Borrowers (cnbc.com)

Perfect Quarter at 4 Banks After Fed Shovels Them Full Of Counterfeit Cash (bloomberg.com)

Senate votes to ban certain screw-the-customer mortgage broker bonuses (articles.latimes.com)

Do Americans Spend Enough Time Researching Mortgages? (bucks.blogs.nytimes.com)

Tax credit's end to hit house prices? (azcentral.com)

Housing Begins to Fade Without Taxpayer Blood Donations (online.barrons.com)

Why California Is The Next Greece (businessinsider.com)

The Cash Value of Real Estate Explained (irvinehousingblog.com)

Millions of Jobs That Were Cut Won't Likely Return (nytimes.com)

Food-stamp tally nears 40 million, sets record (reuters.com)

The Twilight of the Welfare State? (roomfordebate.blogs.nytimes.com)

OMG 3.8% tax on all house sales in Obamacare bill! Really? No. (patrick.net)

Thank You Daniel B. ($100) for your kind donation.

Free Trial of the Landlord's Bargain Finder

Thu May 13 2010

Housing bulls "not paying attention" to facts (finance.yahoo.com)

House prices fall, but news spin rises (bankrate.com)

Behind upbeat data are inflation facts pointing to crisis in 2012 (marketwatch.com)

Housing never really improved (doctorhousingbubble.com)

Gold hits all-time high as investors seek haven (edition.cnn.com)

Gold Climbs to Record as Investors Seek Alternative to Currency (bloomberg.com)

Furious Real Estate Decline Coming; Beijing House Prices Plunge 31.4% (Mish)

The Chinese Real Estate Bubble (businessinsider.com)

Roubini Says Greece May Lead Euro Exodus, China Faces Slowdown (bloomberg.com)

Bank Bailout Protesters Storm Ireland's Parliament (dailybail.com)

Volcker just saved Wall Street's bankers, and now he owns them (tnr.com)

Little counterfeiter flees country, Big One across street still forging (latimesblogs.latimes.com)

How to profit from volatility, chaos and misery (theautomaticearth.blogspot.com)

Ammiano carries bill to amend California's Prop. 13 rules (sfgate.com)

Democrats Reject 5% Down Payment Rule (blogs.investors.com)

How to turn Congress Inc. back to just Congress (washingtonpost.com)

Gov't corruption means Americans pay most in world for cell service (informationweek.com)

I escaped ATT DSL hell! (patrick.net)

Free Trial of the Landlord's Bargain Finder

Wed May 12 2010

Mortgages: Strategic Defaults Are On the Rise (news.yahoo.com)

Anger, Fear Driving Many Mortgage Defaults (online.wsj.com)

JPMorgan Chase Warns Investors About Homedebtors Walking Away (huffingtonpost.com)

Government's Zero Down-payment Mortgages (old but good – bullionbullscanada.com)

Latest Mega-Case Against Housing And The Housebuilders (businessinsider.com)

A Lost Decade Ahead for Housing (smirkingchimp.com)

Repeating the housing bubble mistakes (mybudget360.com)

Senate Backs Weak, One-Time Partial Sort-of Audit of Fed's Bailout Role (nytimes.com)

Ron Paul Says It's NOT Too Late To Call Senator About Watered-down Fed Audit (Mish)

Artificially low interest rates bad for economy (detnews.com)

In bed with Fannie and Freddie (washingtontimes.com)

Have No Fear, More Bailouts Are Here (minyanville.com)

Union City landlords blast rental tax (contracostatimes.com)

Poor guy has to lower price from $22.9 million to $18.9 million (patrick.net)

Patrick's Australian relatives save the family farm from developers (illawarramercury.com.au)

Tue May 11 2010

Luxury houses not immune to short sales (azcentral.com)

Newport house foreclosed at $7.8 million (mortgage.freedomblogging.com)

Frank Lloyd Wright's Ennis House Now Half-Price (huffingtonpost.com)

Mortgage Holders Owing More Than Houses Are Worth Rise to 23% (bloomberg.com)

FL house sellers take it on the chin (weblogs.sun-sentinel.com)

Home Values Continue To Fall, More Owners 'Underwater' (cnbc.com)

Strategic defaults up in March; professor says risk of contagion remains (snl.com)

Strategic Default: Walking Away from Mortgages (cbsnews.com)

Hope you enjoyed the housing recovery, because it's history (finance.yahoo.com)

Tax-Credit Hangover Begins? (blogs.wsj.com)

American Taxpayers Looted To Bail Out The Euro (propagandamatrix.com)

The Financial Oligarchy Reigns: Democracy's Death Spiral (ampedstatus.com)

Why an Extended Bear Market is Likely (finance.yahoo.com)

Fannie Mae seeks $8.4B in gifts after 1Q loss (news.yahoo.com)

An Ill-Timed Request for Aid By Fannie Mae (nytimes.com)

Ignoring the Elephant in the Bailout (finance.yahoo.com)

Let Fannie and Freddie die! (patrick.net)

A Radical Plan to Reform the Financial System (newsweek.com)

Interest Rates Surge as Europe Launches Bailout (nytimes.com)

The Case Against Goldman Sachs (theonion.com)

Mon May 10 2010

High-end pain and suffering (csbj.com)

Expensive houses are falling prey to foreclosure (usatoday.com)

Housing Prices Are Falling Again (newobservations.net)

Shiller: "Renting is very attractive right now" (capitalgainsandgames.com)

L.A. cities still in housing bubbles (doctorhousingbubble.com)

4 biggest lies in real estate (finance.yahoo.com)

White House Should Support Three Critical Banking Reforms (robertreich.org)

Is Your Senator A Member Of The Bankster Party? (dailybail.com)

Freddie Mac's Loss Is Ignored in Washington (nytimes.com)

Sen Shelby: Bank bill should include Fannie and Freddie (news.ino.com)

Roubini Urges Goldman Sachs Breakup, Possible CDO Ban (bloomberg.com)

Greenspan Arrogance Set Up U.S. for Big Fall (bloomberg.com)

Why is the Federal Reserve so afraid of openness and accountability? (slate.com)

Iceland arrests ex-chief of collapsed bank (news.bbc.co.uk)

What goes around comes around for banks (finance.yahoo.com)

U.S. Market-fraud Enters New Era (benzinga.com)

Harvard study of interest and housing finds mortgage deduction worse (patrick.net)

The Subprime Rhyme with U.S. Debt Debacle (prudentbear.com)

U.S. Debt Shock May Hit In 2018, Maybe As Soon As 2013 (investors.com)

Fighting the Deficit By Selling Military Land (nytimes.com)

Irvine Home Address … 34 DEER Spg Irvine, CA 92604

Resale Home Price … $699,000

Home Purchase Price … $250,000

Home Purchase Date …. 12/31/1997

Net Gain (Loss) ………. $407,060

Percent Change ………. 179.6%

Annual Appreciation … 8.2%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$144,900 ………. Income Requirement

$3,005 ………. Monthly Mortgage Payment

$606 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$58 ………. Homeowners Insurance

$47 ………. Homeowners Association Fees

============================================

$3,716 ………. Monthly Cash Outlays

-$735 ………. Tax Savings (% of Interest and Property Tax)

-$671 ………. Equity Hidden in Payment

$273 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

============================================

$2,671 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,990 ………. Furnishing and Move In @1%

$6,990 ………. Closing Costs @1%

$5,592 ………… Interest Points @1% of Loan

$139,800 ………. Down Payment

============================================

$159,372 ………. Total Cash Costs

$40,900 ………… Emergency Cash Reserves

============================================

$200,272 ………. Total Savings Needed

Property Details for 34 DEER Spg Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 1 full 2 part baths

Home size: 2,800 sq ft

($250 / sq ft)

Lot Size: 5,015 sq ft

Year Built: 1977

Days on Market: 98

Listing Updated: 40308

MLS Number: P720813

Property Type: Single Family, Residential

Tract: Dc

——————————————————————————

Remodeled Plan 4 with extra large floorplan. Custom kitchen features: Large granite island with gas stove, kitchen dining area viewing the back garden, solarium, huge double-doored walk-in pantry. Wet bar off the kitchen overlooking the family room. Gorgeous hardwood flooring throughout most of downstairs. Formal dining and living rooms. Large custom indoor laundry room. Two water heaters. Located at end of cul-de-sac… and much more! Must see!

It is a shame this property earned the gorgeous graphic. I really do like it. I am partial to Deerfield anyway, and the kitchen in this place is awesome. That atrium effect is really cool.

The Mechanism For Diverting Bank Losses to the US Taxpayer

The GSEs made many bad loans during 2008 and 2009. Loan buyback clauses in mortgage-backed securities deals insured by the GSEs is how these loans will become the responsibility of US taxpayers.

Irvine Home Address … 28 BELMONTE Irvine, CA 92620

Resale Home Price …… $675,000

{book1}

Oh baby, baby

How was I supposed to know

That something wasn't right here

My loan losses are killing me

I must confess, I still believe

When I'm not in homes I lose my money

Give me a sign

Hit me baby one more time

Britney Spears — Baby One More Time

Fannie Mae, Freddie Mac, Ginnie Mae and the FHA all insure loans against default. Investors that buy mortgage-backed securities pools from the GSEs or other governmental agencies know that if the loans in the pools go bad, the insurance will kick in and the insuring entity will either make up the payment or buy the loan back from the pool and make the investor whole. This buyback clause is the mechanism by which bad loans become the responsibility of the insurance pools covered by the US taxpayer.

Ever since the GSEs were nationalized in 2008 — an occurrence preceded by decades of official denial of the implicit guarantee given by the US Government — the GSEs underwrote loans during the crash of the Great Housing Bubble. The government enticed buyers to overpay for real estate with tax incentives. The Federal Reserve agreed to overpay for the bad government paper to lower mortgage interest rates and make affordability possible at very high debt-to-income ratios. As a result, many knife-wielding borrowers caught the market in 2008 and 2009 and prices have at least temporarily stabilized.

Most of the crash buyers will fall underwater over the next several years as the slow decline in prices continues. Rising interest rates and the overhang of distressed properties will pressure market prices. Many of the loans securitized and insured by the GSEs in 2008 and 2009 will go bad. When they do, the GSEs will have to repurchase these loans and eat the losses. Since the US taxpayer is now responsible for the GSEs, the US taxpayer will absorb all GSE losses. These losses will be very significant.

Fannie Mae mortgage holdings up after loan buyouts

By Lynn Adler

NEW YORK, May 7 (Reuters) – Fannie Mae (FNM.N), the largest buyer of residential home loans, said on Friday its March mortgage portfolio was inflated by buyouts of seriously delinquent loans repurchased from securities pools.

The company's total book of business, gross mortgage portfolio, commitments to buy loans and net and new business acquisitions included about $40 billion of loans it bought back from the pools.

Forty billion in seriously delinquent loans, meaning those over 120 days late. That is a lot of bad loans.

Excluding those repurchases, which will not be reflected as liquidations from the mortgage-backed securities that Fannie Mae holds until April data, the total book of business would have declined 2.3 percent in March. Including them, there was a 2.8 percent increase to a total book of business of $3.263 trillion.

The company, like its counterpart Freddie Mac (FRE.N), is in the process of buying back tens of billions of dollars in troubled home loans that now collateralize its securities. The loans being repurchased are at least 120 days late and are a capital drain.

The serious delinquency rate on Fannie Mae single-family loans rose 7 basis points in February, the latest month for which data is available, to 5.59 percent. The rate rose 4 basis points on multifamily loans to 0.73 percent.

If 5.59% of their portfolio is seriously delinquent. That is a lot of bad loans.

A year earlier, the single-family rate stood at 2.96 percent and the multifamily rate at 0.32 percent.

Fannie Mae also said in its March portfolio summary that the unpaid principal balance of its gross mortgage portfolio spiked by 87.1 percent to $764.8 billion due to the repurchases that were not reflected as liquidated from the MBS trusts yet.

As of March 31, the gross portfolio end balance, taking into account $25.5 billion in net commitments to sell mortgage assets, stood at $739.3 billion, Fannie Mae said.

Retained holdings were $725.9 billion in February and $783.9 billion in March 2009.

Fannie Mae's total debt outstanding grew to $800 billion in March from $767 billion the prior month. A year ago, the company had $869.3 billion outstanding.

CAPITAL STRAIN

Fannie Mae has yet to report first quarter earnings.

But Freddie Mac on May 5 reported an $8 billion first-quarter loss, which included a dividend payment on senior preferred stock owned by the Treasury Department, and asked the government for an added $10.6 billion in aid.

That draw would bring federal aid for Fannie Mae and Freddie Mac to more than $136 billion.

The Treasury has provided an open credit spigot for the two companies through 2012.

Your potential losses are unlimited. During the Christmas holidays last year when nobody would notice, the $400 billion cap on assistance was removed. No matter how large the bill gets, the US taxpayer will take on the losses. That is a lot of bad loans.

Fannie and Freddie were taken under government control in September 2008, in the midst of the deepest housing crisis since the Great Depression, as loan defaults and record foreclosures slashed their capital.

Fannie Mae is spreading its larger amount of loan buyouts over several months whereas Freddie conducted the lion's share in a single month.

In the aftermath, Freddie reported on April 30 the first decline in the single-family delinquency rate in three years. Still, the 4.13 percent rate in March was well above 2.41 percent a year earlier.

Freddie Mac reports a statistical blip after three years of constant, significant, and unprecedented rises in its delinquency rate. Happy days are here again, right?

The takeover the GSEs was engineered as a stealth bailout of the banks. If bank loans can be redone and repacked with government backed insurance, the losses are transferred from the banks to taxpayers. The losses from the GSEs and the FHA will mount. Some of these losses will be hidden on the Federal Reserve's balance sheet, but most will be covered by the general obligations of the US Treasury. That's you and me.

Now that we are all absorbing these losses, perhaps we should go along with whatever the banks want? Or worse yet, perhaps underwater homeowners should keep paying their oversized mortgages and "take one for the team?" Our leaders made poor decisions. We should not be liable for the bailout of banks either directly through TARP or indirectly through the GSEs. The poor decisions of our leaders does not mean we have some collective obligation to make the bad decisions of lenders go away. Besides, no matter how bad the losses are, twenty years from now the government will produce an accounting report showing that we made money on the deal.

This whole situation sucks. The banks give large amounts of money to irresponsible people who blow it. When the Ponzi scheme collapses and both the Ponzis and the lenders are suffering, the government is called in to take money from the prudent to bail out the reckless. I don't feel good about it.

More equity-stripping HELOC-abusing Ponzis

It was suggested in the comments recently that Irvine house prices have held up because fewer borrowers here are in distress. We do have fewer underwater homeowners because the banks haven't caught up with their foreclosures, but we still have many borrowers who stripped the equity from the walls and spent themselves into oblivion. I profile these every day, and I don't need to hunt and cherry pick to find these people.

  • Today's featured property as purchased on 12/8/2003 for $600,000. The owners used a $400,000 first mortgage, a $170,000 second mortgage, and a $30,000 down payment.

  • On 7/26/2004 they opened a $196,000 HELOC and got back most of their small down payment.

  • On 1/26/2005 they refinanced with a $585,000 first mortgage and a $99,900 second mortgage.

  • On 3/31/2005 they refinanced the first mortgage with a $585,000 Option ARM with a 1% teaser rate.

  • On 12/14/2006 they refinanced the first mortgage for $710,000.

  • On 5/7/2007 they obtained a $131,000 HELOC, and with their previous pattern of borrowing, we can assume they took it out and spent it.

  • Total property debt is $841,000.

  • Total mortgage equity withdrawal is $271,000.

  • The stopped paying the mortgage early this year or late last year.

Foreclosure Record

Recording Date: 04/28/2010

Document Type: Notice of Default

Irvine Home Address … 28 BELMONTE Irvine, CA 92620

Resale Home Price … $675,000

Home Purchase Price … $600,000

Home Purchase Date …. 12/8/2003

Net Gain (Loss) ………. $34,500

Percent Change ………. 12.5%

Annual Appreciation … 1.8%

Cost of Ownership

————————————————-

$675,000 ………. Asking Price

$135,000 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$540,000 ………. 30-Year Mortgage

$139,925 ………. Income Requirement

$2,902 ………. Monthly Mortgage Payment

$585 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$56 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$3,543 ………. Monthly Cash Outlays

-$710 ………. Tax Savings (% of Interest and Property Tax)

-$648 ………. Equity Hidden in Payment

$263 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves

============================================

$2,534 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,750 ………. Furnishing and Move In @1%

$6,750 ………. Closing Costs @1%

$5,400 ………… Interest Points @1% of Loan

$135,000 ………. Down Payment

============================================

$153,900 ………. Total Cash Costs

$38,800 ………… Emergency Cash Reserves

============================================

$192,700 ………. Total Savings Needed

Property Details for 28 BELMONTE Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,144 sq ft

($315 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1979

Days on Market: 3

Listing Updated: 40309

MLS Number: S616799

Property Type: Single Family, Residential

Tract: Ol

——————————————————————————

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

Spacious home on a quiet cul-de-sac location. Living room with fireplace. Dining room with wet bar. Kitchen overlooks family room. Oversized master bedroom. Large private backyard. Three car attached garage.

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

Riverside County: 90% of mortgages underwater, 23% of mortgages 60-days late

The mortgage statistics out of Riverside County are pretty grim. Will the substitution effect pull prices down here in Irvine?

Irvine Home Address … 40 SALT BUSH Irvine, CA 92603

Resale Home Price …… $4,995,000

{book1}

And I'm here to remind you

Of the mess you left when you went away

It's not fair to deny me

Of the cross I bear that you gave to me

You, you, you oughta know

And I'm not gonna fade as soon as you close your eyes

And you know it

And every time I scratch my nails down someone else's back

I hope you feel it…well can you feel it

Alanis Morissette — You Oughta Know

Lenders,

I am here to remind you of the mess you made when your standards went away.

It's not fair to deny it.

Of the cross they bear that you gave to them.

You oughta know.

I'm not gonna fade away if you close your eyes.

And you know it.

And every time someone defaults on your loan.

I hope you feel it… well can you feel it?

How do you feel about the banks?

I am seeing the argument put forward frequently that we need to coddle the banks because if they lose money, we all suffer. Many are suggesting that Individual borrowers should continue to make payments when they are hopelessly underwater and they can rent something much cheaper elsewhere in order to preserve neighborhood property values and prevent the banks from going under. That is rubbish. People don't owe their neighbors or the banks anything.

The lenders created this mess, and they need to experience the consequences of their foolish lending otherwise they will do nothing to learn from their mistakes and prevent doing it again. They loaned too many people too much money under unstable loan terms. They deserve the pain they get. They do not deserve our tax dollars or assistance.

The more I pay attention to this issue the more I become annoyed at the banks. They inflate bubbles with their loans. They create the Ponzis. They enable the squatters. They conspire to keep prices artificially high and keep prudent families out of reasonably priced homes. I have a problem with their behavior and how it impacts all of us.

Fitch finds Calif. at both extremes in mortgages

Copyright © 2010 The Associated Press. All rights reserved.

NEW YORK — California has the best-performing U.S. region in mortgage performance as well as some of the worst, according to a study by Fitch Ratings.

Results of the ratings agency's study of all securitized non-agency California mortgage loans were released Wednesday.

Among the findings, it said the Bay Area region of San Francisco, San Mateo and Redwood City has a 60-day mortgage delinquency rate of just 4 percent. That was No. 1 among the 382 metropolitan statistical areas tracked by Fitch.

Recent price trends have helped. While California home prices are under stress and further declines are likely, San Francisco home prices have increased by 12 percent over the past year.

I don't know the listed markets to comment, but I I do note that it pays to live in neighborhoods with others with 800 FICO scores. The lower the delinquency rate the better the values are holding up; although, the real correlation is to foreclosures: the higher the rate of foreclosure the lower the resulting property values.

Banks stopped foreclosing after they kicked out all the poor, subprime borrowers. The middle- and upper-middle- class borrowers who were given Alt-A loans and Option ARMs have simply been allowed to squat. Lenders have made a conscious decision to allow the Ponzis to squat in cities like Irvine because they know foreclosing on them will reduce prices.

This isn't a story of the rich getting richer… well, that did happen too, but the poor certainly did get poorer. The borrowers given subprime loans all went delinquent like their higher wage earning counterparts in Alt-A and prime borrowing pools, but the subprime crowd was actually foreclosed upon, and values in these areas cratered as expected. Of course, that means those markets have found a market clearing price, and the lives of the people can be rebuilt and go on.

The Alta-A and prime borrowers took out toxic loans like Option ARMs and interest-only financing with low down payments. Despite recent reports to the contrary, toxic loans and low down payment speculation did inflate the housing bubble. The only difference between these neighborhoods and the subprime neighborhoods is the foreclosures. The middle class and the working affluent are being given a pass.

At the other end of the spectrum is the Riverside-San Bernardino-Ontario (Riverside) region, at 367th among all U.S. metro areas with a 60-day delinquency rate of 23 percent.

Nearly one in four borrowers is not paying their mortgage. One in four. Unemployment is not that high. Despite reports that strategic default is a small percentage of delinquencies, how do lenders explain a 23% delinquency rate without strategic default? The people in the land of the dirt people are not stupid. They recognize when the economics favor walking away, and they do.

Ninety percent of Riverside mortgages are now "underwater," Fitch said, and

Only one borrower in nine has any equity in Riverside County. Wow! I guess it pays not to be a loan owner out there….

nearly 60 percent of borrowers owe more than 150 percent of the value of their homes.

It will take forever for house prices to recover enough for these people to survive without scuba gear. They won't even qualify for a principal reduction program because they are too far underwater. This is the primary reason so many strategic defaults are occuring.

Fitch said California mortgage trends are important for both new and existing securities in the rest of the nation, since the state has about 40 percent of overall mortgage origination volume.

What happens in California determines what happens to the banks. It is in the banks best interest to maintain the Ponzi scheme anywhere it hasn't already imploded. You know they must be desperate when their only option is widespread squatting, and they chose that option. Banks typically are not in the business of buying homes for people and letting them live there for nothing. Yet that is what they are doing. The banks bought all these homes at ridiculous prices, allowed Ponzis to move in, and now they are just letting them live there. Amazing.

Riverside County Substitution Effect

Yesterday, I was in south Corona on the terrace of the Retreat Golf Club overlooking the finishing holes and the surrounding real estate development. It is a sea of McMansions of a quality as high as anything in Irvine. Buyers can have a 4,152 SF home with a prime location looking down on a golf green perched on the edge of a lake for under $600,000. There is a price where people say to themselves, "I can get an 1,800 SF condo touching another 1,800 SF condo in Irvine, or I can go get a 4,000 SF McMansion in Corona for the same price." When the disparity gets very high, like it is now, people substitute for the larger home in the less desirable location.

If you want to speculate on where prices will go up in the future, you can bet on the improvements in our traffic corridors. When improvements go in, real estate values go up in the areas serviced by the improvements. A classic example from history is the construction of the Brooklyn Bridge and the impact it had on property values in Brooklyn. The slow ferries that made commuting slow and expensive gave way to speedy and inexpensive land travel.

There is a bottleneck where the 241 meets the 91 that backs up for hours. If you have ever waited in that line, you know the maddening experience of the people who bypass the entire wait and try to cut in at the last minute. The police patrol it heavily, but I am surprised there are not more road-rage shootings at this location. The daily wait at that location is the primary thing preventing more people from living in Riverside County and working in Orange County.

Much of the real estate value in Orange County remains due to this bottleneck because it strongly inhibits the substitution effect. If cars could quickly and efficiently move to and from Orange and Riverside Counties, much of the real estate value would leak out of Orange County to the nearest transportation system locations in Riverside County. Improvement in our transportation system would be great for commerce, but it would almost certainly raise real estate values in Riverside County at the expense of properties in Orange County.

Is the perception of premium self-reinforcing?

Is it possible that areas where prices have not fallen attracts other money that prevents prices from falling? Is there a premium for being premium? If someone had suggested this to me a year ago, I would have laughed, but there certainly are buyers in the market motivated by the apparent flight to quality. The real question is, "are there enough zealot buyers acting on faith instead of math to support the entire market?" We won't know the answer until the foreclosure and delinquencies problems are resolved. I don't think so.

I have one major problem with this idea. One sign of kool aid intoxication is that people bought property simply because prices were going up. People had no idea why prices were going up, but prices were, and this induced more buying which was actually the cause of prices going up. Isn't buying because prices are not going down the same thing? Isn't buying into a market crash in areas that have not crashed yet another manifestation of buying on faith? Isn't that the very essence of kool aid intoxication?

The fact that we may have witnessed a temporary bottom and a bear rally does not mean that the move we are seeing is based on any underlying fundamentals of the market.

(1) Rents are dropping,

(2) salaries are dropping,

(3) anyone in real estate is making less money,

(4) unemployment is still very high,

(5) our state is going bankrupt,

(6) interest rate subsidies are ending,

(7) government tax incentives are ending, and

Everything about this real estate market move is an illusion. However, many believe we will fake it 'til we make it. I can't argue with that. We might.

I still believe prices will go down as the cartel loses its grip on the market, but I am surprised at the effectiveness of their squatting program. By allowing Ponzis to squat, they are sustaining values and preventing widespread strategic default in many areas. Only time will tell if this fix was a good solution or an enduring one.

Losing $1,619,700 sucks

This is the biggest loss I have seen to date on an Irvine property, and the owner is the one losing the money, not the bank.

  • Today's featured property was purchased on 4/3/2007, the eve of the subprime implosion. The owners used a $3,750,000 first mortgage and a $2,565,000 down payment.

  • On 8/2/2007 they refinanced with a $3,400,000 first mortgage. They actually paid their mortgage down. They earn an A for mortgage management. I doubt that is much comfort to them.

No mortgage equity withdrawal, and no squatting. This deal has not worked out as well for them as it has for others….

Irvine Home Address … 40 SALT BUSH Irvine, CA 92603

Resale Home Price … $4,995,000

Home Purchase Price … $6,315,000

Home Purchase Date …. 4/3/2007

Net Gain (Loss) ………. $(1,619,700)

Percent Change ………. -20.9%

Annual Appreciation … -7.2%

Cost of Ownership

————————————————-

$4,995,000 ………. Asking Price

$999,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$3,996,000 ………. 30-Year Mortgage

$1,042,522 ………. Income Requirement

$21,623 ………. Monthly Mortgage Payment

$4329 ………. Property Tax

$750 ………. Special Taxes and Levies (Mello Roos)

$416 ………. Homeowners Insurance

$475 ………. Homeowners Association Fees

============================================

$27,593 ………. Monthly Cash Outlays

-$2395 ………. Tax Savings (% of Interest and Property Tax)

-$4740 ………. Equity Hidden in Payment

$1981 ………. Lost Income to Down Payment (net of taxes)

$624 ………. Maintenance and Replacement Reserves

============================================

$23,064 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$49,950 ………. Furnishing and Move In @1%

$49,950 ………. Closing Costs @1%

$39,960 ………… Interest Points @1% of Loan

$999,000 ………. Down Payment

============================================

$1,138,860 ………. Total Cash Costs

$353,500 ………… Emergency Cash Reserves

============================================

$1,492,360 ………. Total Savings Needed

Property Details for 40 SALT BUSH Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 5 full 2 part baths

Home size: 7,150 sq ft

($699 / sq ft)

Lot Size: 20,150 sq ft

Year Built: 2006

Days on Market: 28

Listing Updated: 40280

MLS Number: U10001628

Property Type: Single Family, Residential

Tract: Shdc

——————————————————————————

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

This property is in backup or contingent offer status.

Live La Dolce Vita in Shady Canyon at this tremendous Tuscan-inspired estate on one of the enclave's most sought-after oversized lots. Gracing the top of a scenic promontory, the property soaks in panoramic vistas of the verdant hillsides – while also offering the ultimate in privacy at the end of a cul-de-sac with only one neighbor. Encompassing more than 7,100 square feet of relaxed elegance, the estate provides 5 bedrooms and 5 and 2-half baths, including a secluded guest casita. Designed for alfresco living in all seasons, the estate features expansive living 'suites,' where disappearing doors create a seamless transition from indoor to outdoor spaces. A stylish formal living room opens to a sheltered loggia and to the sparkling hillside pool/spa, cabana and sun-drenched dining terrace beyond. Even the lantern-lit entry portico, with its breathtaking reclaimed brick barrel-vaulted gallery, sets the stage for unparalleled entertaining.

These photographs are beautiful.

.

The Cash Value of Real Estate Explained

With an understanding of the relationship between mortgage interest rates, capitalization rates and market rents, the cash value of real estate can be readily calculated. Today, I show you how.

Irvine Home Address … 1 WINTERSWEET Way Irvine, CA 92612

Resale Home Price …… $1,188,000

{book1}

I wanna be a billionaire so fricking bad

Buy all of the things I never had

Uh, I wanna be on the cover of Forbes magazine

Smiling next to Oprah and the Queen

I swear the world better prepare

For when I’m a billionaire

Travie McCoy — Billionaire

Most people purchase real estate in California because they believe they will get rich. Few want to spend money to provide a home for their family as most expect their home to provide money for the family. Houses are the new wage earners, not through rental cashflow but through appreciation. Life doesn't work that way. Real estate can be a profitable cashflow investment, and it can make people rich — not through speculation on buying and selling, but through owning for positive cashflow.

Cash value of real property

Establishing the cash value of real property requires an understanding of risk and relative rates of investment return. Today, we will review these basics and apply a little simple math to show how to value real estate based on its cashflow value.

Cashflow investment is very different than speculation. The value obtained from owning a cashflow investment does not come from the change in the assets resale price; the value comes from the cash the investment provides while it is owned. In contrast, a speculative investment derives its value from the change in resale price that presumably goes up. Sometimes speculative investments provide cashflow, but in the case of California real estate, speculative investments often have a strongly negative cashflow because people over pay and over leverage themselves in order to speculate.

Since a cashflow investment relies on positive cashflow to derive value, the investment is best analyzed with an assumed permanent holding period. Appreciation or depreciation is not considered as it is not important to the investment's performance. Potential changes in asset value may be important if the investor needs to liquidate for other reasons, but a resale value at a later date is not a major consideration in analyzing the investment.

Also, since a cashflow investment needs positive cashflow to warrant consideration, the investment must perform immediately upon purchase. Once cashflow investors begin projecting future increases in rents to justify a purchase price, they are entering the fantasy world of speculation and failing to make a wise cashflow investment decision. Nearly everyone in California looks at property in this foolish way.

To properly analyze a rental real estate investment, the property must provide a minimum return in the first year of ownership without regard to future resale value. If rosy projections of the future occur, that is a bonus; if they don't the investment is still likely to perform as planned. That is low-risk investing.

Equity and Debt

If you analyze nearly any property in coastal California, the capitalization rate (the measure of cash return) is very low, generally between 3% and 4%. With mortgage interest rates at 5%, such low capitalization rates are unwarranted. Why would anyone want to earn 3% in an equity position when they could invest in mortgage debt an earn 5%? Most do this because they expect rapid appreciation.

Equity should trade at a premium to debt. Just as a second mortgage carries a higher interest rate than a first mortgage, equity should carry a higher cap rate than debt because equity is a subordinate claim to real estate. Landlords must pay the mortgage before they pay themselves. If the mortgage is greater than the rent, the landlord loses money. Similarly, if the landlord sells a rental property, the debt is paid first, and any remainder is paid to the landlord. Given the subordinate position and the associated risk, smart equity demands a premium for subordination. One of the surest signs of overvalued real estate is cap rates that are lower than mortgage interest rates.

Of course, California speculators do not see it this way. Fools believe prices rise very quickly and go up forever, and they see debt as a tool that positions them to capture this appreciation. It works well during market rallies, but it is devastating when prices crumble — and prices do crumble because appreciation in excess of wage growth is not sustainable. Speculators chasing the dream of appreciation pay too much for real estate, and in doing so, they push cap rates down well below the cost of debt.

Advantages of equity

There are two main advantages of taking an equity position in real estate versus a debt position:

  1. Equity returns are perpetual because it is ownership. Debt can be paid off and retired whereas equity can be kept forever and passed on through multiple generations.

  2. Equity returns rise as rents increase with wage inflation whereas prudent debt is fixed. Adjustable rate debt may go up or down with interest rates, but it will never see steady growth like an equity position.

California speculators believe these advantages warrant paying a large premium to own real estate; however, overpaying for real estate reduces the return and negates much of the advantage of ownership. Premiums are not infinite.

The equity premium

When I say that equity carries a premium to debt, it is easy to get confused about what that means for pricing. For capitalization rates to exceed the cost of debt, prices must be low. Obtaining an equity premium means paying less for a property, not paying more. The relationship between the amount invested and the return on that investment is inverse; In other words, the more you pay, the worse your return and the lower your cap rate.

As a general rule, equity should trade at a 20% to 40% premium to debt. For instance, at 5% interest rates, capitalization rates should be between 6% and 7%:

5% x 120% = 6%

5% x 140% = 7%

Last week I profiled a cashflow property in Corona. The capitalization rate exceeded the mortgage interest rate and fell within the parameters listed above. That property is an excellent cashflow investment.

Cash value of real estate based on mortgage interest rates and monthly rent

Based on the relationship between debt and equity explained above, it is possible to produce a simple spreadsheet that relates mortgage interest rates and monthly debt to arrive at a properties cashflow value.

The table below is loaded with information. The two assumptions are the expense ratio which is how much of the income goes toward taxes, insurance, upkeep, and other expenses, and the other assumption is the equity premium I described above.

The first four lines show the calculation of net operating income from monthly rent. I have selected rents showing a range typical across properties here in Irvine. The columns to the right show the capitalization rate based on the mortgage rate as I described above.

The table itself shows the resulting cashflow value when you divide net operating income by the capitalization rate.

I imagine many who view these numbers in Irvine think they are rather quaint but completely meaningless. However, when you look at properties where values are not inflated — like the property in Corona — the numbers illustrate a basic truth about bottoming values in a real estate market. Once the equity premium over debt reaches a viable threshold, money is attracted to a market and prices are stabilized. Large swaths of Riverside County, most of Las Vegas, and much of the Phoenix markets are at prices consistent with positive cashflow valuations. In short, they are as cheap as they need to be for cashflow investors to come in an clean up the mess.

This doesn't mean we are at the bottom in some of these markets because the huge supply of current and future foreclosures will continue to put pressure on prices, but cashflow investors will buy anyway because to them, if prices fall more, it is more reason to buy. Cashflow opportunities as good as what is currently available in Las Vegas are very rare, and cashflow investors are buying everything available.

I am very bullish on Las Vegas, not because prices will rise any time soon, but because prices are very attractive on a cashflow basis.

Today's featured property

Today's featured property clearly illustrates how clueless speculators are to cashflow values here in Irvine. The property is being marketed as a cashflow property. It is occupied by 6 students.

First, I believe marketing this property as a multi-family property in a single family neighborhood is against code, and since this property is in my neighborhood, I plan to forward this listing to code enforcement and see if they will do something about it.

Second, for this property to be worth almost $1.2M, these six students must be paying a combined $12,000 a month rent. I would be surprised if they pay half that amount. It would take a very foolish investor to pay double the cashflow value for a property that is not zoned for the occupation necessary to obtain the value. On a cashflow basis, this property is not worth what the owner paid for it, yet this guy plans to make almost $500K. If buyers in Irvine are that stupid, everyone should quit their jobs and start doing illegal rental conversions.

This is one of the dumbest ideas I have seen. Perhaps the guys who remodeled the monstrosity at 2 Angell can go this route to get out from under their albatross. If this guy gets $1.2M, anything is possible.

Irvine Home Address … 1 WINTERSWEET Way Irvine, CA 92612

Resale Home Price … $1,188,000

Home Purchase Price … $700,000

Home Purchase Date …. 4/25/2009

Net Gain (Loss) ………. $416,720

Percent Change ………. 69.7%

Annual Appreciation … 49.8%

Cost of Ownership

————————————————-

$1,188,000 ………. Asking Price

$237,600 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$950,400 ………. 30-Year Mortgage

$247,951 ………. Income Requirement

$5,143 ………. Monthly Mortgage Payment

$1030 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$99 ………. Homeowners Insurance

$180 ………. Homeowners Association Fees

============================================

$6,451 ………. Monthly Cash Outlays

-$1413 ………. Tax Savings (% of Interest and Property Tax)

-$1127 ………. Equity Hidden in Payment

$471 ………. Lost Income to Down Payment (net of taxes)

$149 ………. Maintenance and Replacement Reserves

============================================

$4,531 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$11,880 ………. Furnishing and Move In @1%

$11,880 ………. Closing Costs @1%

$9,504 ………… Interest Points @1% of Loan

$237,600 ………. Down Payment

============================================

$270,864 ………. Total Cash Costs

$69,400 ………… Emergency Cash Reserves

============================================

$340,264 ………. Total Savings Needed

Property Details for 1 WINTERSWEET Way Irvine, CA 92612

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,500 sq ft

($475 / sq ft)

Lot Size: 3,840 sq ft

Year Built: 1966

Days on Market: 15

Listing Updated: 40291

MLS Number: H10044068

Property Type: Single Family, Residential

Tract: Shdc

——————————————————————————

6 suites fully rented to UCI students. Beautiful home in the heart of Irvine University Park is surrounded by acres of parks, trees, and greenbelt – a tremendous health benefit for residents. Corner lot in a cul-de-sac. Total living area 3327 sq ft. profile only shows 2500 sq ft. Previous owner added 549 sq ft and current owner added 278 sq ft (both has permits please verify with city). Major remolded on 2008 likes new house. Owner occupy or investment.