Monthly Archives: May 2010

The Lender Decision Tree and Limited Resale Inventory

Lenders have limited options for dealing with delinquency. So far lenders are holding current price levels by keeping properties from the market.

Irvine Home Address … 7 Capobella Irvine, CA 92614

Resale Home Price …… $675,000

{book1}

Ring, ring, ring goes the telephone

The lights are on but there's no-one home

Tick tick tock it's a quarter to two

And I'm done

I'm hangin' up on you

I can't keep on waiting for you

I know that you're still hesitating

Don't cry for me

'cause I'll find my way

You'll wake up one day

But it'll be too late

Madonna — Hung Up

Borrowers are done paying, and their hanging up on lenders. The lenders are still hesitating, waiting for borrowers to pay. Lenders will wake up one day and start the foreclosure process in earnest. Will it be too late?

The Lender Decision Tree

When lenders make loans, they far prefer borrowers to repay those loans; in fact, their entire business plan relies on it. As long as borrowers are current with their payments, lenders are happy and making money. When borrowers don't make their payments, the end result is a distressed sale. If there are enough of these, market prices are reduced dramatically which causes significant lender losses.

Below is the lender decision tree for delinquent borrowers. Today we will explore this diagram in some detail and discuss the ramifications of the decisions lenders make.

Loan Modifications

Once a borrower stops paying on the loan, the first step in the process is to attempt a loan modification. Many borrowers are using this step as a place to game the system for more time in the property. If the loan modification is successful, then the borrower is made current and everyone is happy. Very few loan modfications are successful mostly because it isn't in a borrower's best financial interest to get temporary relief and sustain the huge debt. Loan modifications are the first step in the amend-pretend-extend dance.

Short Sale

The next option is a short sale. This process generally goes nowhere because Banks Refuse to Recognize HELOC and Second Mortgage Losses. To give a sense of scale of this problem, consider this: "Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans." These loans are all going to go bad, and it will decimate the banking industry when these losses are finally recognized.

Short sales are not going to be the final resolution of this problem for one main reason: many distressed sellers do not bother to attempt a short sale. First, for those with non-recourse loans, they are foolish to attempt a short sale because buried in the terms of the sale is the abandonment of their non-recourse status. Plus, why would they go through the hassle? The magnitude of the loss doesn't impact the borrower, so there is little incentive for them to participate in the short sale process. Once they decide they are not going to sell and obtain any equity, most people stop paying and stop responding to lender inquiries. If borrowers don't care enough about the property to communicate with the bank, they certainly are not going to get involved in a short sale process.

If a short sale does go through, it is still a distressed sale. It is a sale that probably would not be occurring in the market if the borrower were not in distress. These should be inventory added to the organic inventory of people moving for other reasons. One of the side effects of having 11.2 million properties underwater is that about 25% of our organic sales inventory is removed from the market. People are trapped in their homes.

Squatting and shadow inventory

Once loan modifications and short sales have failed, the only options available to lenders are within the foreclosure process. At this point, borrowers are not making payments, and contractually, lenders have the right to force the sale of the property at public auction. Prior to the Great Housing Bubble, it was inconceivable that lenders would allow borrowers to squat in houses once it became obvious they were not going to repay the loan. Now that over 10% of loans in the United States are delinquent, lender are overwhelmed by the volume. And since lenders know that foreclosing on all those people will cause them catastrophic losses on their second-home lien portfolios in addition to crushing home prices, they are choosing not to do anything. More than one-third of all delinquent borrowers have been delinquent for more than a year. Squatters are everywhere.

The reason lenders are allowing widespread squatting are twofold:

  1. Lenders hope that people in this category will cure their loans with a loan modification. Nobody believes this is the cure to the problem, not even the lenders.

  2. The government benefits by having fewer homeless and no rioting in the streets. The twenty-first century's version of squatter's rights is allowing delinquent homeowners to stay in their homes. It prevents Hoovervilles and provides significant economic stimulus through the temporary elimination of housing expenses. Too bad it totally screws renters who don't enjoy such benefits.

Shadow inventory is foreclosure's purgatory. It prepares delinquent borrowers for the singularity of trustee sale.

Pre-Foreclosure Inventory

Once lenders finally serve notice on the squatters, these properties show up as pre-foreclosure inventory and we can see them on ForeclosureRadar.com. Although the amend-pretend-extend dance is primarily keeping people in shadow inventory, a huge number of properties are bottlenecking in pre-foreclosure.

We have been watching the foreclosure market very closely. Ordinarily, very little inventory exists here because once the process is started, it tends to move forward in an orderly process and is resolved in about five months. Not anymore.

I took a survey of properties scheduled for sale during the first four months of 2010. The dancing is evident. Over 50% of scheduled trustee sales are postponed, some of them are postponed many times. Over 25% are cancelled, presumably due to a loan modification. This is the outcome lenders are dancing to obtain. Less than 25% go to auction on any given day with lenders taking 10% to 15% and third parties getting 5% to 10%. It is the postponements that are most telling.

An IHB reader has contacted me about a property that has been scheduled for trustee sale for over six months. Every two weeks, the sale is postponed for another two weeks. The first mortgage on this property has not been paid since 2008, and the borrower is making no effort to pay. The one and only reason for this postponement is because the lender is unwilling to take the loss. This is happening all over, and the postponement numbers above are testament to this phenomenon.

Unfortunately, due to the endless postponements, we have been unable to put any owner-occupants into any foreclosure properties. For any given property, there is a 93% chance that the auction will be postponed, canceled, or sold back to the bank. This makes a nearly impossible environment to work with families. We will let everyone know when this changes, but for now, that is what we are up against in the foreclosure market. The dance goes on for the sake of those cancellations as lenders hope those loan modifications are successful. Most end up re-defaulting and accumulate in shadow inventory or back here on the path to foreclosure.

Keep in mind that these pre-foreclosure inventory numbers are the visible inventory. Shadow inventory is four times as large.

Limited Inventory

On any given day, less than 25% is released to the public. The effect is to restrict local inventories and cause competition among would-be buyers. Ask anyone active in the market today, and they will tell you that the competition is fierce because so little of the MLS inventory can actually transact. The few reasonably priced properties usually offered by lender REO departments get much attention. Buyers often have to bid over ask and accept onerous terms. Many sellers offer at WTF prices nobody can afford, so they are effectively out of the market. Many properties are short sales that linger for months with twenty offers waiting for the second lien holder to accept a loss. When it doesn't happen, the property heads to foreclosure.

The effect of these conditions is to create limited inventory for the lenders to sell their own properties at inflated prices. If inventory is restricted enough, lenders capture the most motivated buyers. That is the way monopolies, oligopolies and cartels operate. Unfortunately, since this is a cartel, and since there is a huge shadow inventory, each cartel member gains advantage over the others by releasing more inventory. Once the administrative roadblocks are removed, we should see more inventory that moves from shadow inventory to visible inventory and finally through foreclosure and on to the market.

Until the spigot of inventory is opened wider, the flow of properties will be slow, prices will remain inflated, and shadow inventory and squatting will continue unabated. The Ponzis inflated house prices with their quest for appreciation income, and now inflated prices are supported by allowing the Ponzis to squat in their castles of debt. What was the Ponzi economy is now the squatter economy.

Doubling the mortgage

Many Irvine home owners doubled their mortgage during the housing bubble. With free money readily available, many took it, and now they are losing their homes.

  • Today's featured property was purchased on 4/21/1999 for $338,000. The owner used a $270,400 first mortgage and a $67,600 down payment.

  • On 10/17/2000 he opened a HELOC for $55,000.

  • On 9/4/2001 he refinanced with a $275,000 first mortgage and a $150,000 HELOC which he didn't use.

  • On 2/1/2002 he refinanced the first mortgage for $286,500.

  • On 10/4/2002 he refinanced with a $400,000 first mortgage and obtained a HELOC of $50,000.

  • On 9/9/2003 he refinanced with Countrywide and got a $408,000 first mortgage and a $50,000 HELOC.

  • On 4/22/2004 he refinanced with a $420,000 first mortgage.

  • On 1/10/2006 he refinanced with a $525,000 Option ARM with a 1% teaser rate and obtained a $100,000 HELOC.

  • Total property debt is $625,000

  • Total mortgage equity withdrawal is $354,600.

  • Total squatting time is at least 18 months.

Foreclosure Record

Recording Date: 08/07/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/17/2009

Document Type: Notice of Default

Irvine Home Address … 7 Capobella Irvine, CA 92614

Resale Home Price … $675,000

Home Purchase Price … $338,000

Home Purchase Date …. 4/21/1999

Net Gain (Loss) ………. $296,500

Percent Change ………. 99.7%

Annual Appreciation … 5.9%

Cost of Ownership

————————————————-

$675,000 ………. Asking Price

$135,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$540,000 ………. 30-Year Mortgage

$140,881 ………. Income Requirement

$2,922 ………. Monthly Mortgage Payment

$585 ………. Property Tax

$67 ………. Special Taxes and Levies (Mello Roos)

$56 ………. Homeowners Insurance

$42 ………. Homeowners Association Fees

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

$3,672 ………. Monthly Cash Outlays

-$717 ………. Tax Savings (% of Interest and Property Tax)

-$640 ………. Equity Hidden in Payment

$268 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves

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

$2,667 ………. 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

$40,800 ………… Emergency Cash Reserves

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

$194,700 ………. Total Savings Needed

Property Details for 7 Capobella Irvine, CA 92614

——————————————————————————

Beds:: 3

Baths:: 0002

Sq. Ft.:: 1908

$0,354

Lot Size:: 3,586 Sq. Ft.

Property Type:: Single Family Residential Detached

Stories:: 2

Year Built:: 1987

Community:: Biltmore

County:: Orange

On Redfin:: 237 days

——————————————————————————

As of 15th of March, 2010 this is a short sale. Subject to lender(s) approval of short sale. Upgrade home in Westpark in Irvine CA. This a lovely 2 story home with 3 bedrooms, 2.5 baths and 2 car garage. Tiled floors downstairs, fireplace, kitchen with TV room, refinished cabinets, granite counters and more. Call agent for details.

If you missed the 60 Minutes story on strategic default, you can find it here.

Watch CBS News Videos Online

Greed, Foolish Optimism, and Toxic Mortgages Ruin Financial Lives

Borrowers took on huge debts during the housing bubble from a combination of greed, foolish optimism and an abundance of toxic mortgage options.

Irvine Home Address … 10 HOLLINWOOD Irvine, CA 92618

Resale Home Price …… $975,000

{book1}

Gimme the microphone first, so I can bust like a bubble

Compton and Long Beach together, now you know you in trouble

Ain't nothin' but a G thang, baaaaabay!

Dr Dre and Snoop Dogg — Nuthin But a G Thang

It was all about Greed. The G thang took over. The stories of the Great Housing Bubble are seldom black and white, right or wrong, good or evil. Some of the characters are despicable and deceiptful, but the majority are ordinary folks who succumb to greed, foolish optimism about the future of housing prices, and the market prowess of realtors and mortgage brokers.

Although the media likes to portray loan owners and innocent bystanders who don't deserve the hardship they are facing, the reality is more nuanced. People may not have fully understood the Option ARM, but they certainly did understand that (1) they would have a low payment for a few years, (2) their house would double in value and (3) they would make a fortune — or so they thought.

Few buyers during the bubble contemplated the risks they were taking on. Even today, people are buying with the false assurance that prices have bottomed and that they cannot lose on real estate. ARMs are still popular despite their obvious risks at the bottom of the interest rate cycle, and few people consider the near certainty of an increasing house payment to be a potential problem. Everyone will be make much more in a few years, right?

Many buyers today are making the same mistakes of bubble buyers; they are buying from greed and fear and an overly optimistic set of assumptions about the future of resale prices and interest rates. We are not learning the lessons of history… or are we? How many of today's buyers witnessed the bailouts and numerous government market props and reason that if things go bad the government will step in to bail them out too? The government's response is loaded with moral hazard.

Drowning in home debt

By Lisa Gibbs, senior writerMay 5, 2010: 4:28 AM ET

(Money Magazine) — A transfer in 2005 landed Air Force major Richard Hallbeck, his wife, and two kids in Southern California smack in the middle of the real estate bubble. Home prices in the area had doubled in the past five years and were still climbing. So the Hallbecks swallowed hard and bought an $845,000 four-bedroom in a suburb of Long Beach.

The $3,800 monthly payment was high but affordable on two incomes. (Laurie, now 37, worked as a claims adjuster.) And they figured the market was so strong that when they had to move again, they'd at least break even. "Our house actually appraised over what we paid for it," Richard, 42, recalls wistfully.

Since then, area sale prices have fallen 26% — when properties sell at all. Meanwhile, the recession cost Laurie her job, and the payment on the couple's adjustable-rate mortgage will jump $800 in July. Next year Richard will face mandatory retirement from the Air Force, and his pension will be a third of his current $117,000 income.

Can these people honestly say they "swallowed hard" before they bought this house? That suggests they actually contemplated the risks involved and made an informed decision. This couple, like thousands of other buyers during the bubble were assured by everyone involved in the transaction that everything would be fine, and all of their friends were telling them the same. If they swallowed hard it was to down their celebratory drinks when they got the house. They were about to make a fortune.

All that's got the Hallbecks anxious to move to a more affordable city — like Dayton, where they used to live. But they're just as anxious about how much they could lose on the sale of their house.

A similar home down the street lists for $655,000, $21,000 less than the Hallbecks' outstanding mortgage. At that price, the couple would be out $231,000, including their down payment and closing costs. "The stress has really worn on us," Richard says.

The stress over this huge mistake is exactly why people shouldn't do what this couple did. it is the reason I didn't do what this couple did. They should be stressed. They have already lost a quarter million dollars, and if they sell now, it will also damage their credit. There are consequences for participating in a massive Ponzi Scheme despite the government's best efforts to foster moral hazard by eliminating the consequences.

Nationwide, about one in four home mortgages are now underwater, meaning borrowers owe more than their places are worth. No surprise, California and other bubbly states — Nevada, Arizona, and Florida — lead the nation.

While a bevy of new federal programs aim to help, underwater owners who want to move still face uncomfortable choices: Postpone the move and continue sinking money into a pit; sell for a loss, forfeiting the down payment and some savings to close the deal; desperately try to enter into a short sale; or simply walk away and face the consequences of foreclosure. If you (or your kids) are in this situation, here's how to think about the options.

This article had my attention up to this point. I knew it could go one of two ways: (1) it could discuss the real options truthfully including strategic default, or (2) it could be a load of crap written to appease lenders who want people to stay and keep paying? Any guesses before we move on?

Keep on keeping on

If you don't have to move and can afford the payments, it probably makes sense to soldier on and wait for housing prices to recover, says Denver financial planner Ross Schmidt. Moody's Economy.com projects that prices in 61% of metro areas will return to recent peak levels by 2015.

Here is a half-truth disguised as good advice. First, the projections from Moody's is overly optimistic as shill studies tend to be, and second, the 39% of metro areas where prices will not reach peak levels by 2015 include most of California, Nevada, Arizona and Florida — the areas that bubbled most.

If you live in one of the harder-hit cities — which may take 20 years to rebound — and you're more than 25% underwater, your house won't be a financial asset anytime soon. But as long as you're happy to stay in it for many years, that may not matter.

May not matter? Bullshit. Timing Does Matter. It matters a great deal to the family that will have to do without the significant resources going to a bank for debt service. Lenders need to feel the brunt of their foolish losses. Losing money causes the pain that prevents them from doing it again. Banks should never have extended oversized loans to people who couldn't afford the payments. People renting from the bank at overpriced rates are screwing themselves and enriching stupid, greedy bankers.

In the meantime, you may be able to cut your loan balance — and lower your payments — through a new federal program that refinances existing loans into smaller FHA loans. To qualify, you must be current on payments — but it's up to the lender to agree to it.

I am sure the lenders are lining up to reduce loan balances of those who are paying on time… Not. What possible incentive do lenders have to participate. Unless the borrower becomes a problem to lenders by refusing to pay the note, there is no urgency for lenders to do anything.

The Hallbecks might have been eligible for some of this aid, but Laurie is eager to move with the kids by this fall, rather than waiting until Richard retires — which will be in the middle of the school year.

Beg the bank for a break

What if you need to get out of the house? The Hallbecks initially considered renting their place out. But they'd probably lose money, given the spread between their mortgage payment and rental prices. Becoming a landlord is a risk even in areas where you can cover carrying costs, as you're still on the hook in between tenants, says Maryland financial planner Timothy Maurer.

The fact that rents are much less than the cost of ownership is exactly why this was a stupid purchase to begin with. There was no viable plan B. Renting for negative cashflow is stupid, particularly with an ARM where the negative cashflow can become even more negative.

A cleaner option may be to ask your lender for a short sale, in which it would accept less than the loan amount. To convince the bank, homeowners must show they're at risk of default because they can't make payments or are so deep underwater that they're likely to bail. (With $155,000 in savings outside of retirement accounts, it's unlikely the Hallbecks will qualify.)

Why would a bank agree to a short sale if the borrower has assets? Banks don't want to tell borrowers they don't have to pay the bank even if they can, unless the US taxpayer is paying the difference.

It can take months to arrange a short sale, if you're successful at all. So for best results, work with a "distressed-property specialist," a real estate agent who has experience negotiating with lenders. At realtor.com, select "SFR" under Find a Realtor to search for this type of specialist.

Notice the plug for realtor.com? Who do you think sponsored this story?

Also seek free advice from a certified mortgage consultant, whom you can find via makinghomeaffordable.gov, suggests Melinda Opperman, of Springboard Nonprofit Consumer Credit Management. Such an adviser can help you determine whether your loan type allows the bank to come after you for money later. He or she can also help ensure the loan is reported as "settled" to the credit bureaus. A mortgage listed as "settled for less than agreed" can damage your score the way a foreclosure would.

Not exactly. For the truth, please see How Delinquencies Impair Credit Scores:

After a mortgage delinquency, the two scores [680 and 780] would look like this:

• After 30-day delinquency, 680 score drops to 620 to 640; 780 score declines to 670 to 690.

• After 90-day delinquency, 680 score falls to 595 to 610; 780 score goes to 645 to 665.

• After foreclosure, short sale, or deed-in-lieu, 680 goes to 575 to 595 and 780 drops to 620 to 640.

• After bankruptcy, 680 drops to 530 to 550; 780 declines to 540 to 560.

Speaking of foreclosure, University of Arizona law professor Brent White says walking away may make sense financially if you're more than 40% underwater and could rent a similar house for less than your mortgage bill. But doing so has consequences, not the least of which may be a guilty conscience. Foreclosure stays on your credit report seven years — and can cut a 780 score an average of 150 points, per Fair Isaac. That can affect everything from your insurance premiums to your employment potential to your future ability to buy a house.

Do you think Dr. White really set the bar at 40% underwater? Didn't that strike you as such a high threshold that few find themselves in that situation? I believe the reporter intended it that way. Default rates go up dramatically at the water line. People are generally better off if even a little underwater if rents are less than the cost of ownership.

Guilty conscience? LOL! More lender fantasy and projection. I predicted previously that by the end of 2010, there will be no guilt and no stigma associated with strategic default. Lenders have played on borrower guilt for too long, and borrowers are starting to see if for the manipulative lie that it is.

I have an I-Phone with the local AT&T service. The AT&T network in Irvine really sucks, and the moment Verizon gets the I-Phone to work on its system, I will cancel my AT&T contract and pay the early termination fee. I won't feel any guilt about breaking my contract, and it won't make me immoral.

Eat the loss yourself

For the Hallbecks, the best — and fastest — option may be simply selling the house and paying any difference between the sale price and the mortgage out of pocket, says Maurer. That is a good, if not particularly palatable, choice for homeowners who have significant savings and aren't deeply underwater. Selling this way eliminates any credit risks.

Since Money first spoke to the Hallbecks, they have listed their home and attracted an offer of $655,000. That would've meant shelling out the $21,000 difference, plus some $40,000 in commissions and closing costs. So, the couple decided to hold out for more. "Hopefully," says Richard, "our expectations aren't too high."

I would love to joke about the stupidity of their decision, but with the restricted inventory condition caused by lenders refusing to foreclose and clear out the squatters, some desperate buyer may bid them up enough to get them out at even. This is exactly what the banks want. They need a small army of knife catchers to take advantage of the artificially low interest rates and bail out the banks through direct acquisition.

More than the temporary increase in prices, the bear rally does one other very useful thing for the banks: it gives existing borrowers false hope that them may not be underwater soon. If borrowers really accepted that it will take ages to get back to the surface, many more would strategically default. If lenders and keep borrowers in their homes long enough, borrowers become invested in their own bad decision, and they will stay long beyond the point where staying makes sense.

Guilt and paying the mortgage

Have you ever wondered why people associate guilt with certain terms of mortgage contracts? If you examine the terms in the promissory note and mortgage arrangement, the lender is making a loan, and as a contingency in the event an borrower does not repay the loan, the lender has the right to force a public auction to resell the property to obtain their money.

Prior to our era of widespread squatting, failure to repay the loan resulted in a borrower losing the house they consider their home. A borrower who was capable of making the payment but didn't was causing their family to lose their home.

In normal circumstances, losing the house would not be in the best interest of the family, and it could be argued that losing the house is immoral as it harms the family. However, in our current circumstances with prices in many markets well below the loan balance, losing the family home — which may be emotionally painful — is better for the family than sustaining a crushing debt load.

The old moral reason for paying the mortgage to keep the family home is superceded by the greater moral imperative to provide a financial future unfettered by crushing debt.

There is another way to view this transaction. It is the banks that were immoral when they made loans without regard to a borrower's ability to repay. They put people into homes under terms that were not sustainable, and they caused the pain we are witnessing today. Making the loan was immoral, walking away is the just response.

Raiding the Equity Piggy Bank

  • Today's featured property was purchased for $900,000 on 1/17/2003. The owner used a $650,000 first mortgage and a $250,000 down payment.

  • On 3/31/2004 she liberated some equity with a $730,000 refinance.

  • On 10/29/2004 she refinanced with a $767,000 Option ARM.

  • On 12/22/2005 she obtained a $250,000 HELOC, but she may not have used it.

  • Total property debt is $1,017,000.

  • Total mortgage equity withdrawal is 367,000 including her down payment.

  • Total squatting is at least 1 year.

Foreclosure Record

Recording Date: 03/31/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/28/2009

Document Type: Notice of Default

Because of the behavior of owners like this, even those who should be sitting on mountains of bubble equity are broke. There is no move-up market. First-time buyers with significant wage savings are sustaining our housing market. What is typically only a small fraction of buyers now comprises the entire buyer pool.

Irvine Home Address … 10 HOLLINWOOD Irvine, CA 92618

Resale Home Price … $975,000

Home Purchase Price … $900,000

Home Purchase Date …. 1/17/2003

Net Gain (Loss) ………. $16,500

Percent Change ………. 8.3%

Annual Appreciation … 1.0%

Cost of Ownership

————————————————-

$975,000 ………. Asking Price

$195,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$780,000 ………. 30-Year Mortgage

$203,495 ………. Income Requirement

$4,221 ………. Monthly Mortgage Payment

$845 ………. Property Tax

$233 ………. Special Taxes and Levies (Mello Roos)

$81 ………. Homeowners Insurance

$140 ………. Homeowners Association Fees

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

$5,520 ………. Monthly Cash Outlays

-$1035 ………. Tax Savings (% of Interest and Property Tax)

-$925 ………. Equity Hidden in Payment

$387 ………. Lost Income to Down Payment (net of taxes)

$122 ………. Maintenance and Replacement Reserves

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

$4,069 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,750 ………. Furnishing and Move In @1%

$9,750 ………. Closing Costs @1%

$7,800 ………… Interest Points @1% of Loan

$195,000 ………. Down Payment

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

$222,300 ………. Total Cash Costs

$62,300 ………… Emergency Cash Reserves

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

$284,600 ………. Total Savings Needed

Property Details for 10 HOLLINWOOD Irvine, CA 92618

——————————————————————————

Beds: 4

Baths: 0003

Home size: 3100

($315 / sq ft)

Lot Size: 6140

Year Built: 2001

Days on Market: 35

MLS Number: P728911

Property Type: Single Family, Residential

Community: Oak Creek

——————————————————————————

Atractive home in Oak Creek, very comfortable and inviting for entertaining. One bedroom and office downstairs. The beautiful home is very nicely layed out. There are many conveniences including an artium with an inground spa, built in BBQ with electric and gas in the beautiful back yead. The gated community offers pools, tennis courts, trails and is walking distrance to shopping. Located on a cul de sac street within the community.

Atractive? layed? artium? inground? yead? distrance?

Future House Prices – Part 2

http://www.thegreathousingbubble.com/images/HomePageImage.jpg

Price-to-Income Ratio

Since incomes and rents are closely related, evidence for the Great Housing Bubble that appears in the price-to-rent ratio also appears in the price-to-income ratio. National price-to-income ratios are quite stable. There has been a slight upward drift with the decline of interest rates since the early 1980s peak, but from the period from 1987 to 2001, this ratio remained in a tight range from 3.9 to 4.2. The increase from 4.1 to 4.5 witnessed from 2001 to 2003 can be explained by the lowering of interest rates; however, the increase from 4.5 to 5.2 from 2003 to 2006 can only be explained by exotic financing and irrational exuberance.

Figure 46: Projected National Price-to-Income Ratio, 1988-2015

If national price-to-income ratios decline to their historic norm of 4.0, prices nationally will fall 9% peak-to-trough, bottom in 2011 and return to peak pricing in 2014. A 10% decline and a nine year waiting period would be difficult on homeowners nationally, but the magnitude and the duration will not be nearly as severe for most as it will be for homeowners in the extreme bubble markets like Irvine, California.

Figure 47: National Projections based on Price-to-Income Ratio, 1986-2015

The volatility in price-to-income ratios caused by bubble behavior is clearly visible in the historic price-to-income ratios from Irvine, California. During the coastal bubble of the late 80s, in which Irvine participated, the price-to-income ratio increased from 3.7 to 4.6, a 25% increase. In the decline of the early 90s, price-to-income ratios dropped to a range from 4.0 to 4.1 and stabilized there from 1994 to 1999 before rocketing up to an unprecedented 8.6–a 115% increase. This new ratio was achieved by the extensive use of exotic financing, in particular negative amortization loans that rendered the new ratio inherently unstable.

Figure 48: Projected Irvine, California Price-to-Income Ratio, 1986-2030

If house prices in Irvine decline to the point where the price-to-income ratio reaches its average of 4.2–a ratio higher above this historic range of stability between 4.0 and 4.1–prices will decline 43% peak-to-trough, bottom in 2011 and return to the peak in 2029. The magnitude of this decline would be catastrophic to homeowners who purchased during the bubble. Twenty-four years is a long time to wait for peak buyers hoping to get out at breakeven.

Figure 49: Irvine, California Projections from Price-to-Income Ratio, 1986-2030

Hyperinflation

The Federal Reserve under Ben Bernanke began aggressively lowering interest rates at the end of 2007 in response to the severe economic downturn caused by the collapse of house prices and the related difficulties falling house prices had on the banks and other institutions that made loans using houses as collateral. [1] Bernanke, prior to taking the position as the chairman of the Federal Reserve, was an academic who studied the Great Depression and wrote extensively on the failures of monetary policy by the Federal Reserve at the time. He also wrote about the crisis of deflation Japan faced when their combined stock market and real estate bubbles deflated throughout the 1990s. [ii] Bernanke believed that quick and decisive action on the part of the Federal Reserve was necessary to prevent a destructive deflationary spiral as was witnessed in the United States during the Great Depression and in Japan during the 1990s. [iii] By lowering interest rates and creating price inflation, Bernanke hoped to devalue the currency and provide market liquidity through both domestic and foreign investment. Once the real rate of interest was below the level of inflation, borrowing would be strongly encouraged as the value of the currency was falling faster than the interest rate being charged. The increased borrowing would stimulate business growth and the general economy minimizing the deflationary impact of falling home prices. In theory, the lower interest rates would also serve to blunt the decline in housing prices as borrowers would again be able to finance large sums to support inflated prices.

Figure 50: CPI Adjusted Median Home Prices, 1986-2006

At the time of this writing, the results of the policies of the Federal Reserve have not become history so the consequences cannot be fully evaluated. The primary foreseeable consequence of Federal Reserve policy is rampant price inflation. An economy that relies for 70% of its value on the spending of consumers will be strongly impacted by price inflation. When a country knowingly devalues its currency, it causes a severe recession as the prices of imported goods and raw materials increase significantly. Perhaps a severe recession and price inflation is preferable to an economic depression like the one of the 1930s in America, but it is certainly not desirable. Since stagflation of the 70’s, the FED has shown a willingness to push the economy into recession before it allows inflation to get out of control. When the FED started lowering interest rates at the end of 2007, it appeared as if they may be moving down the path of hyperinflation; however, it seems unlikely they would take it to extreme. One of the primary functions of the FED is to provide a stable financial system. Once the Federal Reserve begins to see economic growth and liquidity in the debt markets, interest rates may rise as quickly as they fell in order to stop hyperinflation from occurring.

Figure 51: National Inflation Rate, 1961-2007

There will be some benefits to a devalued currency. A less valuable currency is a boon to exporters. The United States has run a chronic trade deficit for many years, and much of the recent deficit has come from inexpensive goods imported from China. The trade imbalance may correct itself with currency devaluation. Of course, this rebalancing of trade will come at the cost of more expensive imported foreign goods and a commensurate decline in spending power from US consumers. Also, prior to currency devaluation, wages in the United States were so high that jobs were being outsourced to foreign countries where people can be paid much less. Wages could not rise significantly from where they were without devaluing the dollar to prevent wage arbitrage from moving jobs overseas. [iv] The devalued currency provided some room for wage increases, and these wage increases could theoretically provide additional support for housing prices.

Figure 52: Inflation-Adjusted Projections for Los Angeles, 1987-2012

Currency devaluation and inflation eats away at the buying power of money. Although this may support house prices at marginally higher nominal price levels, real price levels, the price level adjusted for inflation, will remain unchanged. Imagine if the Federal Reserve allowed inflation to cut the spending power of the dollar in half by 2011, and imagine if this level of inflation allowed house prices to remain stable at 2006 price levels for those 5 years. Many homeowners would feel relieved their homes did not decline in value, but this relief would be an illusion as the buying power of their money tied up in the value of their houses was cut in half. Irrespective of the nominal decline in prices, the inflation adjusted prices will decline significantly going forward. In the Los Angeles market as measured by the S&P/Case-Shiller index, a decline in prices to levels of historic rates of appreciation as previously described will result in a 66% decline in inflation adjusted terms. [v] On an inflation adjusted basis, buyers during the bubble will never get back to breakeven unless there is another real estate bubble similar to the Great Housing Bubble.

An Educated Guess

Each of the four methods of house price valuation described previously makes an independent prediction of how far prices will fall, and when they will recover. Some of these will prove more reliable and accurate than others, but an average of the results of these four methods makes it possible to make an educated guess as to the percentage decline in house prices and when prices will get back to peak levels. Unfortunately, there is no reliable method for projecting the rate of this decline, but if the experience of the coastal bubble of the early 90s is a good guide, then prices should fall for 6 to 7 years before reaching a bottom. This puts the bottom of prices sometime in or around 2011 based on the peak in various markets occurring in 2005 or 2006. Prices will flatten at the bottom because it will take time to absorb the inventory of foreclosures resulting from the drop. Market psychology and the rate of foreclosures will largely determine the rate of price decline, and these forces are difficult if not impossible to model. It is possible to construct a graph that illustrates the path of house prices over time based on the methods of price valuation and assumptions about the timing of the decline.

Table 10: Summary of Predictions for National Home Prices

Method

Total Decline

Appreciation Rate

Recovery Year

S&P/Case-Shiller Inflation Support

33%

3.3%

2025

Median House Price and Historic Appreciation

10%

4.5%

2011

Price-To-Rent Ratio

27%

3.6%

2020

Price-To-Income Ratio

9%

3.3%

2014

20%

3.7%

2018

The range of predictions for the decline of national home prices is from 9% to 27% with an average of 20%. The predicted time of peak-to-peak recovery ranges from 2011 to 2021 with an average of 2018. Some will argue price drops of this magnitude are not likely, and these would be unprecedented declines; however, the increases were unprecedented as well. The Great Housing Bubble was a unique and unprecedented event.

Figure 53: National Median House Price Prediction, 2004-2019

The predictions for national prices are based on a 3.7% rate of fundamental appreciation for some combination of wage growth, rental increases and other factors. The origin point for the graph is based on the last period in which fundamentals were aligned in the 1986-1999 period (not shown on the figure). The amount of the decline, 20%, is based on the average prediction of the four methods. The rate of decline was interpolated from the date of the peak to the date of the predicted bottom based on the experience of the coastal bubble of the 1990s. National prices peaked at an approximate value of $246,000 in 2006; they should bottom out at around $196,000 in 2011, and if fundamental appreciation rates hold, they will reach the previous peak in 2018.

Table 11: Summary of Predictions for Irvine, California Home Prices

Method

Total Decline

Appreciation Rate

Recovery Year

S&P/Case-Shiller Inflation Support

55%

3.3%

2039

Median House Price and Historic Appreciation

45%

4.4%

2023

Price-To-Rent Ratio

22%

4.7%

2019

Price-To-Income Ratio

43%

3.2%

2029

41%

3.9%

2028

* The appreciation rate of 3.9% moved up the recovery year to 2025

The range of predictions for the decline of home prices in Irvine, California, is from 22% to 53% with an average of 41%. The predicted time of peak-to-peak recovery ranges from 2019 to 2033 with an average of 2028. Of course, since Irvine is in the heart of a bubble-prone market, recovery may happen more quickly, but then again, that would mean prices have entered another unsustainable price bubble.

Figure 54: Irvine, California, Median House Price Prediction, 2004-2025

Predictions for Irvine, California, are based on a 3.9% rate of fundamental appreciation as wage growth and rental rate growth have consistently outpaced national averages. The origin point is the intersection of the last two stable bottoming periods in 1984-1987 and 1995-1999. The 41% decline is the average of the four analysis methods, and the rate of decline is projected in the same manner as the national statistics. In Irvine, California, prices peaked around $723,000 in 2006, and they should bottom out in 2011 along with the rest of the country. If the fundamental appreciation rate of 3.9% is accurate, the previous peak will be reached in 2025–a 19 year span from peak to peak.

[1] Adam Posen wrote Why Central Banks Should Not Burst Bubbles. (Posen A. , 2006) His conclusions are as follows, “Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system’s structure and stability – in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source.” His argument is sound, but he does point out that if bubbles get too large, the fallout can be even more disastrous than attempts to restrain them. This argues against his central point, and the Japanese example does show what can happen if bubbles are allowed to get too large. Ben Bernanke also wrote a paper titled Should Central Banks Respond to Movements in Asset Prices? (Bernanke & Gertler, Should Central Banks Respond to Movements in Asset Prices?, 2000). He professes a belief that the activities of the Central Bank should not target asset prices, although his behavior as FED chairman has been interpreted as an attempt to bolster market prices. In a later paper (Bernanke & Boivin, Monetary Policy in a Data-Rich Environment, 2002) Bernanke also explored the uses and aggregation of data by the Federal Reserve. He seemed to be preparing himself for the job of FED Chairman. The focus of policy debate and academic research in the wake of the Great Housing Bubble is likely to be the issue of asset bubbles in general. Central Banks around the world learned how to control inflation in the 1980s and 1990s, but their policies have tended to create excess liquidity which has resulted in financial bubbles.

[ii] (Bernanke B. S., Japanese Monetary Policy: A Case of Self-Induced Paralysis, 1999)

[iii] Adam Posen in his paper It Takes more than a Bubble to Become Japan (Posen A. S., 2003), outlines the causes of the prolonged recession after the bursting of the stock and real estate bubbles in Japan. He agrees with Ben Bernanke’s conclusion that aggressive monetary easing is the solution to the problem, “Central bankers should learn from Japan’s bubble the benefits of a more thoughtful approach to assessing potential growth and of easing rapidly in the face of asset price declines and not be concerned with targeting asset prices or pricking bubbles per se.” In a related paper Passive Savers and Fiscal Policy Effectiveness in Japan (Kuttner & Posen, 2001) by Kenneth N. Kuttner; Adam S. Posen, the authors reaffirm their conclusions on the mistakes of the Japanese Central Bank in handling their asset bubbles. The authors note that despite excessive borrowing of the central government, Japanese citizens continue to by government debt at very low cost and in effect subsidize their own borrowing.

[iv] In the paper Offshoring, Economic Insecurity, and the Demand for Social Insurance (Anderson & Gascon, 2008), Richard G. Anderson and Charles S. Gascon describe the problems associated with offshoring, in particular the increased demand of social services caused by the fear of offshoring.

[v] The inflation adjusted chart for the S&P/Case-Shiller index was drawn by the following method. The index value was then divided by the consumer price index date from the U.S. Department of Labor Bureau of Labor Statistics. The resulting number was converted to a baseline value of 1 so the data could be represented as a percentage change.

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

{book1}

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.

Clueless Academic Wonders, "Was It Really a Bubble?

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

Irvine Home Address … 27 STARVIEW Irvine, CA 92603

Resale Home Price …… $2,999,000

{book1}

I practice every day to find some clever lines to say

To make the meaning come true

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

And I'm alone with you

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

And oh the night's so blue

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

Frank Sinatra — Something Stupid

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

Was There a Commercial Real Estate Bubble?

By CASEY B. MULLIGAN

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

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

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

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