Safe Haven Buying: Kool Aid Intoxication of the Housing Bust

High-end squatters are starting to be pushed from their houses. Will the added inventory bring down high-end prices, or will the high end be a safe haven?

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price …… $2,799,000


You wanna stay out with your fancy friends.

I'm tellin' you it's got to be the end,

Don't bring me down,no no no no no,

I'll tell you once more before I get off the floor

Don't bring me down.

Electric Light Orchestra — Don't Bring Me Down

You want to buy with your fancy friends? I'm tellin' you the rally's got to end. Don't bring them down. I'll tell you once more as prices bounce off the floor, they will go down.

Prices have crashed nationwide because buying only made sense as long as prices were going up. Once the rally stopped, prices were doomed to crash because the only alternate reason to buy is to save money versus renting. In many areas of the country, prices are low enough that buying makes sense because it is cheaper to own than to rent. Locally, that is not the case.

During the rally kool aid intoxication caused people to buy to capture appreciation, but this is not the only manifestation of kool aid intoxication. Now, some people are buying merely because prices have not gone down. This reason is just as crazy because it isn't grounded in anything tangible. The herd is seeking protection from the crash, and people are buying in areas simply because other people are buying and holding up prices. This isn't careful analysis, it is herd-following foolishness.

Back in 2007, many real estate boards had heated arguments between bulls and bears. The bulls would pull up charts showing the huge preceding rally as evidence that prices would go up forever. It is hard to argue with a chart, but past performance is no guarantee of future outcomes, and just as the bears predicted, prices fell off a cliff.

Those who argue for safe-haven speculation make the same argument: prices haven't fallen therefore they will not fall. The bulls ignore the huge inventory of distressed properties as if it isn't there. "I'll believe it when I see it," they say. How much more obvious does it need to be? We can see years worth of inventory in the foreclosure pipeline, and although we don't have addresses of the shadow inventory, First American CoreLogic does, and they say 8.4% of Orange County mortgage holders are delinquent on their payments. That doesn't seem particularly safe to me.

New Trulia Real Estate Index: Rent vs. Buy

Today Trulia announced America’s Top 10 Cities to Buy vs. Rent and the Top 10 Cities to Rent vs Buy. Trulia calculated the price-to-rent ratio using the average list price compared with average rent on 2 bedroom apartments, condos and townhomes listed on To create the list, Trulia analyzed the largest 50 cities in America, by population.

Top 10 Cities to Buy vs. Rent

City Price-to-Rent Ratio
1. Minneapolis, Minnesota 8
2. Arlington, Texas 8
3. Miami, Florida 8
4. Fresno, California 8
5. San Antonio, Texas 8
6. Mesa, Arizona 9
7. Jacksonville, Florida 9
8. Phoenix, Arizona 10
9. El Paso, Texas 10
10. Las Vegas, Nevada 11

“At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true,” said Pete Flint, co-founder and CEO of Trulia. “Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result , these unattainable markets are so affordable it makes better financial sense to buy than rent.”

Yes, it is better to own than to rent in all of the places listed above. I would also include most of Riverside County. Prices in these areas are well below rental parity. Renters in these areas pay a premium for the freedom of movement and lack of liability — as they should. Renting is supposed to cost a premium. Ownership is a burden; taxes, maintenance, debt service, transaction costs, and illiquidity.

Top 10 Cities to Rent vs. Buy

City Price-to-Rent Ratio
1. New York, New York 33
2. Omaha, Nebraska 26
3. Seattle, Washington 25
4. Portland, Oregon 22
5. San Francisco, California 22
6. Oklahoma City, Oklahoma 21
7. Kansas City, Missouri 20
8. San Diego, California 20
9. Cleveland, Ohio 20
10. Dallas, Texas 19

“It is not a surprise to see cities like New York and San Francisco on the ‘Rent’ cities but I was surprised to see areas like Omaha, Oklahoma City and Kansas City on our rental list, “said Flint “We’re not suggesting that it’s unwise to buy in these areas, though – just that it’s significantly more expensive than renting. In many of these cities, even though home buying is much more costly than renting, prices are still much lower than they have been in a long, long time.”

To see the Top 50 City Rent v Buy Index, please click here to download.’s Rent vs. Buy Index – Interpretation Key

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation. Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

Definitions: Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.

Total costs of renting include rent and renter’s insurance.

I was surprised to see San Diego is still unaffordable. Prices have crashed pretty hard there as they led Orange County on the way up and on the way down. If ownership is still more expensive than rent, that market may experience more pain.

One of the weaknesses of the Trulia method is that it does not take into account changes in affordability based on interest rates. With our current 5% interest rates, price to rent ratios near 20 are close to rental parity.

A Fresh Look at Rent vs. Buy

"Why on Earth would you buy down here when you can rent?" asked a friend of mine in Miami Beach not long ago. "Buying is so over."

He promptly moved to Manhattan for work reasons–and bought a $1 million loft on the Upper West Side.

Note the typical behavior. People want to buy when prices are up, and turn more wary when they've collapsed. Logically it makes no sense.

Mathematically, it makes no sense either. The various strata of the market are spread out based on incomes and amounts borrowed. During the housing bubble, the low end increased in price because first-time homebuyers whose income could only afford a $200,000 were instead given a $500,000 mortgage. The added $300,000 pushed up all prices in the marketplace. The natural spread between the low end and the high end was maintained.

However, during the bust, the low end of the market has collapsed, and the high end has held up because lenders decided to let high-end borrowers squat. The result is a wide dispersion of market prices, far wider than what is normal. Market dynamics indicate that the substitution effect will restore the natural balance of prices by lowing prices at the high end. Since many high-end borrowers are delinquent on their loan payments, the only reason the high end has not collapsed so far is that the supply has been withheld by banks not approving short sales and not foreclosing on squatters.

Research out Thursday adds some hard numbers.

Real estate website has looked at major real estate markets across the country and asked: Is it cheaper to buy, or to rent?

By Trulia's math my friend was moving in exactly the wrong direction.

Rent in Manhattan: Home prices there are way too high, says Trulia. (Ditto San Francisco.)

Buy in Miami. And Phoenix. And Las Vegas. And most of the other places that have been flattened by the crash. Homes there are cheap compared to rents.

The cross-over point is about 15 times annual rent, the company believes. In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year's rent. So, for example, if you're paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000. Dean Baker, economist at the Washington, D.C. think-tank The Center for Economic and Policy Research, came to a similar conclusion in research on the subject in recent years. Fifteen times is the historic average, he said.

With 5% interest rates, the crossover is closer to 20 than 15. I used to write often about a gross rent multiplier of 160 (I used monthly rent rather than yearly). As interest rates dropped to 5%, the 160 GRM increased to about 220, a number well above historic norms.

So what's the multiple in New York right now?

About 32 times, says Trulia. The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent. Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).

On the other hand Miami list prices are now about eight times annual rents, says Trulia. Phoenix is about 10 times and Las Vegas about 11.

The most beaten down markets are where the best deals are to be had.

Trulia's data need to be taken with some caveats.

Trulia looked at list prices rather than actual transaction prices, so its figures for prices may be too high.

Furthermore drawing the cut-off point at 15 times rents may be on the low side.

Mr. Baker, in conversation yesterday, said that figure assumes that you're only going to stay in your home for the typical seven years. If you stay a lot longer, he says, the transaction costs of buying and selling become less and less important. That makes owning more attractive.

Nonetheless the Trulia analysis seems directionally correct. Work done by the C.E.P.R. last year came to similar conclusions: Namely that markets like New York and the California coast remained expensive compared to rents, while the hardest hit markets now look cheap.

And Trulia's research emphasizes two points that are absolutely spot on.

First, homeowners need to look first and hardest at present cashflow. The cult of homeownership made no sense. If renting is much cheaper than buying, think seriously about it.

Second: The markets that have fallen the furthest now look like good places to buy, while those that seem to be "safest" aren't. As the saying goes: There is no such thing as a "safe" investment, merely one whose risks are not yet apparent. It's a principle that a lot of people forget time and again.

Write to Brett Arends at

When the spread between low-end and high-end prices becomes as extreme as it is now, market forces and the substitution effect will force this spread to tighten — either low-end prices must go up significantly or high-end prices must come down. Both scenarios suggest speculating at the high end is not a good idea.

Safe-haven speculation is kool aid intoxication

In The Great Housing Bubble, I described the three typical beliefs of a bubble:

  1. The expectation of future price increases.
  2. The belief that prices cannot fall.
  3. The worry that failure to buy now will result in permanent inability to obtain the asset.

The belief that prices cannot fall is the fallacy behind safe-haven speculation. This erroneous belief is supported by a host of other fallacies including:

  1. They Aren’t Making Any More Land
  2. Everyone Wants To Live Here
  3. Prices Are Supported By Fundamentals
  4. It Is Different This Time

Doesn't this all sound familiar? Long-time readers of the IHB used to see this nonsense frequently in 2007 when denial ruled the market. It disappeared for a couple of years, but it is resurfacing again. This is kool aid intoxication, a disease proven to be harmful to speculator's net worth.

Safe-haven buying is not true investment, it is speculation. It is purchasing property based on faith rather than math. It is following the herd rather than studying and analyzing financial performance. There is no logic to it, but there is the allure of emotional comfort from making the same mistake everyone else does. Everyone who bought in 2006 thought they were going to be rich following the herd. Most of them were slaughtered.

I wish the safe-haven argument were true

In case you didn't notice, the IHB also operates in the real estate sales market. Since most readers of this blog are interested in Irvine real estate, it would benefit my business greatly to embrace buying in Irvine as a safe haven. I don't for one simple reason: safe-haven speculating is foolish. Don't do it. It will cost you dearly.

If you want to buy in Irvine today, know the risks. Prices may go down further (they probably will), and the best case is tepid appreciation or an extended period of flat prices. With the low payments from 5% interest rates, many properties are affordable, but buyers may find themselves underwater while the distressed properties are pushed through the market and interest rates rise. Any buyers planning to buy should expect to stay put for at least five to seven years. If there is any chance of moving three years from now, would-be buyers should rent instead.

Air in the high end

Not many years ago, there was not much debt in the high-end market. Borrowers rarely took out loans over $1,000,000 partly because they were more difficult to qualify for and partly because you couldn't deduct amounts over $1,000,000. In neighborhoods with houses over $1,000,000, it was very unusual to see debt distress because there wasn't much debt used. People would buy into these exclusive neighborhoods with large amounts of cash. Not anymore.

Many nice tract-home neighborhoods became elevated to the $1,000,000 club by borrowed money. People used to sell their homes and port $500,000 in equity to buy a $1,100,000 home. During the housing bubble, they would borrow $2,000,000 with an Option ARM and push prices of homes up to the ridiculous prices we see today. The problem with this is simple: the debt buyers cannot be replaced with equity buyers. Some neighborhoods may survive, but the more debt a neighborhood has, the more it will fall — when lenders finally get around to pushing out the squatters.

  • Today's featured property was purchased near the peak on 10/16/2006 for $3,518,000. The owners used a $2,814,167 first mortgage, a $351,771 HELOC, and a $352,062 down payment. Think about that — these people only put about $350K of their own money in a $3.5M purchase.
  • On 12/8/2006 they obtained a HELOC for $356,078 to get access to their full down payment.
  • On 6/14/2007 they obtained a HELOC for $742,400.
  • Total property debt is $3,556,567
  • Total squatting time is at least 11 months.

Foreclosure Record

Recording Date: 04/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/24/2009

Document Type: Notice of Default

I recently published a list of about 60 properties with NODs filed where the debt is over $1,000,000. Who is going to buy all of these properties? If there were cash buyers to replace the deadbeats, don't you think the lenders would have foreclosed?

Irvine Home Address … 65 GRANDVIEW Irvine, CA 92603

Resale Home Price … $2,799,000

Home Purchase Price … $3,518,000

Home Purchase Date …. 10/16/2006

Net Gain (Loss) ………. $(886,940)

Percent Change ………. -20.4%

Annual Appreciation … -6.2%

Cost of Ownership


$2,799,000 ………. Asking Price

$559,800 ………. 20% Down Conventional

4.91% …………… Mortgage Interest Rate

$2,239,200 ………. 30-Year Mortgage

$573,637 ………. Income Requirement

$11,898 ………. Monthly Mortgage Payment

$2426 ………. Property Tax

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

$233 ………. Homeowners Insurance

$395 ………. Homeowners Association Fees


$15,518 ………. Monthly Cash Outlays

-$1825 ………. Tax Savings (% of Interest and Property Tax)

-$2736 ………. Equity Hidden in Payment

$1061 ………. Lost Income to Down Payment (net of taxes)

$350 ………. Maintenance and Replacement Reserves


$12,368 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$27,990 ………. Furnishing and Move In @1%

$27,990 ………. Closing Costs @1%

$22,392 ………… Interest Points @1% of Loan

$559,800 ………. Down Payment


$638,172 ………. Total Cash Costs

$189,500 ………… Emergency Cash Reserves


$827,672 ………. Total Savings Needed

Property Details for 65 GRANDVIEW Irvine, CA 92603


Beds: 6

Baths: 6 full 1 part baths

Home size: 5,600 sq ft

($500 / sq ft)

Lot Size: 12,683 sq ft

Year Built: 2006

Days on Market: 34

Listing Updated: 40318

MLS Number: P734433

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Lacm


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

Million $$ Views Luxury Estate – La Cima Model 1X on Single Loaded Street w Ocean/City Lights & Breathtaking Views * Welcome Entry Courtyard adjoints an Open Air Dining Loggia w Fireplace * 6 BR 6.5 BA + Hm Theater + Bonus Rm 4 Car Garage * Main Floor Master Suite * Complete Saparate Living Suite The Casita is a Private Oasis * 2nd Story Private Access to a spacious Living Rm w Open Kitchen * Super Launddry Rm * Lot of Custom upgrades.

Saparate? Launddry?

Does that description read like a $2,799,000 property?

How about this back yard?

51 thoughts on “Safe Haven Buying: Kool Aid Intoxication of the Housing Bust

  1. theyenguy

    You write: “Since many high-end borrowers are delinquent on their loan payments, the only reason the high end has not collapsed so far is that the supply has been withheld by banks not approving short sales and not foreclosing on squatters.”

    How very true. This is the FASB 157 entitlement in operation. But once there is a liquidity evaporation on the stock market, and bank stocks fall, that being seen in the ETFs, like IAT, KBE, and RWW; as well as a sell of in the Treasuries, like IEF, TLT, and ZROZ, then the banks, having had their capital wiped out, will be looking for cash flow, and will start asking the squatters for lease payments.

    The $2.8 million house at 65 Grandview, Irvine, CA 92603 is surreal — totally a plastic dream both in price and in ammenities. What a trajedy, I know people who impose and couch serf, and the intoxicated and squat. But I tell you … Solyent Green Living is coming very, very soon, as Debt Deflation gets underway.

    The article mentions New York with a price-to-rent ratio of 33. Perhaps one might enjoy reading my article entitled ” The Surreal Upper East Side … Zip Code 10021″ which I provided a link for.

    Trulia reports that the median sales price for homes in Upper East Side, New York for Mar 10,2010 to May 10,2010 was $1,235,901 based on 152 sales. Compared to the same period one year ago, the median sales price increased 11.3%, or $125,901, and the number of sales increased 42.1%. Average price per square foot for Upper East Side was $1,198, a decrease of 4.2% compared to the same period last year.

    Oshrat Carmiel in Bloomberg article Manhattan Empty Condos May Be Rentals as Leases Reign relates: “When Richard J. Bailes and his family paid $4.1 million in March for a four-bedroom apartment in the glass and steel Georgica on Manhattan’s Upper East Side, just eight of the building’s 58 units were occupied, he said.”

    “Bailes and his family had plenty of places to choose from. About 8,700 new condos sit empty in Manhattan, with 75 percent not even listed for sale yet, said appraiser Miller Samuel Inc. Priced at levels the market no longer supports, they’re selling so slowly it would take as long as seven years to find buyers for them all, said Jonathan Miller, president of Miller Samuel.”

    “‘Most investors would be happy to buy apartments for operation as rentals, but most sellers and their lenders would not,’ said Susan Hewitt, president of a New York real estate investment and development firm that bought unsold condos in the last property downturn. ‘The original developer isn’t interested in any price below the value of his interest and the lender isn’t interested in writing it down until they’re forced to for regulatory reasons,’ she said. ‘That accounts for the paralysis right now.’”

    “So long as regulators don’t force lenders to write down the value of their condo loans, they won’t, said Alexander Goldfarb, an analyst at Sandler O’Neill & Partners LP in New York. ‘Here’s the challenge,’ Goldfarb said in an interview. ‘At the peak, a for-sale condo in New York cost, let’s say $1,000 a square foot to build. To make it work as a rental — conceptually you need a pretty big haircut.’”

    “The 8,700 unsold new condos in Manhattan exceed all residential sales in the borough in 2009, according to Miller. About 6,500 of those units are ’shadow inventory’ and have not yet been listed for sale, he said. ‘If you flush that all into the market you tank the market,’ said Daniel Alpert, managing partner of New York-based Westwood Capital. ‘So the only way you can effectively push that into the market is to bleed it out very slowly. Well, the lenders don’t really have the option to bleed it out slowly because they can’t hold onto it for six years.’”

  2. Sue in Irvine

    2.8 million and no landscaping? For that price (and less) you could buy acres with horses, pools, views (even ocean views)in Orange County.
    The only thing I like is the kitchen 🙂

    1. wheresthebeef

      The landscaping looks like some the bubble developments in the IE, I’m sure their neighbors love them for that.

      Hey, for 2.8M I would think a Bentley or Maybach would be parked out front. That must be the car of the maid or nanny. We truly live in interesting times…zero consequences for bad behavior (at all levels).

    2. Alan

      What you’re seeing is a $200k dog house, made to look like a trash can in a cute-chic kind of way. Or maybe it is a casita.

  3. Geotpf

    Amazing that somebody paid (ok, “paid”) $3.5 million for a house but never bothered to put in ANY landscaping at all, front or back.

    1. IrvineRenter

      The lack of a yard makes me wonder if the house was ever lived in. This may have been a speculative purchase from the beginning. The “investor” only had $350,000 at risk until the $750K HELOC. The lender can’t go after him for the deficiency on the purchase-money first. If the property goes up in value, the investor makes a fortune.

      1. Sue in Irvine

        There must be a Turtle Ridge Association. I wonder how they got away with this “yard” for all those years.

        1. tenmagnet

          I was thinking the same thing.
          How’s that possible?
          In Turtle Ridge of all places

        2. tonye

          I wonder how healthy those TRidge associations are.

          A strong association would have never allowed this to happen. After this long, they would have put the house on foreclosure on some type of a lien.

          Of course, if the majority of homeowners just don’t give a hoot, or don’t have the money, then they wouldn’t (coudln’t) afford the legal costs.

      2. es

        You need a “breathtaking” graphic. I recommend finding a picture of a person getting punched in the gut as hard as possible, appearing to have the wind knocked out of them.

        1. wheresthebeef

          You are talking about the album cover to Pantera’s “Vulgar Display of Power.” One of my all time favs. Google it…don’t know how to post it.

      3. Geotpf

        The house is lived in. There is furniture in all the interior photos, plus personal effects that would not be there if the house was merely “staged”. In the kitchen, there’s an Albertson’s shopping bag being used as a garbage or recycling bag. In the master bathroom, there is a very large amount of makeup and other beauty care products on the vanity. Somebody simply didn’t care enough to plant grass and bushes and trees.

        1. Freetrader

          Of course not, and why would they. They were gonna flip it, you know, and make their fortune. Why would they want to spend ‘actual money’ on putting in a yard? I’ll bet they figured they would only live there for a year or so. They’ve just been hanging in there, waiting for the market to recover. I’ll also be you that when they took out that $450,000 HELOC, they stated on the loan that they were going to make home improvments, including “putting in a lawn and yard.”

          1. lowrydr310

            A friend of mine bought a home in Texas a few years ago *to live in* (not as a speculative investment). It was a brand new home in a new development, and for whatever reason landscaping wasn’t included in the price. While we were driving out one day, we noticed a contractor hired by the developer spraying liquid grass seed mix on the bare public areas of the development. We slipped the guy a $20 and he did the entire yard of my friend’s house. Three years later, it’s one of the nicest lawns in the neighborhood!

  4. irvine_home_owner

    Maybe people are buying now because this last bubble has taught them bad habits:

    1. Low interest rates and FHA low downs are like the new OArms.

    2. If prices are going down (or at bottom in some places) we are closer to them going back up at some point.

    3. If they do, then we can cash out like all those people at the last bubble.

    4. If not, we can squat or walk away like everyone else is doing since it’s been shown that the banks are in no hurry to foreclose.

    Why wouldn’t a renter (or even a move-up buyer) consider the above scenarios if there is little cash to risk (3.5%)? Especially when waiting on the sidelines so long and noticing that the “suckers” who bought during the bubble not only made money… but are living rent-free so are making more money.

    And by encouraging underwater homeowners to strategically default… that’s just adding more sugar to the KoolAid.

    1. IrvineRenter

      That is a very astute observation. If you don’t mind, I may use that in a post.

      I would also add that if inflation comes back because the Fed keeps interest rates too low for too long, the cheap debt becomes even cheaper. Image a world of 6% price inflation, and you are holding 5% debt. The government is actually paying you to hold that debt and pay it off slowly.

      1. Buck Gilchrist


        With rates at the historic lows, and asuming a market that at the very least is tentatively ‘flirting’ with the first tier of support (rent save) versus being certainly overvalued, it does bend the metrics for your typical rent saver as noted (220 vs 160 [220 seems high, I digress]).

        The 3.5% minimal skin factor combined with squat-savings potential as an escape hatch if “all-else-fails” (severe neg equity) are game changers, or the ‘new OArms’, are they not? They form almost a poor man’s golden parachute of sorts, amplifying the low rate incentive; especially when you know rates must climb sometime.

        While the rise in rates will put further downward pressure on prices, a further drop cannot be ‘crippling’ as the ‘durable bottom’ cannot be too far off, can it? A cashflow investor exists in this same ZIRP universe that I do, are not all boats lowered accordingly?

        To an otherwise ultra-conservative rent-saver-wanna-be-cashflow-investor, the urge to lock in at these absurd ‘conforming standards’ starts to cloud my judgement. I’d appreciate astute thoughts.

      2. Michael

        It is even better than that. The 5% is tax deductible so the effective rate is one third lower….

    2. AZDavidPhx

      I’m not so sure. Think about it – if you did not make the extra effort to go out and read housing blogs each day, would you even have the faintest clue about all the strategic defaults and squatting going on?

      I typically observe the mainstream news casts and the stories are either constructed to pump “monthly sales” enthusiasm or to tell a sob story of someone in foreclosure without giving you all the pieces of the story.

      Your typical lemming who works 8 to 5 and maybe checks foxnews or cnn a few times throughout the day isn’t going to get any non superfluous neutered down information.

      I say that your average tool thinks this is bottom because prices have not fallen as rapidly in the last year. So naturally, now is the time to buy!

      Of course now that all the tax gimmicks have herded in a large percentage of those suckers, there aren’t many left. I suspect the remainder of the year is going to be very very crappy and at some point there will be another drumbeat for another round of tax credits as the realtors start running low on their Top Ramen.

      1. tonye

        The “average tool” did not buy into TRidge.

        Heck, I don’t think “average tool” ever bought a million dollar home.

        1. Stu

          I know quite a few “Average Tools” that made 2-4 hundred thousand a year between 2002-2007. A few of them blew it all in clubs in LA acting like B movie stars, and others used it to buy houses.

          Money was extremely easy to get in those years here in California. I knew quite a few 24 year old “Millionaires”, some with no college degree. All were in finance or real estate. Almost all are now living with their parents.

          Just because someone has money, does not mean they are intelligent. As they say, “Easy come, easy go”. Those who get money easily also lose it easily.

          I know a two Hispanic families that bought a 1.5 million dollar home in 06, no one in the house made more than 30k a year. Anything was possible. A million dollar home was nothing in So Cal.

    3. Alan

      I’m not so sure about the first part of the “bought during the bubble not only made money… but are living rent-free so are making more money.” If they spent their HELOC or refinance equity withdrawals, the money is gone – they got to enjoy it, but did not hang on to it. If they invested it and kept all or most of it during the crash, the bank or debt collectors can come after it. At the low end of the housing market, probably not worth the trouble, but at $3.5M it has got to be worth at least taking a careful look.

    4. Chris

      Question is: can we all buy using FHA at 3.5%?

      (Perhaps IR already mentioned this before but) what are the minimum requirements for borrowers who want to borrow using FHA?


  5. tonye

    The pricing in TRidge was never based on reality, it was pure marketing and speculative mania.

    Again, they were charging a 100% premium over TR for no reason other that people were following the herd.. a pure momentum play.

    Remember the NASDAQ on 1999 and 2000?

  6. ElvisInMiami

    Funny thing about the Trulia data is that in Miami it still isn’t a better deal to buy. The averages speak differently because there are some high end condos that rent for high end prices in desirable areas. Unfortunately these same high rent condos cost a lot more than the average sale price.

    Lets take a look at the building I live in, recent rentals:

    units for sales:

    Now compare a similar floor number (first 2 numbers) with the same unit (last two numbers) and see that a 2 bedroom might rent for $2000/month, but it is for sale at a price of $420K (questionable if this comes with a parking spot). At first that might seem ok but HOA dues of $680/month and taxes are about the same leave you with a $1300/month cost assuming you bought for cash.

    I will admit my building is nicer than many, but not in the high end league of dozens of other buildings. The $190K 2 bedroom condos/houses mentioned in the trulia article are further out in less desirable areas and not as fancy. The large volume of $2K/month renters are all the developers that are not selling any units and just renting whole buildings.

    So as the blog post mentioned take this data with a grain of salt. Nobody is willing to take a loss unless the bank takes over the property.

  7. awgee

    If their monthly payments that they haven’t paid are about $12,000 and they live in the home without paying for 18 months or more, that is a tax free income of over $200,000.

    Someone will have to pay for that.

    1. IrvineRenter

      On this property the squatter’s bonus (also known as the bank’s lost interest) is eye-popping.

      1. Geotpf

        Or is it? If you factor in total missed payments, yeah, that’s a lot of dough. The squatter sure made out big time by not having to pay housing costs for a year. But did the bank really lose that much? I say no. The banks are “Saved By Zero”.

        Basically, banks can borrow at very close to 0% interest from the Fed. In addition, inflation is 0% (or less!), and most investments on the open market make not much more than a 0% return.

        The net result of these zeros is that a bank doesn’t really care if they foreclose today or a year from now, since their costs for waiting is basically zero. In fact, if the bank thinks prices are going up, it is in their best interest to delay foreclosing as long as possible.

        1. MalibuRenter

          The banks borrow by putting collateral at the Fed window. They don’t (usually) get money for nearly free with no collateral.

          I keep returning to a basic question. If banks are behaving similarly, is it because they have some similar incentive? A pressure from regulators? It’s certainly not that banks are in similar financial positions, because they aren’t.

          I don’t think it’s pure cartel behavior, because there is always an incentive to cheat. Some bank would start foreclosing and dumping quickly.

  8. newbie2008

    You make a math analysis; whereas, most investments are made by herd analysis for the possibility of following the money or being forced into an investment by company’s retirement plan, e.g., 401k.

    Very similar to other areas of popularity such as drug addiction or usage. In the 1980’s, coke was called a new drug and new problem never seen in medical history. Too bad the press and so-called experts did look back to the early 1920’s and 1950’s too see repeats of history. Same with investments. No real historical perspective. It’s different this time, never before in history, bah bah bah…. Truth is it’s the same old, same old with different names and may times with the same names.

    Re-leverage here we come again. This time, the purpose of re-leveraging is to transfer the liability from the banks to the federal govt through GSE, FHA and other govt. guaranteed loans. Banksters and co-conspirators reep the profits and leave the innonocent to clean-up (pay for) the mess.

    For your featured property, it made more $ sense for the “current owner/borrow” to buy than rent. He has no money in the house and one year of free rent in a multi-million dollar house. Your tax dollars at work. Let’s see if hecan stright the FC process/free rent for another 2 years.

  9. Soylent Green Is People

    Would love to see a 1000 yard overview of what else is for sale in the ‘hood. $2.8m for a turd on a prarie seems a bit steep, unless it’s surrounded by $4.m homes with all of the amenities you’d expect for that kind of cabbage.

    $2.8m and that kind of description would get my Realtor out on their keister in a heartbeat. Assuming this goes for $2.2m and the Realtor gets even 1.5%, that is a heavy paycheck for such little effort.

    My .02c

    Soylent Green Is People.

    1. Geotpf

      It’s a short sale. I doubt the “owner” gives a shit about the description or whether or not it even sells. I’m surprised there’s even more than one photo.

  10. thrifty

    Need a little help understanding the reserve requirement that banks must meet on outstanding loans. It seems that banks nearly always sell the loans which are bundled into CMO, etc. that created the current crisis.
    I don’t understand the necessity to maintain a reserve when the loan is sold – and there is now nothing requiring “mark to market” accounting. What am I missing?

  11. Eat that!

    I didn’t see it with my own eyes I’d believe that this house was from the IE. What you can’t even afford to have someone lay down some sod? Maybe the listing should say “drought tolerant, native landscaping!”

  12. awgee

    A point to consider on forecasting the future direction of interest rates. They many continue to fall, not because of anything the Fed is doing directly, but because as people and institutions all over the world exit other asset classes with perceived risk, where the heck else where they put their money? US treasuries are perceived as riskless, at least for now.

    And what happens when the first few recognize the real risk in UST? Yikes!

    1. Planet Reality

      What’s more likely?

      This blog no longer exist by this time next year?


      UST auctions fail and premium SF, NYC, Seattle, etc housing markets crash. Let’s try to be somewhat realistic. I’d bet on the former.

      1. Marc

        And most RE agents bet in 2007 that prices in the OC would never come down. Self-interested parties like RE agents should refrain from trying to give advice on market trends since they are simply not credible. It’s like asking a used car salesman whether you should buy a car today.

        1. matt138

          “the gov/t will never let that happen”

          just like stock prices…just like RE prices…just like the price of anything else.

          The gov/t can only manipulate prices for so long. Why? limited resources and the repercussion of trying to create infinite money.

          Treasury auctions will eventually be filled with investors demanding a higher return. This is inevitable. It won’t happen overnight. Interest rates are the supply and demand of money. We’ve borrowed and spent like mad. There is a price to pay for this and the price is high interest rates and we will pay.

          The big question is how we address servicing the debt. Have any homeowners resorted to sending in counterfeit $100s like our gov/t will? I guarantee investors will find somewhere else to put their money.

      2. awgee

        Who said anything about a treasury auction failure or how long this blog will exist? I mentioned nothing included in your either / or scenario. What in the world are you responding to? Maybe instead of Planet Reality, you should change the nom to Planet Strawman.

        In response to your comment, IMO, a UST auction failure is not possible. The dealers are obligated to buy and the present record increases in direct bid percentage and weekly repo is a reflection of that requirement. There will also never be a treasury default. Our Fed has the ability to print at will and the US Congress has never met a debt increase they did not like.

      3. tonye

        Anecdotaly, the Seattle RE market has been soft for four years and has been tanking for the last six months at least.

        I dunno where they get numbers, but I know people living up there.

  13. newbie2008

    As for the lack of backyard landscaping, the cost to landscape will decrease the borrower’s profit margin. He will get nothing back upon the short sale or FC on the out of pocket investment for the landscape.

    As for the HOA forcing him to landscape, he got not money in the property, maybe negative, so if a lien is unforced, the HOA needs to pay off the first and seconds and will be holding a house house under market and legal bills. I think the banks would like the HOA to take over the loans, backpayments & taxes ….

    From the pictures, it looks lived-in.

    I’ve seen one short sale where it was alway unavailable for showing. A pretend for sale. Is this a real for sale?

    If the owner heloc it out with $38,000 in pocket 3.556k-3.518k) in half year, his annualized ROI was 22% plus years for free rent.

    Now who’s the smart one?

    1. tonye

      As I noted elsewhere… I suspect the HOA is running into some financial problems. No self respecting HOA in Irvine would allow this.

      Heck, some HOA will file a lien for the wrong type of plants out front.

  14. newbie2008

    March OC CA US
    90+ day delinquency (This year) 8.40% 11.70% 8.93%
    From your OC link:

    90+ day delinquency (Last year) 5.49% 8.08% 5.79%
    Percentage pt. chg. in delinquency
    +2.92 +3.63 +3.14
    Foreclosure rate (This year) 2.50% 3.29% 3.23%
    Foreclosure rate (Last year) 2.02% 2.97% 2.32%
    Percentage pt. chg. in foreclosure
    +0.48 +0.31 +0.91
    REO rate (This year) 0.35% 0.77% 0.57%
    REO rate (Last Year) 0.52% 1.13% 0.61%
    Percentage pt. chg. in REO
    -0.17 -0.36 -0.04

    REO are down for this year, so time to buy before your price out of the market.

    Ignore that the 90+ day delinquency are up. Just repeat the mantra: Everybody knows that RE prices always goes up.

    There was another Polly Anna report that FHA is back on track making new bad loans. The percentage 90+ day delinquency from the origination date for new loans being deliquent are less than for loans made two years ago.

  15. avobserver

    “Safe-haven buying is not true investment, it is speculation.”

    Well said. Ask yourself –

    If RE market in Tustin/Laguna Niguel/Aliso Viejo drops another 20%, will Irvine market be able to hold its current price level?

    Or if RE market in Mission Viejo/Lake Forest drops another 20%, will Laguna Niguel/Aliso Viejo market hold its current price level?

    In the end we are talking about if there are enough high paying jobs left to support all decent locations in OC.

    During credit expansion/bubble years a large percentage of the population made disproportionately high income when compared to the median. The top 20-30% (think of all the people working in RE, financial services, mortgage, construction, or house flippers, or sales in all high end goods and services thanks to HELOC induced consumption) probably saw increase in their income far outpaced the wage growth for the rest of the population. Some of these gains have been put back to work in the past couple of years to prop up “premium” markets.

    Anyone bother to guess how many of these top earners have ceased to earn 3X or 5X of median income after we entered into the new credit contraction era? But for premium markets in OC to continue to hold their bubble time price level for an extended period (say, next 5 – 10 years) there has to be continuous large number of new “big earners” to replenish the dwindling pool to keep the overall buying power sustained at 2005/2006 level. That makes me wonder whether some of the perceived “safe havens” are really that safe (price-wise) after all. Easy money made from a by-gone era, coupled with gov’t bailout policy and a low interest environment, may keep price elevated for a while. But for how long?

    1. Marc

      Fully agree. Businesses are downsizing or moving out of (this overpriced) state. Just drive down Red Hill. Every building has “For rent” signs out, most of them are empty. Are all of these properties owned by the Irvine Company? Hard to imagine the opportunity cost of all that empty office space in a Irvine “prime location” 3 min from the airport and next to the 405, with all these “high potentials” living around the corner. So why then why is everything empty? Maybe businesses don’t want to pay Irvine salaries and CA taxes? I wouldn’t if I owned a business.

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