Sentiment toward owner-occupied housing is changing, and people are starting to accept that housing is not the great investment they thought it was.
Irvine Home Address … 18 BAHIA Irvine, CA 92614
Resale Home Price …… $594,900
From the darkness, I walk into the light
From the day, I walk into the night
From the shadows, I will appear
With a message, for all who will hear
For the weak of heart, I will be strong
To the defenders of faith, I will belong
To the last of us, fight till we die
Till the keys, of the kingdom, are mine
Manowar — I Believe
Kool aid intoxication is an unshakable belief in real estate appreciation. As I wrote in Losing My Religion:
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the "higher power" of market forces — real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn't matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn't matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "Why Christianity Must Change or Die" in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California's religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California's Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.
Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.
The article for today's post calls into question some of the basic beliefs Californians have about real estate. Some may lose their religion, but some will decide that despite the obvious contradictions, they still believe.
By DAVID STREITFELD
Published: August 22, 2010
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
I have written on many occasions about Our HELOC Economy. California is built on a foundation of borrowed money. We continually build Ponzi Schemes, and when they collapse and lenders no longer give us money, the entire economy grinds to a halt.
I believe it will take many years for lenders to repeat their mistakes of the bubble. The Ponzi era may not be gone for good, but unless the government starts backing cash-out refinancing and HELOCs, it is gone for the foreseeable future.
Of course, most current California home buyers don't see it that way. They believe HELOC riches are right around the corner, and banks will be willing to finance the profusion of personal Ponzi Schemes Californians are so fond of creating. It isn't going to happen.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
The fact that people believed these delusions amazes me. People were choosing to spend more on housing, but that was only because house prices were going up. More people were not moving to the coasts, but the people that were there were taking their home equity and buying multiple properties to create artificial demand. And despite running short of usable land, we have thousands of land deals all over California where the residual land value is negative right now. Each of these fallacies was promoted to the masses by the NAr to create false urgency to enrich realtors.
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Most people don't think about market conditions when they buy a home. Realistically, people buy and sell because of life's circumstances. This couple was going to buy now regardless of what happened in the market. Their house will decline in value for a while, but if they hold it long enough, they will be hurt less than those who bought from 2004-2008.
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
I am always astonished by how much people think house prices should go up — or even that house prices should go up at all. Do wages go up at 10% per year? Why should house prices go up any faster than wages? How can house prices go up faster than wages on a sustained basis? How are people supposed to pay for houses once it costs 100% or more of their income? Somehow logic seems to elude the average home buyer. Kool aid intoxication is very strong.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
realtors will never accept that real estate appreciation is a lost cause, nor will anyone who likes to use this fallacy to generate false urgency in buyers.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
Housing is special. Irvine is different. How many times have we heard that bullshit before?
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Wrong. Arizona may not see peak prices for quite some time, but it will recover. Of all the distressed markets out there, Phoenix is one of those most likely to make a comeback. The economy is diverse and the population is growing. I would buy cashflow properties there if I had more contacts. I am more excited about Las Vegas mostly because I have the contacts to get cashflow properties there. The economic story in Phoenix is actually more compelling.
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
The fantasies of Mr. Austin are shared by homeowners everywhere. He has been forced to let go of his fantasies whereas Orange County and Irvine home owners are still clinging to theirs.
The contrarian view
I would like to believe that stories like today's reflect a positive and permanent change in buyer attitudes, but there is another way to see it.
… Because now I'm starting to see more articles about how housing is a lousy investment and no one should buy a house. Anyone who's been paying attention knows that this statement is just a wrong as home ownership is always better than renting. Both statements are just flat out wrong. But that doesn't stop the pundits.
One sign of a market bottom is a change in sentiment. When an asset class is strongly out of favor with the investment community is often a great time to purchase it.
I believe we are about to see a leg down in house prices, but what happens after that is a mystery. There are far too many variables to predict. I am planning a future post to look at some of these scenarios and try to assess the probability of each. One possible scenario is that low interest rates persist until the inventory is absorbed, and the leg down we are about to see is the last one. This may not be the most likely scenario, but this winter should be (1) the bottom of the recession, (2) the peak of inventory, and (3) the bottom of buyer demand. When conditions are at their worst is often when markets find a durable bottom. Only time (and interest rates) will tell.
No money in, much money out
Houses were a great trading vehicle during the bubble. Lenders were giving houses to people with no money down, and when values went up, lenders gave people this money as well. With that kind of lender behavior, it isn't surprising that houses were in high demand.
- The owner of today's featured property paid $570,000 on 1/9/2004. He used a $456,000 first mortgage, a $114,000 second mortgage, and a $0 down payment.
- On 5/8/2006 he refinanced with a $586,000 Option ARM with a 1.25% teaser rate.
- On 11/26/2007 Wells Fargo refinanced his first mortgage for $604,000 and gave him a $37,750 HELOC. How stupid is that?
- Total property debt is $641,750.
- Total mortgage equity withdrawal is $71,750.
- Total squatting time was about 14 months.
Recording Date: 11/12/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Recording Date: 08/10/2009
Document Type: Notice of Default
Wells Fargo bought the property back for $663,586 on 6/10/2010. They will lose about $100K on the deal.
Irvine Home Address … 18 BAHIA Irvine, CA 92614
Resale Home Price … $594,900
Home Purchase Price … $663,586
Home Purchase Date …. 6/10/2010
Net Gain (Loss) ………. $(104,380)
Percent Change ………. -15.7%
Annual Appreciation … -42.9%
Cost of Ownership
$594,900 ………. Asking Price
$118,980 ………. 20% Down Conventional
4.51% …………… Mortgage Interest Rate
$475,920 ………. 30-Year Mortgage
$116,401 ………. Income Requirement
$2,414 ………. Monthly Mortgage Payment
$516 ………. Property Tax
$67 ………. Special Taxes and Levies (Mello Roos)
$50 ………. Homeowners Insurance
$50 ………. Homeowners Association Fees
$3,096 ………. Monthly Cash Outlays
-$403 ………. Tax Savings (% of Interest and Property Tax)
-$626 ………. Equity Hidden in Payment
$199 ………. Lost Income to Down Payment (net of taxes)
$74 ………. Maintenance and Replacement Reserves
$2,341 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,949 ………. Furnishing and Move In @1%
$5,949 ………. Closing Costs @1%
$4,759 ………… Interest Points @1% of Loan
$118,980 ………. Down Payment
$135,637 ………. Total Cash Costs
$35,800 ………… Emergency Cash Reserves
$171,437 ………. Total Savings Needed
Baths: 3 baths
Home size: 1,599 sq ft
($372 / sq ft)
Lot Size: 4,138 sq ft
Year Built: 1988
Days on Market: 15
Listing Updated: 40415
MLS Number: P747732
Property Type: Single Family, Residential
According to the listing agent, this listing is a bank owned (foreclosed) property.
If your client likes sunlight- loves a well lit home- then this is their home. Dozens of windows in this home and house is sunny and bright and cheery. A place to come home to after the end of a day. Upgraded glazed kitchen countertops. Gazebo/patio cover out back to relax. Centrally located near both freeways and near shopping centers. Lushly landscaped for the gardener in you.
Technically, this doesn't deserve the lite-brite graphic, but since the realtor went out of her way to sell sunshine, I thought she still deserved it.