When a house was viewed purely as shelter, prices were generally stable. Once investment motives entered buyer's decision process, prices begin a wild ride resulting in a cycle of boom and bust.

Irvine Home Address … 16 FOXHILL Irvine, CA 92604

Resale Home Price …… $789,900

As you're watchin' all your days go by

Lookin' back on younger years

That's what our hopes and dreams are made of

All the laughter and the tears

Slaughter — Days Gone By

Most people who bought houses during the 00s did so with dreams of riches. Those dreams materialized in laughter for some, tears and financial slaughter for others.

Bricks and slaughter

Property is widely seen as a safe asset. It is arguably the most dangerous of all, says Andrew Palmer

Mar 3rd 2011

… Why is property so dangerous? One obvious answer is the sheer size of the asset class. The aggregate value of property held by American households in the peak year of 2006 was $22.7 trillion, their biggest single asset by a wide margin (pension-fund reserves were next, at $12.8 trillion). Working out the figures in other countries involves much more guesswork. Back in 2002 this newspaper reckoned that residential property in the rich world as a whole was worth about $48 trillion and the commercial sort $15 trillion: if you allow for property-price changes in the intervening period, the current values, even after the bust, would be $52 trillion and $28 trillion (see chart 1), or 126% and 67% respectively of the rich countries’ combined GDP in 2010. Whatever the precise number, property is so big that when credit conditions loosen it is likely to absorb a lot of the extra liquidity; and when something goes wrong the effects will be serious.

An even bigger reason to beware of property is the amount of debt it involves. Most people do not borrow to buy shares and bonds, and if they do, the degree of leverage usually hovers around half the value of the investment. Moreover, when stock prices fall, borrowers can usually get their loan-to-value ratios back into balance by selling some of the shares. By contrast, in many pre-crisis housing markets buyers routinely took on loans worth 90% or more of the value of the property. Most had no way of bringing down their debt short of selling the whole house. …

The leverage in housing is great when prices go up, but when they go down…. Stocks are primarily investments held with discretionary income whereas houses are consumptive shelter — a necessary expense of living. When stock prices crash, people may lose some money, but their losses are generally limited to their investment. Even in leveraged investing, a brokerage will liquidate before equity dips below zero. In housing there is no such stoploss. In a housing crash, people are wiped out and go bankrupt.

With only a small sliver of their own capital to protect them, many owners were quickly pushed into negative equity when property prices fell. As borrowers defaulted, the banks’ losses started to erode their own thin layers of capital. “Banks are leveraged and property is leveraged, so there is double leverage,” says Brian Robertson, who runs HSBC’s British and European operations and used to be the bank’s chief risk officer. “That is why a property crash is a problem for the banks.”

In other words, the money banks lost is money they didn't have.

Property bubbles almost always start because fundamentals such as population growth, interest rates and economic expansion are benign. A shrinking population weighs on Germany’s housing market, for example, and a rising one underpins long-term confidence in America’s. These fundamentals explain why many market participants are able to persuade themselves that huge price rises are justified and sustainable.

We see a microcosm of this phenomenon here where fools deny a housing bubble ever happened.

Chastened regulators now talk about a presumption of guilt, not innocence, when prices look frothy. That is because property markets are inefficient in several ways which make it more likely that they will overshoot.

Cycle paths

For the lenders, property is attractive in part because it attracts lower capital charges than most other assets. That makes sense—the loan is secured by a tangible asset that will retain some value if the borrower defaults—but it can also lead to overlending. Indeed, one of the bigger ironies of the property bubble was that lenders and investors probably thought they were being relatively prudent.

The investors buying toxic loans were usually purchasing them through collateralized debt obligations blessed by ratings agencies with AAA status.

Capital charges are higher for commercial property than for homes but banks can still be seduced by the apparent stability of a real asset producing predictable cash flows. “Commercial real estate is often a borrower of last resort,” says Bart Gysens, an analyst at Morgan Stanley. “It tends to be willing to absorb a bit more debt if and when banks and debt markets want to provide it.”

Collateralised lending offers a degree of protection to the individual lender, but it has some unfortunate systemic effects. One is the feedback loop between asset prices and the availability of credit. In a boom, rising property prices increase the value of the collateral held by banks, which makes them more willing to extend credit. Easier credit means that property can sell for more, driving up house prices further.

That is a fancy description of a banking Ponzi scheme.

The loop operates in reverse, too. As prices fall, lenders tighten their standards, forcing struggling borrowers to sell and speeding up the decline in prices. Since property accounts for so much of the financial system’s aggregate balance-sheet, losses from real-estate busts are likely to be synchronised across banks.

The credit cycle of boom and bust is just as the author describes. Once you understand the cycle, it is easy to foresee problems like the credit crunch of 2007 — the timing is always tough, but the inevitability is easy to see. It's a bit like inflation is today. We all know its coming, but nobody is quite sure when it will arrive.

Borrowers, too, contribute to the inefficiency of property markets, particularly on the residential side. Some people think that renting will enjoy a renaissance as a result of the crisis (see article), but few expect a wholesale, permanent shift in attitudes. Unlike other assets, housing is seen both as an investment and something to consume. In its latest survey of consumer attitudes in July 2010, Fannie Mae, one of America’s two housing-finance giants, found that Americans wanted to buy houses for a range of reasons, from providing a safe environment for their children and having more control over their living space to making a financial return. In China there is another item to put on the list: for many young men owning a property is a prerequisite for attracting a wife.

This mixture of motives can be toxic for financial stability. If housing were like any other consumer good, rising prices should eventually dampen demand. But since it is also seen as a financial asset, higher values are a signal to buy.

That's kool aid intoxication. What should be taken as a sign that prices are too high instead motivates more buying. Buy now or be priced out forever, right? Once that fear overcomes a market, the combination of greed and fear motivates some truly irrational buyer behavior. Remember when people used to write passionate letters to sellers to bestow them the honor of ownership?

And if housing were simply a financial investment, buyers might be clearer-eyed in their decision-making. People generally do not fall in love with government bonds, and Treasuries have no other use to compensate for a fall in value. Housing is different. Greg Davies, a behavioural-finance expert at Barclays Wealth, says the experience of buying a home is a largely emotional one, similar to that of buying art. That makes it likelier that people will pay over the odds. Commercial property is a more rational affair, although hubris can play a part: there is nothing like a picture of a trophy property to adorn a fund manager’s annual report.

Once house prices start to rise, the momentum can build up quickly. No single individual (except, perhaps, Warren Buffett) can push up a company’s share price by buying its stock at an inflated price, but the price of residential property is set locally by the latest transactions. The value of any particular home, and the amount that can be borrowed against it, is largely determined by whatever a similar house nearby sells for. One absurd bid can push up prices for lots of people.

I outlined a proposal to overhaul the appraisal system in the US to require cashflow valuations of properties in addition to the comparable value method. As the author notes, comparable value simply makes irrational behavior the standard of the market. it does nothing to curb the excesses or keep valuation in line with lender payment schedules. Markets trading at cashflow values don't crash. What price levels would they crash down to?

As prices rise, property is arguably more likely than many other asset classes to encourage speculation. One reason is that property is so much part of everyday life. People do not gossip about the value of copper and tin, but they like to talk about how much the neighbour’s house went for. They watch endless TV shows about houses and fancy themselves as interior designers, able to raise the price of their home with a new sofa and artful lighting. Eventually the temptation to take a punt on property becomes overwhelming. “Speculation is a bit like sex,” says Robert Shiller of Yale University, a long-standing observer of speculative bubbles. “People who have lots of sex are not approved of but they are thought to live life with gusto. People eventually decided to try for themselves.”

That is one of Dr. Shiller's more interesting analogies.

Even the risk-averse may well respond to rising prices by entering the market. Everyone needs somewhere to live, and many want to own their own homes. The amount of space that people need increases predictably over time as they find partners and have children. James Banks, Richard Blundell and Zoë Oldfield of Britain’s Institute for Fiscal Studies and James Smith of RAND, an American think-tank, find that this gives people an incentive to buy early in order to protect themselves against the risk of future price increases that would make houses unaffordable.

These guys are talking about NAr fear mongering. The belief that you need to buy the most house you can afford today because it may be unaffordable in the future is exactly how we got into this mess. Overextended borrowers are the root of housing's woes.

Another reason for momentum in property markets is the fact that there are no short-sellers. If you think property is overpriced, it is difficult to profit from that view. As Adam Levitin of Georgetown University Law Centre and Susan Wachter of the University of Pennsylvania pointed out in a recent paper on the causes of the housing bubble in America, it is impossible to borrow the Empire State Building in order to sell New York real estate short. HSBC probably came closest by selling its Canary Wharf tower in London for £1.1 billion ($2.18 billion) in 2007 and buying it back from its debt-laden Spanish owners for £250m less in late 2008—the greatest short sale in the history of property, says one observer.

That one is pretty good, but I know a local real estate developer who bought a property for $10M in 1999, sold it for $100M in 2005, and was negotiating to repurchase the property — with its $135M in improvements — for $40M in 2010. I don't think he closed the deal, but it would be a remarkable short trade if it happens.

Some investors infamously did make money from betting against American subprime mortgages, but their real achievement was to find a way of doing so, by buying up credit-default swaps that paid out when mortgage-backed securities soured.

There have been attempts to create instruments that allow property to be hedged or shorted. Mr Shiller himself has been involved in launching derivatives linked to home-price indices for both large and small investors, but with limited success to date. Commercial-property derivatives, however, are gaining ground.

Such products are conceptually appealing but face several obstacles. Some are common to all financial innovations: new products lack enough liquidity to lure buyers in, for example. Others are more specific to property. Individual properties and neighbourhoods differ, which makes it hard to construct accurate hedges. Government interventions to shore up the housing market add an extra element of unpredictability. And since house-price cycles tend to last for a long time, says Mike Poulos of Oliver Wyman, a consultancy, it can be expensive to sustain a short position.

Short positions in real estate using futures contracts will likely never catch on. Who is going to buy a short futures contract to hedge any possible loss in their homes value? In reality, most people who buy believe house prices are going up, and if any such futures contract were widely traded, most people would take the long side and magnify their exposure to real estate rather than hedge it.

Up, up and away with the fairies

The effects of buying a home when prices are rising are insidious. A 2008 paper by Hugo Benitez-Silva, Selcuk Eren, Frank Heiland and Sergi Jiménez-Martín used the Health and Retirement Study, a biennial survey of Americans over the age of 50, to compare people’s estimates of the value of their homes with actual values when a sale took place. The authors found that homeowners overestimate the value of their homes by an average of 5-10%.

Even now, many in Irvine believe their house values never declined. People have a selection bias when it comes to comps for their own property. They will almost always conclude the asking price of a similar but nicer property represents the actual resale value of their own property. Comps that might inject a bit of reality are routinely ignored, and Pollyanna assessments of valuations and appreciation abound.

Those who had bought during good times tended to be more optimistic in their valuations, whereas those who had bought during a downturn were more realistic. Expectations of higher prices explain why bubble-era buyers were more willing to buy risky mortgage products and take on ever greater quantities of debt. The amount of mortgage debt in America almost doubled between 2001 and 2007, to $10.5 trillion.

The rich-world buyers of today ought to be more realistic about the future value of their homes, but attitudes are deeply entrenched. When asked to rate the safety of various investments, two-thirds of the respondents in the Fannie Mae survey classed homeownership as a safe investment, compared with just 15% for buying shares. Only savings accounts and money-market funds, both of which enjoyed an explicit government guarantee during the financial crisis, scored higher than homes. Homeowners who were “under water” on their mortgages (ie, they owed more than their properties were worth) were just as sure as everyone else that housing was a safe investment.

If the Burj Khalifa shows that memories of property cycles are short, the Fannie Mae survey suggests that some of the lessons are never taken on board at all. Given the state of residential property around the rich world, perhaps the victims are suffering from post-traumatic amnesia.

How do we explain that level of ignorance. How can people be underwater, facing the reality of what a poor investment housing can be, how can these people continue to remain in denial?

I suppose many refuse to admit their mistakes even when maintaining denial is barely tenable. Cashflow real estate can be a great investment. Betting on appreciation is a fool's game more likely to be a great disaster.

Typical California home owner

I was asked recently if I believed Irvine has more Ponzis than other places. Well, compared to poor rural areas, there are likely more Ponzis because more people are given opportunity to show their cosmopolitan sophistication by taking on copious amounts of debt. Plus, there are greater pressures to keep up with the Joneses in places like Irvine that is difficult for many to resist. But Irvine isn't out of control.

The Ponzis here are more flamboyant in their consumption because house prices went up so much, but I don't believe Irvine is Babylon. Although the huge HELOC abuse cases are more interesting, owners like today's are much more common. These owners increased their mortgage, likely in response to burgeoning credit card debt and funding their entitlements, but by and large, they kept their spending under control and didn't spend the house to the point they are in financial distress and facing foreclosure.

• These owners paid $326,500 at the bottom of the last cycle on 6/3/1997. They used a $261,200 first mortgage, a $32,600 HELOC, and a $32,700 down payment.
• On 9/23/2003 they refinanced with a $282,000 first mortgage and a $100,000 stand-alone second.
• On 10/15/2004 they obtained a $200,000 HELOC, but it doesn't look as if it was used.
• On 1/20/2005 they refinanced with a $330,500 first mortgage and a $120,000 HELOC. This HELOC and the ones that followed where not fully used.
• On 6/14/2005 they opened a $155,000 HELOC.
• On 2/23/2007 they opened a $185,000 HELOC.
• On 5/20/2008 they obtained a new $417,000 first mortgage and a $35,000 HELOC.
• On 8/27/2010 they refinanced with a $442,000 first mortgage.
• This typical, somewhat-frugal Irvine couple still added $148,200 to their mortgage.

This behavior is so common that most don't even recognize is as a dangerous Ponzi scheme.

Look at it this way. In 1997 when this house was purchased, the aggregate DTI was very similar to Las Vegas. Houses were generally affordable, but not inexpensive by conventional cashflow measures. People in both places were paying a similar percentage of their incomes toward housing.

Fast forward to today, and prices in Las Vegas are hovering near their 1997 levels. Any amount of mortgage equity withdrawal — even the tame Irvine version above — would put a Las Vegas homeowner underwater. The housing bubble deflated there and is overshooting to the downside. Here in Irvine, the housing bubble has not deflated, and homeowners like today's stand to take a few hundred thousand with them on top of the $150K they already spent.

They should be very thankful banks are allowing their delinquent neighbors to squat in order to hold up housing values.

Irvine Home Address … 16 FOXHILL Irvine, CA 92604

Resale Home Price … $789,900

Home Purchase Price … $326,500

Home Purchase Date …. 6/3/1997

Net Gain (Loss) ………. $416,006

Percent Change ………. 127.4%

Annual Appreciation … 6.4%

Cost of Ownership

————————————————-

$789,900 ………. Asking Price

$157,980 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$631,920 ………. 30-Year Mortgage

$160,221 ………. Income Requirement

$3,323 ………. Monthly Mortgage Payment

$685 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$132 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$4,428 ………. Monthly Cash Outlays

-$806 ………. Tax Savings (% of Interest and Property Tax)

-$785 ………. Equity Hidden in Payment

$291 ………. Lost Income to Down Payment (net of taxes)

$132 ………. Maintenance and Replacement Reserves

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

$3,261 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,899 ………. Furnishing and Move In @1%

$7,899 ………. Closing Costs @1%

$6,319 ………… Interest Points @1% of Loan

$157,980 ………. Down Payment

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

$180,097 ………. Total Cash Costs

$49,900 ………… Emergency Cash Reserves

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

$229,997 ………. Total Savings Needed

Property Details for 16 FOXHILL Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2580

$306/SF

Lot Size: 5,400 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Traditional

View: Park/Green Belt

Year Built: 1975

Community: El Camino Real

County: Orange

MLS#: S651471

Source: SoCalMLS

Status: Active

——————————————————————————

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Out of Bank of America's assets excretes a special home investment trust (SHIT) bank designed to hold their crap loans from the housing bubble.

Irvine Home Address … 174 CHERRYBROOK Ln Irvine, CA 92618

Resale Home Price …… $575,000

I don't give a damn about my reputation

You're living in the past it's a new generation

And a bank can do what it wants to do

And that's what I'm gunna do

And I don't give a damn about my bad reputation

Halfcocked — Bad Reputation

We are still living in the past. The legacy of the housing bubble is pockets of overpriced real estate and mountains of untenable debt. Banks will work to manage their reputations, but they really don't care what people think as long as government keeps bailing them out.

What are the banks going to do with all their REO?

I have written at length about the lending cartel. Their activity is important because how the lending cartel disposes their REO will determine the market’s fate. There were over a million foreclosures last year, and 2011 will likely break last year's record. Over two-thirds of those foreclosures end up as real estate owned or REO.

As banks convert more and more of their non-performing loans into real estate, they become less of a bank and more of a real estate investment trust (REIT). People who are investing in banks want to see their money put into loans to obtain the cashflow stream from interest. The large institutional investors become concerned when so much of the banks assets and income is tied up in real estate instead of a loan portfolio.

The easiest solution to this problem for banks is to compartmentalize it. If they take all of their bad loans and create a special home investment trust (SHIT), they can dump their SHIT on Wall Street. Investors can buy shares based on their opinion of the liquidation value of the portfolio. Rather than having to wait for the actual liquidation of the assets to regain their lost capital, the banks can get the capital from investors as they sell their SHIT in an IPO. By getting the SHIT off their balance sheets investors will regain confidence they are investing in loans rather than depreciating real property.

On an accounting basis, lenders can keep the value of the loan on their books at par value, convert the income stream from rental into a mock “payment” on the loan. If they reduce the interest rate enough, nearly any rental income can be use to amortize even very large loans to zero over 30 years. Basically, they can take the rent, pretend it was a loan payment, and ignore the real value of the collateral. If they hold it as a rental long enough, they will pay off the amortizing loan.

Right now, lenders have squatters in properties that are paying neither rent nor their mortgage. It is a completely non-performing asset tying up their capital, and to make matters worse, liquidation value is well below par value on the note. Creating a special home investment trust allows banks to remove toxic assets from their balance sheets, turn non-performing assets into performing ones, and if they are lucky, they will even get to recoup a significant portion of their capital.

BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank’

By Dawn Kopecki – Mar 8, 2011 11:43 AM PT

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.

I am always really annoyed when I see the term “legacy loans” associated with stupid toxic crap these same bankers peddled as safe affordability products. This is a classic euphemism designed to obscure the plethora of errors behind the existence of these loans.

Legacy conjures up images of wealthy benefactors and things from the past to be proud of. Further, it provides a convenient receptacle for all criticism of errors past. No matter what folly is exposed, it was one of those legacy loans, right?

“We are creating a classic good bank, bad bank structure,” Laughlin told investors at a meeting in New York today. He was promoted last month to manage the costs of resolving disputes stemming from the company’s 2008 purchase of Countrywide Financial Corp. “We’re going to get after this, we’re going to do it the right way and we’re going to put it to bed in the next 36 months,” he said.

I wish he was describing how quickly they will liquidate. In reality, he is saying it will take three years to make this SHIT and get all of their toxic crap into it. It will take a decade or more for this pile to stop steaming.

The legacy portfolio will hold 6.7 million loans with outstanding principal balance of about $1 trillion, according to a presentation to investors today. The split leaves home loan President Barbara Desoer with about half her previous portfolio, as well as new lending going forward.

Laughlin’s portfolio will include loans that are currently 60 or more days delinquent as well as riskier types of loans the bank no longer originates, such as subprime, Alt-A, interest- only and option adjustable-rate mortgages, he said. He said the portfolios will be completely split by March 31 and that his will be liquidated over time. Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors.

About half of B of As loan portfolio is made of of that garbage? OMG! that is so much worst than I thought.

“It’s a way to get investors focus on the good,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s a way to talk about good things and ignore the bad.”

There's a brilliant investment strategy: focus on the good and ignore the bad. Winning combination, I'm sure.

JPMorgan, Wells Fargo

Laughlin’s portfolio includes loans the company originated in addition to Countrywide mortgages. That differs from practices at JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), whose legacy books include only loans they acquired through their respective purchases of Washington Mutual and Wachovia.

“Many of the assets that are coming over into the legacy asset-servicing portfolio are delinquent or are expected to go delinquent over the next three years,” Laughlin said.

Apparently, B of A expects the majority of the 6.7M loans in their SHIT to stink.

“As borrowers default, we’ll evaluate them for a loan modification.”

In case you needed any reminding, you must default on your loan before they will give you a loan modification. Free money is waiting for you if you just stop making your payments.

Laughlin is also responsible for overseeing foreclosure processes as well as negotiations with investor groups that are demanding the bank buy back faulty loans.

State Probes

State and federal law enforcement agencies are pushing lenders to cut outstanding loan balances as part of a proposed settlement they hope to reach with banks over their mortgage- servicing and foreclosure practices.

State attorneys general and federal agencies sent a 27-page settlement proposal last week to Bank of America, Wells Fargo, JPMorgan, Ally Financial Inc. and Citigroup Inc. (C), the five largest mortgage services, which process 59 percent of all U.S. home loans. Iowa Attorney General Tom Miller said regulators and law enforcement agencies want an agreement that leads to more loan modifications for struggling homeowners.

Laughlin said regulators have reviewed the bank’s foreclosure processes and “no findings came out of those exams that basically said the foreclosure process was fundamentally flawed.”

He said the bank was instituting a standardized affidavit form and providing better oversight of third-party attorneys and vendors. “Certainly there’s always room for improvement in process,” he said.

Bond Bagholder Group

Bank of America may face “material fines” from government probes into possible irregularities in foreclosure processes, it said in its annual earnings report filed with the Securities and Exchange Commission on Feb. 25. The firm also said that a bondholder group including Pacific Investment Management Co. has almost doubled the number of mortgage deals on which it’s challenging the bank.

Bank of America set aside about $3 billion late last year to settle certain demands from U.S.-controlled mortgage buyers Fannie Mae and Freddie Mac. The bank said other claims on so- called private label mortgages could cost an additional $7 billion to $10 billion.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

During 2011 the other major banks will follow suit and make their own special home investment trust. Bank SHIT will be offered up to Wall Street who will likely bet on the recovery. This mechanism will work for the banks. Will it hold the lending cartel together? I doubt it.

What happens to the rental neighborhoods?

Many bubble era communities will be loaded with bank-owned rentals. These neighborhoods are converting from owner occupants to renters. What impact will all these rentals have on the communities they are in? Will lenders maintain their properties to a reasonable standard, or will they all become slumlords?

What happens to the housing market?

Perhaps of more interest to readers here is what impact will this bad bank liquidation have on house prices? Ordinarily, when a market crashes, there is capitulatory selling. Any debt used to finance the asset is expunged, and everyone holding out for a higher price gives up waiting and sells for whatever they can get. This activity lowers prices, but it also clears out the overhead inventory which allows appreciation to return. All markets behave this way.

Let's assume lenders will try to hold out for their asking prices even if that means holding on to properties for many years. They are determined not to capitulate. As some point either rising home values or declining loan balances (remember the rent is paying down the note) will make asking prices reasonable, and houses will be sold. What this bad bank will do — if it can resist pressures for liquidation — is create a huge amount of overhead supply. Basically, prices won't go down, but they won't be able to go up until the overhead supply is liquidated. That would cause prices to remain below the peak until the backlog of inventory is gone.

Irvine's version of a cashflow property

A few years ago, this property was for rent for $2,500. I went to see the property and met the owner. He bought the property as an investment. Based on his $370,000 purchase price, a few years of rent inflation made this unit cashflow positive. He managed his mortgage reasonably well, and the balance of $374,000 is only slightly over his purchase price.

Without appreciation, the rate of return on this investment was low, but since we did have a housing bubble, this investor stands to make a tidy profit on his 10-year hold. I don't believe in buying for appreciation, but some investors seem to make it work. Are appreciation speculators skilled, or are they lucky?

Irvine Home Address … 174 CHERRYBROOK Ln Irvine, CA 92618

Resale Home Price … $575,000

Home Purchase Price … $370,000

Home Purchase Date …. 6/1/2001

Net Gain (Loss) ………. $170,500

Percent Change ………. 46.1%

Annual Appreciation … 4.4%

Cost of Ownership

————————————————-

$575,000 ………. Asking Price

$115,000 ………. 20% Down Conventional

4.82% …………… Mortgage Interest Rate

$460,000 ………. 30-Year Mortgage

$116,632 ………. Income Requirement

$2,419 ………. Monthly Mortgage Payment

$498 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$96 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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

$3,302 ………. Monthly Cash Outlays

-$411 ………. Tax Savings (% of Interest and Property Tax)

-$571 ………. Equity Hidden in Payment

$212 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves

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

$2,628 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,750 ………. Furnishing and Move In @1%

$5,750 ………. Closing Costs @1%

$4,600 ………… Interest Points @1% of Loan

$115,000 ………. Down Payment

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

$131,100 ………. Total Cash Costs

$40,200 ………… Emergency Cash Reserves

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

$171,300 ………. Total Savings Needed

Property Details for 174 CHERRYBROOK Ln Irvine, CA 92618

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1500

$383/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 2000

Community: Oak Creek

County: Orange

MLS#: S651239

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

Welcome to this PRISTINE home in the Cobblestone tract! This PREMIUM location features three generous bedrooms PLUS a cozy second floor alcove, a full size driveway, and a direct access two-car garage! Enjoy an OPEN and SPACIOUS kitchen with an abundance of natural light, CHARMING French cabinetry, walk-in pantry, and ELEGANT wood flooring! Relax in this exquisite back yard featuring a CUSTOM fountain, BEAUTIFUL greenery, UPGRADED STONE fireplace, CUSTOM sit up bar with TRAVERTINE counter top AND equipped with a mini-fridge!! This FLOWING floor plan boasts a family room with a romantic fireplace, convenient upstairs laundry, an ENORMOUS master suite with walk-in closet, and dual vanities! FABULOUS include hardwood floors, custom carpet, intricately detailed crown moulding, ceiling fans throughout, designer paint and more! Enjoy Oak Creek's upscale dining and shopping, resort style amenities and award winning schools!!

I really don't get realtor writing techniques. Does someone give seminars on how to write badly? Why are there RANDOM capitalized words in the description? If she at least chose important words to capitalize, I could see a justification as an attention getting technique; however, in the description above, the word AND is capitalized. Why?

Housing markets around the country are plunging to new lows. it has renewed the debate as to how low and how long.

Irvine Home Address … 122 STREAMWOOD Irvine, CA 92620

Resale Home Price …… $129,900

Go first in the world, go forth with your fears

Remember a price must be paid

Be always too soon, be never too fast

At the time when all bets must be laid

Gordon Lightfoot — The House You Live In

When is the right time to buy? Timing does matter. Be always too soon, be never too fast. The people who bought the dip in 2007 or 2008 were too fast. Were the 2009 buyers too fast or too soon?

Early 2009 was not the bottom. In fact, the artificial bottom delayed the durable bottom, probably for a couple of years because the capitulatory selling and the destruction of debt has not been allowed to occur. Rather than a steep dive, we are gliding to a higher bottom years later than it should have been. Perhaps it was worth it to save the banks. Homeowners will almost certainly agree the heroic efforts and market manipulation was worthwhile. Renters and prospective buyers, not so much.

Home prices: The double-dip is near

By Les Christie, staff writer — March 6, 2011: 5:02 PM ET

NEW YORK (CNNMoney) — That big sucking sound you heard last week? That was the air being taken out of the housing market by a slew of bad reports followed by some dire predictions by an industry bubble-spotter.

On Tuesday, we found out that home prices were near their post-bust lows. Two days later the government reported that January saw a double-digit dip in the number of new homes sold.

hen Robert Shiller, the Yale economist and co-founder of the S&P/Case-Shiller home price indexes, dropped this bomb: “There's a substantial risk of home prices falling another 15%, 20% or 25%,” he said.

Wow! Robert Shiller is really bearish. A decline that substantial would require the complete breakdown of the lending cartel and higher interest rates. As the economy improves, people will go back to work, and housing demand will pick up, albeit slowly. Low interest rates, increasing demand, and prices already below rental parity in most markets would suggest prices would not decline that significantly.

For prices to go down, loan balances need to decrease, and more supply needs to be released to the market. Interest rates are still low, and if they stay low, prices will stabilize near where they are now. If interest rates continue go up, which is a more likely scenario given we are near historic lows, then mortgage balances will stagnate, and prices will trend lower.

We are in a market trying to avoid catastrophe. The risks are to the downside.

That's a stunning enough pronouncement to make house hunters consider putting purchases on hold. And that may not be a dumb move: If prices are near a double dip — meaning they fell after the bust, rose a bit during recovery and are now heading back down — there may be better deals ahead.

“There will be differences by market, but generally, you may get a big discount by waiting a year [to buy],” said Dean Baker, co-director of the Center for Economic and Policy Research, who thinks the price drop will be closer to 10% or 15%.

Baker looks at the ratio between local home prices and annual rents to judge whether markets are overvalued. If the median-priced home sells for more than 15 times the median annual rent, there's a good chance prices may come down.

On a national level, Shiller and other economists compare home price changes with income growth over the years. Before the bust, home prices had been outpacing earnings since the late 1990s.

Just to get that back to a normal ratio — which we last saw in 1998 — home prices would have to drop another 15%, according to Anthony Sanders, a director of Real Estate Entrepreneurship at George Mason University.

“Even after the bubble burst, the ratio of income to home prices is still way too high,” he said.

Some of the discrepancy in the price-to-rent ratio is caused by the distortion of asset value caused by very low interest rates. The only reason we in Irvine look at a $650,000 house and feel the price is reasonable is because based on our incomes, we know we can get financing for that amount. If interest rates were 9% — which is the 40-year average — the same house at $475,000 seems pricey.

Naturally, many disagree with these assessments. Karl Case, who co-founded the home price index with doom-sayer Shiller, believes that the market will “bounce along the bottom all year.” If that's the case, buyers who take the plunge now shouldn't expect big profits if they sell in the next few years, but they shouldn't have to take a major hit either.

I said this in a post last week. It all depends on how you define a “major hit” and what it would take for that to happen. If you know you are going to sell in less than 5 years, you probably shouldn't buy because you may not cover your real estate commission on the way out. Even if you think you are going to stay longer, beware that you may need to sell at the bottom, and after commissions, half or more of your 20% down payment would be lost.

However, people who are going to live in the same house for seven to ten years or longer can take advantage of the low interest rates and fixed-rate financing to lock in a payment lower than rental parity in most markets. In that instance riding out a 10% decline is not a “major hit.”

Also, buying the bottom tick of the market may not lock in the lowest cost of ownership for a financed buyer. If prices are going down because interest rates are going up, the cost of ownership is unchanged. Only the price of money has gone up. The lowest cost of ownership may actually be obtained at a higher price point. That being said, I don't think we have seen the bottom in affordability either.

Besides, a home purchase is more than a potential investment, especially for families planning to stay put for a while. The big plus for them is the pleasure of living in their own homes.

“People should base their decision on affordability, lifestyle choices and home preferences, not on investment,” said Lawrence Yun, the National Association of Realtors' chief economist.

Yun waits until the housing market collapses before he says something intelligent. That wasn't the song and dance the NAr used back in 2006. Take careful note of the section that says REAL ESTATE IS A GREAT INVESTMENT.

Some stable areas, such as Texas and the Midwest, will probably not experience price plunges at all, but other markets, such as Seattle, Portland and inland California, could still fall substantially, according to Baker.

Even for the markets most likely to rebound, projected returns are minimal. Fiserv, which provides financial information and analysis, projects that the best performing market over the next two years will be Tacoma, Wash. — and it will only record a price increase of 12%. That means those in average markets can only hope for single-digit returns.

OMG! What are people's expectations? Is a housing market underperforming if it doesn't produce 10%+ annual appreciation? Now I see where the general public picks up its dumb ideas.

With home-price gains so modest, it doesn't pay to buy unless you're pretty sure you'll stay for five years or more. “With high transaction costs, buying and selling, it probably will not work out financially,” Baker said.

Nicolas Retsinas, of the Harvard Joint Center for Housing Studies, recently advised his own daughter about buying a home. She was returning to Providence, R.I., but it might only be for a few years.

He told her to rent — not that it mattered. “Whose kids listen to them anyway?” he asked.

Even those with longer time horizons should not take it for granted that their purchases will pay off. Home prices could stagnate well into mid-decade.

The issues of rising interest rates and lingering bad debt and shadow inventory will be with us for the rest of the 10s. We haven't crested the top of the foreclosure wave yet. Which means we have three to five more years of processing new buyers into foreclosed homes and eliminating old borrowers from the buyer pool while their credit repairs, a process that takes at least two years, with problems lingering for up to seven.

With the turmoil from the bubble being so long lasting, it is difficult to foresee what will happen to house prices beyond the bubble. If we print a lot of money, inflation will bring values up by devaluing houses relative to everything else. You can put $12 gas in your $50,000 Honda Civic parked in your $500,000 house. If we don't go crazy printing money, and if unemployment lingers, appreciation could be tepid for a long time.

Despite the gloom, many Americans remain confident about home buying. A survey released Monday by Fannie Mae revealed that 65% of people believe it's a good time to purchase, with 78% expecting prices will rise or remain the same over the next 12 months.

Americans are optimists.

And buyers may take heart from some positive recent indicators, such as an up tick in the sales of existing homes in January; a drop in vacant rental homes; and more investors snapping up properties.

There's also been an upswing in the number of high-end homes — those costing more than $750,000 — being sold, according to Yun. The wealthy buyers of these properties have lots of choices of where to place their money and many are investing in real estate.

“The smart money is making their move,” said Yun.

That is among the dumbest quotes of the bubble by Lawrence Yun. The smart money is making their move… Makes you want to be one of those savvy investors that's “in the know.” A spinmeister in action.

Lawrence Yun could polish a turd.

Processing shadow inventory

This weekend's featured property is a small condo that a bear rally buyer picked up on 8/2/2007 for $229,000. He used a $206,100 first mortgage and a $22,900 down payment. He quit paying sometime before September of 2009.

Foreclosure Record

Recording Date: 03/31/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/14/2009

Document Type: Notice of Default

The lender waited until December to foreclose paying $128,000 on 12/13/2010. This is now REO.

Earlier when I was saying the below median is at or near the bottom. This is what the bottom looks like. This property is selling for more than 40% off its purchase price from 2007. This was after the peak in 2006 when this property hit maximum value.

Couple a 40% decline in price with interest rates below 5%, and affordability is outstanding. Now if the rest of the market continues to compress, we may see affordability become the norm — even in Irvine.

Irvine Home Address … 122 STREAMWOOD Irvine, CA 92620

Resale Home Price … $129,900

Resale Home Price … $129,900

Home Purchase Price … $229,000

Home Purchase Date …. 8/2/2007

Net Gain (Loss) ………. $(106,894)

Percent Change ………. -46.7%

Annual Appreciation … -15.4%

Cost of Ownership

————————————————-

$129,900 ………. Asking Price

$4,547 ………. 3.5% Down FHA Financing

4.85% …………… Mortgage Interest Rate

$125,354 ………. 30-Year Mortgage

$26,440 ………. Income Requirement

$661 ………. Monthly Mortgage Payment

$113 ………. Property Tax

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

$22 ………. Homeowners Insurance

$242 ………. Homeowners Association Fees

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

$1,038 ………. Monthly Cash Outlays

-$62 ………. Tax Savings (% of Interest and Property Tax)

-$155 ………. Equity Hidden in Payment

$8 ………. Lost Income to Down Payment (net of taxes)

$22 ………. Maintenance and Replacement Reserves

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

$851 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,299 ………. Furnishing and Move In @1%

$1,299 ………. Closing Costs @1%

$1,254 ………… Interest Points @1% of Loan

$4,547 ………. Down Payment

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

$8,398 ………. Total Cash Costs

$13,000 ………… Emergency Cash Reserves

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

$21,398 ………. Total Savings Needed

Property Details for 122 STREAMWOOD Irvine, CA 92620

——————————————————————————

Beds: 0

Baths: 1

Sq. Ft.: 0475

$273/SF

Lot Size: –

Property Type: Residential, Condominium

Style: One Level, Contemporary

View: Creek/Stream

Year Built: 1977

Community: Northwood

County: Orange

MLS#: S648565

Source: SoCalMLS

Status: Active

——————————————————————————

Nice upper studio with new carpet, paint and sheet vinyl. In the heart of Irvine with schools, shopping and transportation close by.

High house prices, high unemployment, and a state budget shortfall have contributed to out-migration to other states.

Irvine Home Address … 12 VENEZIA AISLE Irvine, CA 92606

Resale Home Price …… $564,900

California, Here I Come

Right back where I started from

where bowers of flowers

bloom in the spring

each morning at dawning

birdies sing at everything

a sunkissed miss said, “Don't be late!”

that's why I can hardly wait

open up that golden gate

California, Here I Come

Al Jolson — California, Here I Come

Are they? Are the people still coming? Will we form enough households to create the demand necessary to sustain current pricing given the problems in California?

Does today's topic seem familiar? If you were reading during the Christmas holidays, you may remember With people leaving Orange County, who will buy our overpriced homes?

The California Ponzi scheme economy collapsed as the Great Housing Bubble deflated. I have documented over a thousand cases of HELOC abuse here in Irvine, California. Most economists underestimate the economic stimulus of millions of homeowners being given hundreds of thousands of dollars in free money by our banks. Now that this money is gone, Orange County home prices too high for incomes or rents, and Orange County home sales are falling with prices to follow.

These economic woes are prompting families to leave the state. With new household formation near historic lows as we get off the Ponzi juice, there is little tangible demand for housing, and prospects for this demand increasing appear weak.

Today we look at a different dataset showing the same basic pattern: people with a choice about where they live are choosing to live outside of California. Population is still growing because births exceed the outmigration, but newborns don't buy homes, and those who need work to buy homes are leaving the state due to our high unemployment and high cost of living.

Have dark days dulled shine of the Golden State?

Source: USA TODAY

Publication date: March 9, 2011

By William M. Welch

High unemployment, foreclosures and a staggering budget crisis detour domestic migration from California

LOS ANGELES — Census figures released Tuesday detail the new reality that Californians are facing: The Golden State is experiencing the limits that come with slower growth.

Often viewed as a leading indicator for the rest of the country, California is a state where whites are no longer in the majority and where the rise of Hispanics is changing the face of its population and its public schools.

High unemployment, record home foreclosures and declines in industries such as construction and technology have put the brakes on the economy. Joblessness in the state was 12.5% in December, compared with 4.7% in January 2001, according to the U.S. Bureau of Labor Statistics.

While the nation is emerging from a recession, California felt it early and is continuing to lag, economists say. That makes the state far less attractive to residents of other states who in previous decades may have longed to join the California dream.

“The biggest change is definitely the slowing down in our rate of growth and the almost total stop of people coming to California from other states,” says Douglas Johnson, a fellow at the Rose Institute of State and Local Government in Claremont.

California house prices went up so fast during the last 40 years at different times through a combination of wage growth and irrational exuberance. Even if every market were at rental parity and stayed there, many California markets would have outperformed the nation because wage growth outperformed the nation.

High wages coupled with robust employment growth drives a great deal of household formation and demand for housing. The California story for the last 40 years has been, off and on, boom and bust, with an undercurrent of strong wage growth. The wage growth is what makes the real estate engine purr. It corrects all mistakes. Overpaying is only a problem for those who can't wait for house prices to come back, right?

Without wage growth, homebuilding grinds to a halt, household formation slows, and home prices stagnate.

Population growth in recent years in California appears to be internally driven — more people having babies than dying — rather than the massive immigration the state once saw, he said. The Hispanic population is growing fast in part because much of it is of childbearing age while the white and black populations are older.

The small decline, just under 1%, in black population is the first ever such decline in the state, says demographer Hans Johnson at the Public Policy Institute of California.

The state still is attractive to immigrants, particularly from Latin America and Asia, but as with domestic migration, many immigrants now are going to other Western states. “We're not the trailblazers for the rest of the country that we were,” Douglas Johnson says. The Golden State, he says, “has definitely lost its shine for people from other states.”

What is there to attract outsiders to California? Yes, the weather is great, but house prices are double or more the cost of other areas of the country, job prospects are bleak, and state government is dysfunctional.

At the same time, political dysfunction has left the state with staggering budget problems every year and produced large-scale public disaffection with the state's political leaders and institutions.

Gov. Jerry Brown, once the state's youngest governor and since his election last November its oldest at 72, has proposed tax increase extensions and massive budget cuts. He is working to win the backing of the state's business community to get tax proposals on a statewide ballot in an effort to close a projected $25 billion shortfall by June 2012.

“We have become an average-growth state,” says Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.

So much for that above-average wage growth.

He says the Los Angeles area's growth in part is due to an influx of upper-income Asian immigrants buying homes and settling, and a strong entertainment industry. He notes, though, that 600,000 construction jobs were lost in the recession, and tens of thousands of aerospace jobs have been lost permanently over the past two decades or so.

The FCBs will save us. Irvine will become a hub of savvy buyers who seek to outbid each other with cash for an Irvine tract home. Forget posh condos in Manhattan when you can invest in single-family detached homes in Irvine.

California's dynamic growth through much of the 20th century couldn't last forever, demographers say.

Joel Kotkin, executive editor of the website NewGeography.com, blames California's tax and regulatory climate, which he says discourages business. He says big businesses may not be fleeing, but they are directing their expansions elsewhere.

The problem with being one of the highest prices markets in the country is that every nearby market pulls you down by the substitution effect. The high prices in coastal California pushes growth inland as buyers substitute driving distance for cheaper housing. Cheaper substitutes in Riverside County limit price increases in Orange County.

The state saw big population increases in inland areas, where lower housing costs and pre-recession job opportunities made it attractive. Populous coastal areas grew more slowly.

“You've got demographically stagnant coastal areas controlling the fate of more demographically vital inland areas,” Kotkin says.

Inland Riverside County grew more than 40%, even though Hans Johnson says it and other interior regions were devastated by the recession in the last several years of the decade. Five of the nation's top 10 metro areas for home foreclosures are in California's interior region, according to RealtyTrac.com, which tracks foreclosures.

Unfortunately, much of the housing demand of 2003-2006 was artificial demand. When lenders lowered standards to qualify more borrowers, those borrowers bought a house and stimulated a great deal of household formation. With access to cheap money gone, the demand that was pulled forward is now absent from the market.

The limits have been clear in the pessimistic views voiced by Californians in monthly polling conducted by the Public Policy Institute of California. It found in February that by 55%-34%, Californians think things are going in the wrong direction in the state. Still, the 34% saying it was going in the right direction was up from 16% last October, just before the election.

Mark Baldassare, CEO of the institute, says Californians want an end to their annual state budget dramas and are sensing that the economy is stabilizing. He says the state is still one of the largest economies in the world and offers attractive weather, beautiful scenery and a diverse cultural vitality.

“People were shocked by the economic problems and the fiscal problems of the state during the past few years,” he says, “but they're beginning to get the sense that things are stabilizing and coming back to what might be a new normal. It's a time of more limited expectations, but nonetheless some feeling of hope and promise for the future.“

For as bad as things look for California, this crisis too shall pass. The idea of a “new normal” is the cultural equivalent of the The Unceremonious Fall from Entitlement. Everyone has to adjust to a lifestyle within their means. The days of endless Ponzi borrowing are not coming back soon — they may come back — but not anytime soon.

We have done nothing of substance to prevent desire for mortgage equity withdrawal from Inflating another housing bubble. Most buyers of California real estate at least acknowledge it is a distinct possibility that the market may go insane, their home values could go orbital, and they may be offered free money to spend. I would argue that many buyers have this expectation.

If wage growth does not match its historic stellar performance, real estate appreciation will not either. An entire generation is overpaying in anticipation of appreciation that may not materialize.

Bringing cash to the closing?

The owner of today's featured property paid $579,000 on 5/5/2004. He used a $452,000 first mortgage, a $113,000 second mortgage, and a $19,000 down payment. On 6/8/2006 he refinanced with a $560,000 first mortgage which represents a $5,000 reduction in his mortgage balance. For his amazing mortgage management skills, I am giving him a B on the HELOC abuse grading system.

He is trying to get out for a price near his 2004 purchase price. Ordinarily, you would think that selling seven years after buying a property you would be able to sell it without losing money, but that is not the case for this property.

Do you see the face looking down on the kitchen nook table? I think it's frightened by the price.

Irvine Home Address … 12 VENEZIA AISLE Irvine, CA 92606

Resale Home Price … $564,900

Home Purchase Price … $579,000

Home Purchase Date …. 5/5/2004

Net Gain (Loss) ………. $(47,994)

Percent Change ………. -8.3%

Annual Appreciation … -0.4%

Cost of Ownership

————————————————-

$564,900 ………. Asking Price

$112,980 ………. 20% Down Conventional

4.85% …………… Mortgage Interest Rate

$451,920 ………. 30-Year Mortgage

$114,979 ………. Income Requirement

$2,385 ………. Monthly Mortgage Payment

$490 ………. Property Tax

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

$94 ………. Homeowners Insurance

$361 ………. Homeowners Association Fees

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

$3,329 ………. Monthly Cash Outlays

-$405 ………. Tax Savings (% of Interest and Property Tax)

-$558 ………. Equity Hidden in Payment

$210 ………. Lost Income to Down Payment (net of taxes)

$71 ………. Maintenance and Replacement Reserves

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

$2,647 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,649 ………. Furnishing and Move In @1%

$5,649 ………. Closing Costs @1%

$4,519 ………… Interest Points @1% of Loan

$112,980 ………. Down Payment

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

$128,797 ………. Total Cash Costs

$40,500 ………… Emergency Cash Reserves

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

$169,297 ………. Total Savings Needed

Property Details for 12 VENEZIA AISLE Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2000

$282/SF

Lot Size: –

Property Type: Residential, Condominium

Style: 3+ Levels, Mediterranean

View: Pool, Faces East, Faces North, Faces Northeast

Year Built: 1992

Community: Westpark

County: Orange

MLS#: P771098

Source: SoCalMLS

Status: Active

——————————————————————————

Best located home in Corte Bella! Corner unit spaced away from surrounding buildings which gives this home much privacy. Excellent views of pool, fountains, and sculpture garden. Unobstructed northern and eastern exposure give this home unequaled brightness and privacy. Sound of waterfalls creates resort feel. 3 Bedrooms Up, den, office, gym or 4th bedroom downstairs. Many upgrades including maple hardwood floors, granite counter tops, plantation shutters, surround sound, cental vacum. Former model home with very high ceilings. Gated community with no Mello Roos. Black and white race deck checkered tiles in garage. Beautiful Italian design. Play ground, tennis courts, soccer field, baseball diamond, hockey court, basketball court all within a 1 minute walk. Unit will be available for viewing by appointment only, owner is agent.

Some British humor for you. It's painful to watch:

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter