Problem Child – AC/DC

Do you get the impression from the behavior of speculators and HELOC abusers that it isn’t their problem? I do. Today’s featured property was bought in 2005, the equity was quickly extracted right up to the peak, and now that prices are dropping, the speculator is simply walking away. It isn’t his problem anymore, it is the problem of Residential Mortgage and Investment, Inc. or whatever CDO the loan was packaged into.

Day after day, we document lenders taking huge losses. It is not the kind of thing that promotes a loosening of credit and increasing prices. Yet there are still people trying to flip houses (a post for another day, perhaps.) WTF? Do people have so little understanding of credit markets that they believe lenders are suddenly going to go back to the practices of the bubble? Faced with daily huge losses causing unprecedented price declines, lenders will become more restrictive of credit — much more. Either that or they will go bankrupt (I am still waiting on Countrywide, IndyMac, Downey and WAMU.) Prices will fall to the point where people can afford to buy houses with a conservative percentage of their income because lenders will require it. The days of DTIs in excess of 28% may return again someday, but not until that becomes the standard for quite a while. Lenders will retreat to this level because they know people can really afford that. That will become the standard until people stop defaulting. People are going to continue to default until prices stop declining and they stabilize at affordable levels. That is just the way credit markets work.

Asking Price: $575,000

Income Requirement: $143,750

Downpayment Needed: $115,000

Monthly Equity Burn: $4,791

Purchase Price: $680,000

Purchase Date: 6/28/2005

Address: 13 Pebblewood, Irvine, CA 92604

Beds:	3
Baths:	3
Sq. Ft.:	1,853
$/Sq. Ft.:	$310
Lot Size:	2,645 Sq. Ft.
Property Type:	Condominium
Style:	Colonial
Year Built:	1976
Stories:	2 Levels
Area:	Woodbridge
County:	Orange
MLS#:	S538513
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Even the description says, “I don’t care anymore.”

This owner did not own the property long enough to seriously abuse HELOCs, but he did what he could.

• The property was purchased on 6/28/2005 for $680,000. There was a $600,000 mortgage and a $80,000 downpayment.
• On 11/28/2005 he owner withdrew his downpayment with a $80,000 stand-alone second.
• On 5/18/2006 he refinanced with a $607,240 first and a $114,000 stand-alone second.
• Total mortgage equity withdrawal of $121,240 including his downpament.
• The total debt on the property is $721,240

If this property sells for its asking price, Residential Mortgage and Investment, Inc. stands to lose $180,740. The loan is barely two years old.

.

Cop this
I’m hot, and when I’m not
I’m cold as ice
Get out of my way
Just Step aside
Or pay the price

I’m a problem child, hey
I’m a problem child
I’m a problem child
Just runnin’ wild

Problem Child – AC/DC

She’s So High — Tal Bachman

Many people fueled the market rally with a frenzy of fear buying. Fear
of being priced out of the market, and fear of missing the great
profits to be made through home ownership. Those who did not participate by wanted to
became the stereotypical “bitter renters.” These
people were bitter because they believed the nonsense of kool aid
intoxication, and they believed that they missed their chance. Of course, over the last year,
many of these people got their chance and became knife catchers.
Today’s featured song encapsulates the feelings people had toward
houses and those who owned them — they were so high above them. The
bitter renters were jealous and felt unworthy. Little did they know…

Dr. Housing Bubble has an ongoing series he calls “Real Homes of Genius.”
He profiles really awful properties in bad neighborhoods going for
ridiculous prices. There is an intuitive revulsion from seeing these
properties and the prices attached. It does not take a sophisticated
financial analysis to recognize the housing bubble when viewing these
properties. We don’t have any run down properties of that sort in
Irvine, but I remember having the same revulsion when I would
see 1 bedroom condos going for over $400,000. I don’t care how used to
bubble prices you get, when you see tiny condos going for $400,000, the
mind simply cannot grasp it. These prices were just wrong. No amount of
kool aid could drown out the doubts about the prices of these units. Of
course, the people who bought these units almost exclusively used 100%
financing, so it didn’t really matter what they paid, and they did not
care. It wasn’t their money. An Option ARM with a 1% teaser rate made
owning one of these cheaper than renting, and in due time, it would be
selling for millions. Even if it didn’t, any losses would be someone
else’s problem — which is where we are now. Today’s featured property is a simple 100% financing deal gone bad. It is the collapse of prices at the low end of the market like this one that are serving as a drag on market prices, and they will continue to do so until we reach the bottom.

Asking Price: $299,900

Income Requirement: $94,975

Downpayment Needed: $59,980

Monthly Equity Burn: $2,500

Purchase Price: $410,000

Purchase Date: 1/21/2005

Address: 722 Timberwood, Irvine, CA 92620

Why Use Title Case?

Spacious And Rare… Rare Spacious… That description is common and vacuous.

If this property sells for its asking price, and if a 6% commission is paid, First Franklin stands to lose $128,094 — on a 1 bedroom condo. As a side issue, if someone would like to investigate, it appears as if the seller brought in a straw buyer last summer. The property records are a bit confusing.

When you see properties like this one, it isn’t too difficult to see how prices were bid up to such ridiculous levels. During The Great Housing Bubble, you did not need to have verifiable income or good credit to qualify for 100% financing loans. In short, anyone could get as much money as they wanted simply by asking. Nobody would put any of their own money into a $410,000 one-bedroom condo, but if the lenders are giving it away and making the payment very, very small, why not? Properties like this one when it sold in 2005 made someone a lot of money. That person probably took those profits and bought a larger, nicer property. This pushed up the prices of the next tier of houses. As each move up was fueled by a combination of equity and loose financing terms, prices were pushed up very high. It also isn’t too difficult to see how this process can work in reverse.

People buying properties today are making one simple bet: credit will loosen again soon. I discussed this idea in the post Your Buyer’s Loan Terms. Incomes do not support peak price levels or even current price levels. The only way to keep prices inflated is through unstable credit terms. Credit is clearly more restrictive than it was during the bubble. If credit loosens up again, people will bid up prices and kool aid intoxication will grip our society. The problem with the “bet” today’s buyers are making is that credit is not going to loosen again any time soon. The lenders are still losing money even on loans they made after the credit crunch took hold (see yesterday’s post.) Credit will not loosen again until lenders stop losing money for an extended period of time. So far, they haven’t been able to write loans that don’t go bad quickly. Credit will continue to tighten until they can, and that will not occur until prices are so low people can truly afford the properties. We are not there yet.

.

She’s blood, flesh and bone
No tucks or silicone
She’s touch, smell, sight, taste and sound

But somehow I can’t believe
That anything should happen
I know where I belong
And nothing’s gonna happen
Yeah, yeah
Yeah, yeah

She’s So High — Tal Bachman