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

Many people buy timeshares believing they are a good investment. In fact, they are the worst possible real estate investment.

Irvine Home Address … 74 LINHAVEN Irvine, CA 92602

Resale Home Price …… $749,000

So don't go away

Say what you say

Say that you'll stay

Forever and a day

In the time of my life

Cos I need more time

Oasis — Don't Go Away

Timeshare or fractional ownership has been around since the 60s, but is was during the 90s this industry really took off. Wikipedia defines Timeshare as follows:

A timeshare is a form of ownership or right to the use of a property, or the term used to describe such properties. These properties are typically resort condominium units, in which multiple parties hold rights to use the property, and each sharer is allotted a period of time (typically one week, and almost always the same time every year) in which they may use the property. Units may be on a part-ownership or lease/”right to use” basis, in which the sharer holds no claim to ownership of the property.

Timeshares give people the opportunity to use property like a hotel occupant while retaining rights of ownership — a right many believe always brings rapid appreciation. Timeshares do not go up in value.

Time-share owners are struggling to sell

Many are looking to sell their time shares amid the still-ailing economy and as the first generation of owners are nearing retirement. Some find their properties are worth pennies on the dollar.

By Jennifer Bjorhus — March 7, 2011

Time shares are tough to sell, even in the best of times. But now the shared vacation properties and their hefty annual fees have become nearly impossible to unload and are breeding a horde of scam artists preying on eager sellers.

Nearly 8 million people — about 7% of U.S. households — own a time share, a vacation property owned by many people who take turns using it.

When I was out of high school and out of the house, my parents bought a timeshare like many Americans did. They didn't go very often, and they got tired of paying the fees, so they sold it for a loss. They were glad to be rid of it.

My parents enjoyed their stays at the resort where they got their timeshare, but the cost versus the benefit wasn't in their favor over the long term. This is the experience of most timeshare owners.

The slow economic recovery, and the fact that the first generation to buy time shares 35 years ago has been retiring, means many people are looking to sell. Craigslist, EBay and specialized listing service Redweek are chock-full of offerings.

But how much they're worth is a different issue. One Florida listing service estimates that most time shares are selling for no more than 10% of the original price. Some owners are lucky to get pennies on the dollar.

I wonder how many of those people kept up the payments on the timeshare while they defaulted on other loans. Why not? If they aren't making a house payment, they will have the money to go enjoy their timeshare. The timeshare operators won't let the “owners” stay if they're in default. It's hard to squat in a timeshare.

“We've never seen the resale market where it is now,” said Brian Rogers of the Timeshare Users Group, a consumer advocacy group in Jacksonville, Fla., that runs the listing service. Most owners “huff away mad” when told their time share has depreciated like a Yugo, he said.

Then there are the scams.

Resale scammers feeding on desperation have run so rampant that the Better Business Bureau last month named time-share resale swindles one of the top rip-offs of 2010.

One such scam goes like this: Someone tells you they have a buyer lined up and to just pay a flat fee. In another, some company says it will take your unwanted time share off your hands and sell it for an upfront fee that can be thousands of dollars. Many like to advertise by postcard.

Florida has launched a statewide crackdown on time-share resale fraud. Its attorney general's office is investigating at least a dozen companies.

Even the top industry group, the American Resort Development Assn. in Washington, has issued five consumer advisories on resale scams in the last six months.

“In a down market they come out of the woodwork,” Chief Executive Howard Nusbaum said.

Desperation will always breed exploitation. For someone selling one of these through a shady service, what did they expect would happen? After paying an up-front fee that was probably half the value of the asset — assuming it has any real value — did the timeshare seller really believe this seller was going to obtain a price far enough above the open market to warrant the fee? Any service you have to pay for up front is probably a scam. Remember the loan mod shops the California Bar had to crack down on?

Time-share sales plunged 35% to $6.3 billion in 2009, the latest year for which data are available, according to the resort development group. Sales have dropped 40% from the 2007 peak.

Owners continue to fall behind on time-share loans, although overall default rates are down from their peak in January 2010, when 1 in 10 time-share owners was in default, according to Fitch Ratings, which tracks securitized time-share loans that are bundled up and resold to investors. The annualized default rate was 8.51% in December.

Personally, i am shocked it is that low. Perhaps timeshare owners more than appreciation loanowners are willing to hang on because the timeshare was always primarily a consumptive use. Any resale value was a bonus. Plus, those borrowers weren't using Option ARMs; although, I doubt timeshare loans were underwritten to tight standards either.

Nusbaum blames the current trouble on the recession and credit freeze, as well as the demographics of retiring baby boomers. Not only have cash-strapped consumers cut back on luxuries, but resort developers have found it harder to line up the credit to offer consumers. Most new time shares are sold directly by resort developers such as Hilton Hotels Corp., Marriott International Inc., Wyndham Hotels & Resorts and Starwood Hotels & Resorts Worldwide Inc., which provide their own financing.

There are just not as many consumer protections in the secondary market, where time shares get resold, he said. “We're kind of where the used car industry was in 1962.“

Some desperate owners try to hand time shares back to the resort developer under a so-called quit claim deed. But resorts won't take them unless they think they can resell the property, experts say.

Not all time shares are equal. The best — say a Disney resort — hold their value better than the rest. “If you bought a converted motel room in 1982 in Gatlinburg, Tenn., for the first week of December … I don't think it has a whole lot of economic life,” Nusbaum said.

LOL! This guy is hilarious.

People have to give up thinking that time shares are a financial or real estate investment, he added. It's a lifestyle investment, and its real value is the use owners get out of it.

For the last nearly two years, Shevy has worked with clients who came through the IHB. In my conversations and in his, we have shown people the cost of the purchase they're making and made no illusions about the bleak potential for appreciation and likelihood of continued price decline.

Most clients chose to purchase anyway. But rather than justifying an emotional decision with delusions of appreciation and HELOC riches, these buyers know they are paying a price, a consumptive price to the degree they were paying over rental parity. And that's okay as long as they know that going in.

People are smart and generally rational when they want to be. Buying can still be the right decision, it just isn't buying your own personal ATM machine. It's a shelter that provides a forced savings through amortization and a hedge against inflation.

But Bernie Wiklund hasn't been to his Cape Cod time share in nearly seven years. The retired engineer who lives in Ramsey, Minn., is working as a security guard to make ends meet and can't afford to fly out to Cape Cod or fork out $1,000 a year in fees.

He's advertised his two-week time share on Craigslist for nearly six years and marked it down to $5,000, a fraction of the more than $14,000 he paid in the 1980s. He's gotten responses, but only from people trying to sell the time share for him — for a fee.

“I'd like to retire,” he said. “I'm 72.”

This guy's retirement wealth is tied up in a timeshare? I hope he has other investments.

Kim Holbrook knows the feeling. The 56-year-old Brooklyn Park, Minn., resident has been trying for six years to sell the four time shares she and her husband bought years ago when they lived in the South and the resorts were quick getaways.

Now the children are grown, and she and her husband are spending more than $2,000 a year in annual fees on properties that they don't use like they used to. She can exchange some of the time shares for stays at resorts in different places, she said, but there are fees for that too.

Her advice for first-time buyers: Don't. “There isn't a market. You can't resell,” Holbrook said. “Everything I've seen … it's for pennies on the dollar.”

I have a news flash for the Holbrooks: they should take the pennies on the dollar and be happy they didn't have to pay someone to take those losers off their hands.

That's great news for buyers, of course. Mike Spillane, 67, picked up his eighth time share weeks ago: a one-week stay in a four-bedroom, four-bath unit in historic Williamsburg, Va. It's a “gold crown-rated” unit, referring to a time-share exchange system's top rating, that would cost as much as $30,000 if he bought it directly from a resort developer.

Spillane, who co-owns a small manufacturing company, often uses his time shares to exchange for stays at other resorts. He gives one week each year as a perk to employees and can absorb the $5,000 to $6,000 a year spent in maintenance fees.

“We know if the market doesn't fully recover that we're not going to get a lot of money for some of them,” he said. “But we've gotten use out of them for many years.”

Bjorhus writes for the (Minneapolis) Star Tribune/McClatchy.

Timeshares make fortunes for successful developers, and they create financial nightmares for most buyers.

I'll let you in on some timeshare industry secrets. But first some background.

Back in 2000, I worked on a project called Mystic Dunes for a timeshare developer Tempus Resorts.

As part of the project, I was given a behind-the-scenes tour of their sales operation. These guys set the standard for high-pressure sales techniques that worked. I found their tactics appalling but fascinating in a train-wreck sort of way.

Having previously worked for years with homebuilders, I have seen sales with urgency, but these timeshare sales guys won't take no for an answer. And that's a big part of their model for success. Over the course of dealing with thousands of leads in their controlled sales environment, they have encountered every objection imaginable, and they have developed detailed scripts they memorize and regurgitate on command.

Success in timeshare sales is much like that of interrogators. Police interrogators try to induce people to confess. One successful method is to confine the defendant in a room for hours on end and question them over and over again until they break under the pressure. Timeshare sales is the same.

In timeshare sales, one technique is to show people around the resort in large groups with salespeople assigned to each family, couple or individual to politely badger them. These people are herded into an auditorium with small round tables where the salespeople move in for the close.

Some in the group want to buy and eagerly sign up. When these first few buy, they ring a bell and loudly celebrate. This tells the herd purchasing is okay because others have bought. Very few people have the courage to screw up on their own, but as the housing bubble showed, they will go over the cliff together as long as they are reinforced for their foolishness by the people they see. Once a few people buy, momentum builds, and herd dynamics prompts many to buy when they ordinarily wouldn't.

The people who run these operations are master salesmen who know every trick to quickly close the deal. It's an extremely profitable business for the good operators. For those who don't know how to operate one of these unique sales presentations, attempting to go timeshare would be a disaster.

The timeshare business is profitable because they can sell a $200,000 condo 50 times at an average price of $20,000 a week. If you ever go on one of these presentations, do the math for yourself. It's astounding how much they make, but it's also astounding how much they have to pay out to make it.

So when a timeshare owner pays $20,000 for their week in a condo, they are really buying a 1/50 interest in a $200,000 property. Their $20,000 purchase is really only worth $4,000 at best. So back to the main point of the article of the day, timeshares are the worst real estate investment because they are extremely overpriced when you buy them, and the ongoing fees will make them a liability that after a time outweighs the consumptive value.

I'll just stay at a hotel.

This property was first featured on May 25, 2010 when it was for sale as a short for $710,000. Apparently the negotiations with the borrower broke down because the bank foreclosed on 12/13/2010 and now after what looks like a first-rate renovation by the bank, they are offering it for sale.

The following is updated from the previous post, The California Economy is Dependent Upon Ponzi Borrowers:

Today's featured Ponzi borrower

• Today's featured property was purchased on 11/13/1999 for $485,000. My records say the owners used a $502,000 first mortgage, but that is unlikely. It is more likely they used a $402,000 first mortgage and a $83,000 down payment.
• On 5/13/2003 they opened a HELOC for $63,400
• On 1/26/2004 they got a HELOC for $100,000.
• On 2/1/2005 they refinanced with a $634,500 Option ARM with a 1% teaser rate.
• On 3/23/2005 they obtained a $80,000 HELOC.
• On 8/10/2005 they got a HELOC for $100,000.
• On 11/3/2006 they refinanced with a $688,000 first mortgage and a $85,000 HELOC from Wells Fargo. Since Wells owns both mortgages, they are in no hurry to foreclose on this owner and wipe out their HELOC. Look for this property to be in the amend-pretend-extend dance forever.
• Total property debt is $773,000.
• Total mortgage equity withdrawal is $484,227 plus whatever down payment they put into the property.
• Total squatting was at least 11 months.

Foreclosure Record

Recording Date: 04/15/2010

Document Type: Notice of Default

This couple spent almost half a million dollars in a four-year span. That is a one-family stimulus plan. If they were an isolated case, it may be a titillating story, but I have profiled hundreds of these here in Irvine. It is a widespread practice.

Irvine Home Address … 74 LINHAVEN Irvine, CA 92602

Resale Home Price … $749,000

Home Purchase Price … $658,600

Home Purchase Date …. 12/13/10

Net Gain (Loss) ………. $45,460

Percent Change ………. 6.9%

Annual Appreciation … 52.6%

Cost of Ownership

————————————————-

$749,000 ………. Asking Price

$149,800 ………. 20% Down Conventional

4.85% …………… Mortgage Interest Rate

$599,200 ………. 30-Year Mortgage

$152,450 ………. Income Requirement

$3,162 ………. Monthly Mortgage Payment

$649 ………. Property Tax

$114 ………. Special Taxes and Levies (Mello Roos)

$125 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$4,050 ………. Monthly Cash Outlays

-$768 ………. Tax Savings (% of Interest and Property Tax)

-$740 ………. Equity Hidden in Payment

$279 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves

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

$2,914 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,490 ………. Furnishing and Move In @1%

$7,490 ………. Closing Costs @1%

$5,992 ………… Interest Points @1% of Loan

$149,800 ………. Down Payment

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

$170,772 ………. Total Cash Costs

$44,600 ………… Emergency Cash Reserves

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

$215,372 ………. Total Savings Needed

Property Details for 74 LINHAVEN Irvine, CA 92602

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2478

$302/SF

Lot Size: 6,937 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

Year Built: 1999

Community: West Irvine

County: Orange

MLS#: S648733

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 10 days

——————————————————————————

Bank Owned!!! Highly upgraded home in West Irvine. Great curb appeal. Professionally landscaped. Extra long driveway for additional parking. Gourmet kitchen with center island. Granite counters and backsplash. Plantation shutters throughout. Hardwood flooring throughout downstairs. Built-in entertainment center in family room. Ceiling fans throughout. This home is well maintained.

The Orange County Register actually released a news story boldly stating that California had no real estate bubble. Brace yourselves for a kool aid overdose.

Irvine Home Address … 2110 TIMBERWOOD Irvine, CA 92620

Resale Home Price …… $405,000

as you peel back the skin from an orange

remember how you got all this

well all this

well it's never ever coming true

theres nothing you can do to change it

you don't have to do the crime

to do the time

its just guilt by association

Louis XIV — Guilt By Association

Really biased and misleading crap is common on realtor blogs, which is why nobody reads them. When realtors are allowed to post their bluster as news on the OC Register, many people take it as information rather than indoctrination. It soils the OC Register when they permit this.

Published: March 7, 2011

Updated: 5:25 p.m.

California had no real estate bubble

MIKE COTTER

Mike@MCotter.com

Nearly everyone accepts as fact the perception that California real estate prices “skyrocketed” into the stratosphere from the mid-1990s to the mid-2000s, creating a “bubble.” But historical data easily disproves this.

This guy has an interesting way of setting up his argument. He makes a bold and easily disprovable statement as if it were fact, and he proceeds to base his diatribe on this ridiculous statement.

There is also widespread belief that rapid growth in home prices must inevitably lead to rapid decline. The “bubble” must eventually “burst.” What goes up must come down. But this is also demonstrably not true – at least in California.

People tend to take these two notions for granted because they forget the facts of history, they mistake the current dramatic real estate correction as typical, and these misconceptions have not been well-investigated by the news media.

California home prices did not spiral out of control from 1996 to 2007. And rapid appreciation in home prices does not automatically lead to rapid depreciation. Let's examine history.

In 1970, according to data published by the California Association of Realtors, California's single-family home median price was $24,640. By 1983, the median had climbed to $114,370. This was a very rapid almost fivefold increase in market value in 13 years. The actual annual appreciation rate over that period was 12.5 percent. The inflationary '70s were very good for real estate prices. But I don't remember at the time any talk of impending doom for the housing market – that what goes up must come down, that this bubble had to burst.

Of course, 1970s inflation hit interest rates, too, and by 1983, mortgage rates were above 18 percent. The market slowed for one year only – California home prices went flat in 1984.

But no inevitable massive “correction” occurred after this rapid run-up. In fact, from 1984 to 1991, the home median price rose still higher, from $114,260 to $200,600. The annual appreciation rate was 8.4 percent.

Finally, after 21 years of price appreciation, a strong recession hit California and the housing market steadily corrected between 1991 and 1996. Military bases and aerospace companies closed. The home median price slowly declined from $200,660 to $177,270 – an annual depreciation rate of 2.4 percent. This was a tough time for those with slim equity. But most California homeowners muddled through. No one can claim that this was a burst bubble, but simply a gradual and expected adjustment after at least a generation of great times. The clouds lasted five years.

Let's pause here. People who take for granted the idea that home prices then skyrocketed after 1996 have little understanding of California's housing history.

It's true that California's home market took off again. And this time, the good times lasted 11 years. But this was no bubble that was destined to burst.

The facts: Climbing from a median price of $177,270 in 1996 to $560,270 in 2007, the annual appreciation rate for this 11-year growth period came in at a good but unspectacular 11 percent. I say unspectacular because the previous growth period from 1970 to 1983 was stronger at 12.5 percent annually and lasted two years longer.

This guy has based his entire reality on the two anomalous periods where kool aid intoxication took over. He genuinely believes house prices can go up faster than wages and faster than inflation. The magic appreciation fairies must sprinkle it like pixie dust.

In fact, an argument can be made that, had the appreciation rally starting in 1996 been more “typical” of those in the past 40 years, the home median price wouldn't have stopped at $560,270 in 2007 but would have risen an additional $100,000 or $200,000 before fizzling out.

Trees really do grow to the sky, right?

At any rate, the current correction began in 2007, with California's home median price dropping from $560,270 to $274,960 in 2009. I estimate 2010's median price will come in at a flat $275,000. Should that estimate hold, the correction we're ending just now will have brought an annual depreciation rate of about 21 percent. That's pretty severe in historical terms.

So why did the most recent 11-year rally fail to achieve expected heights, and more importantly, why has the subsequent correction been so severe?

Because it was a massive housing bubble that never should have been allowed to push so high to begin with. The fact is that the severe correction isn't complete yet, and when it is finally done, don't expect rapid appreciation any time soon.

Perhaps more than just real estate issues were involved in the truncated rally and subsequent market correction. Esoteric AAA-rated mortgage derivatives and credit default swaps may have set the stage for an extraordinary ruination of the real estate market.

According to The New York Times, commenting on conclusions issued by the Federal Financial Crisis Inquiry Commission, “The 2008 financial crisis was an 'avoidable' disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street.”

Contact the writer: Mike Cotter has been a California real estate broker since 1981 and is currently a Realtor and broker-associate with Century 21 OMA, 229 Avenida Del Mar, San Clemente. His website is MCotter.com. Contact him at Mike@MCotter.com or 949-322-6009.

Mr. Cotter worked hard writing that piece, and he deserves attribution, so his contact information is presented here as a courtesy. Please don't call or email him with inflammatory comments. If you like that perspective on the market from a broker, please go work with him. Reality is not for you. Mr. Cotter may stop by and defend himself in the astute observations. Wouldn't that be fun?

Why the OC Register print this kind of garbage? I found this in my Google news feed, so this is being passed off as news — an unbiased representation of fact. Is this the version of reality we are to embrace? Should trees grow to the sky?

The slow death of the OC Register has been painful to watch, and each time they run a realtor puff piece as news, they take their credibility down one more notch. I know they want content, and I wouldn't be surprised if this guy either paid for the content or advertises a lot with them. It can't be good for the OC Register when readers have to be mindful of bullshit.

It's supposed to go up more than 10% a year

The speculator who bought today's featured property is trying to get her money back out. Six years after the peak, and we are still grinding along the bottom making new lows. Rather than going up 10% a year as the realtor above suggested, this woman has owned for two years, and she isn't going to sell for enough to cover the commission.

The bubble owner paid $375,000 in 2003, and in 2005 refinanced with an Option ARM with a 1% teaser rate. After $145,000 in mortgage equity withdrawal, the property had $480,000 in debt and went into foreclosure.

A flipper bought the property at auction on 4/14/2009 for $341,200 and resells it a month later for $399,000. That was a great flip.

The current buyer paid $399,000. As far as I can tell, she paid all cash. She is taking a haircut.

Irvine Home Address … 2110 TIMBERWOOD Irvine, CA 92620

Resale Home Price … $405,000

Home Purchase Price … $399,000

Home Purchase Date …. 5/14/09

Net Gain (Loss) ………. $(18,300)

Percent Change ………. -4.6%

Annual Appreciation … 0.8%

Cost of Ownership

————————————————-

$405,000 ………. Asking Price

$14,175 ………. 3.5% Down FHA Financing

4.85% …………… Mortgage Interest Rate

$390,825 ………. 30-Year Mortgage

$82,433 ………. Income Requirement

$2,062 ………. Monthly Mortgage Payment

$351 ………. Property Tax

$111 ………. Special Taxes and Levies (Mello Roos)

$68 ………. Homeowners Insurance

$302 ………. Homeowners Association Fees

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

$2,894 ………. Monthly Cash Outlays

-$338 ………. Tax Savings (% of Interest and Property Tax)

-$483 ………. Equity Hidden in Payment

$26 ………. Lost Income to Down Payment (net of taxes)

$5063 ………. Maintenance and Replacement Reserves

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

$7,162 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,050 ………. Furnishing and Move In @1%

$4,050 ………. Closing Costs @1%

$3,908 ………… Interest Points @1% of Loan

$14,175 ………. Down Payment

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

$26,183 ………. Total Cash Costs

$109,700 ………… Emergency Cash Reserves

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

$135,883 ………. Total Savings Needed

Property Details for 2110 TIMBERWOOD Irvine, CA 92620

——————————————————————————

Beds: 2

Baths: 3

Sq. Ft.: 1270

$319/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Split-Level, Modern

Year Built: 2000

Community: Northwood

County: Orange

MLS#: S648735

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 10 days

——————————————————————————

BEAUTIFUL 2 BEDROOMS+ 2.5 BATHROOM TOWNHOUSE IN NORTHWOOD POINT, GATED COMMUNITY, FEW STEP UP TO LIVING ROOM, FEW STEP UP TO KITCHEN AND DINING ROOM AND FAMILY ROOM, TWO BEDROOM UPSTAIRS, TWO CAR ATTACHED GARAGE WITH DIRECT ACCESS FROM THE HOUSE, QUIET INTERIOR LOCATION, 2 MASTER SUITE, NICE HIGH CEILING IN LIVING ROOM, GRANITE COUNTERTOP IN KITCHEN, BREAKFAST COUNTER, VERY BRITE AND AIRY, WALKING DISTANCE TO AWARD WINNING SCHOOLS, ELEM. AND NORTHWOOOD HIGH, PARKS AND TRAILS, AMENISTSIES INCLUDE 2 SWIMMING POOLS, LIGHTED TENNIS COURT, GATED COMMUNITY OF COLLAGE,

Predatory lending happens across the financial spectrum. Subprime lending has long been associated, but today we have a case at the very top of the market.

Irvine Home Address … 8153 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $998,000

Such a feelin's comin' over me

There is wonder in most everything I see

Not a cloud in the sky

Got the sun in my eyes

And I won't be surprised if it's a dream

The Carpenters — Top of the World

The top of the world must be a lonely place. But with so many looking up in envy, people strive for a lifetime to reach the pinnacle. Today we have tales of high end property distress in Newport Beach and in Irvine.

Predatory Lending

According to Wikipedia predatory lending is described as follows: “Predatory lending typically occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property.” It certainly looks as if the highest of high-end homes may be a target of predatory lending. After reviewing the following article, I will let you decide.

I want to start by saying I don't know John McMonigle. I have no ax to grind with him, nor do I have reason to take his side. I know nothing specific about this case other than what is in the OC Register article.

High-profile agent's headquarters in default

Lenders have filed a default notice against the Newport Beach headquarters of luxury-home agent John McMonigle.

McMonigle confirmed that the default notice was filed and said his firm also has been sued as part of an ongoing dispute with a bank that cut off construction funding to McMonigle's signature Villa del Lago development in Newport Coast.

“We're intent on restructuring the debt here, and letting it work its way through the courts,” McMonigle said late Tuesday. “We're on it, and I don't think (our building) is at risk.”

McMonigle maintains that the dispute, not financial difficulties, are the reason for lenders moving against his 20,000-square-foot building at 1000 Newport Center Dr., near the Fashion Island mall.

The problem with stories like these where the property owners are specifically named (something I never do here at the IHB) is that their reputations are smeared by implication rather than fact. If McMonigle is delinqent on his loan and his properties are going into foreclosure, the implication is that he is experiencing major financial distress. The facts may or may not bear that out. Mr. McMonigle maintains he is merely reacting to the bank's bad behavior, and his statements may be accurate, and his actions may be justified.

Circle Family Trust, which provided McMonigle Group with a $1 million second loan on the building, filed a notice of default against McMonigle Residential Group Inc., CountyRecordsResearch.com shows.

McMonigle maintains that the Circle Family Trust default notice was triggered by his firm's decision to halt mortgage payments to the building's first lien holder, OneWest Bank of Pasadena.

OneWest had issued a first loan on the building for $9.4 million, according to County Records Research.com.

McMonigle said his firm since paid that debt down to $6.8 million, but stopped making payments in retaliation for OneWest's decisions to withhold just under $2 million from a construction loan and to deny the firm access to $4.25 million in cash collateral that it has on deposit with OneWest.

If this accusation is true, and if the building in question is worth more than the current loan balance, the lender is engaging in predatory lending with regards to his Villa del Lago project, and this property is being drawn into the broader dispute.

It is likely the debt on the office building was paid down from $9.4M to $6.8M due to the loss of value on the property. The lender will want to maintain a safe loan-to-value ratio, and if the property value falls, the loan balance must fall with it. The lender may have the contractual right to compel the borrower (McMonigle) to maintain a certain LTV which required him to pay it down.

The predatory lending is the bank's decision to stop funding the construction loan on Villa del Lago. Whatever that property is worth, it is worth significantly more if it is completed and can be marketed appropriately to high-end clients. If it goes to auction, it will fetch the lowest possible sales price.

Look at this from the bank's perspective. They already have $20,000,000 into the property, and if they add $$2,000,000 more, it makes the house worth $30,000,000. As it sits unfinished, it is probably worth $12,000,000 at auction, maybe less. The bank can buy the property for the amount of their note, finish it themselves, and they can make $8,000,000.

By forcing a stop to construction, the lender can foreclose and step into Mr. McMonigles shoes and take his equity. No competing bidders will step forward at that price point, and even if they did, the bank would probably be relieved to get their principal back on a property that is not complete after the housing bust.

In short, if what Mr. McMonigle alleges is true, this looks like predatory lending.

OneWest filed suit in recent weeks seeking, among other things, missed loan payments on the headquarters building, McMonigle said. His firm is in the process of preparing a counter suit.

“They're playing hardball, and we're at a stalemate with them,” McMonigle said. “They're trying to bring closure to (Villa del Lago). We are, too, and it'll find its way through the courts.”

At the heart of the dispute is a $20.6 million construction loan issued by the failed La Jolla Bank for the construction of the $37 million Villa del Lago project, a sprawling Newport Coast estate with a 17,500-square-foot mansion, private lake, tennis court and stables. The property is the priciest house now for sale in Orange County.

OneWest Bank decided to cut off the loan after taking over La Jolla Bank, McMonigle has said. The project is at least 90 percent complete, but the cutoff in financing means that McMonigle and his partners are unable to complete construction.

McMonigle said that he and his partners also have $4.25 million on deposit with OneWest as cash collateral for the construction loan.

“They will not let us tap (it),” he said. “We did not breach (on the headquarters loan) until long after they did.”

A OneWest spokesman could not be reached for comment late Tuesday.

So he has millions on deposit with this bank, but they won't release his money or the loan money for him to complete the project. It doesn't look good for the bank.

The other side

Perhaps the lender is merely protecting itself because the various loans Mr. McMonigle has are underwater? The lender has a right to protect itself by keeping the loan-to-value to a reasonable level, and despite the delusions of high-end owners, prices have fallen.

Further, the lender has a broader look at Mr. McMonigle's financial status. Perhaps he really is distressed. The real estate commissions aren't what they were five years ago. I have no idea, but there may be very legitimate reasons the bank is acting to protect itself and not give this borrower more money.

If the facts bear out the bank's case, everything Mr. McMonigle contends is public relations spin, and I have completely fallen for it.

Is predatory lending real?

If you think predatory lending sounds fartetched, I have seen another lender act in a predatory manner on a project I am familiar with. After nearly a decade in the entitlement process, the developer had four or five million into the project, and the lender had nearly ten million in debt applied. If the project gains entitlement, it's worth $80,000,000. If it sits as raw land, its value is a few million at most.

On that project, I watched the lender start putting the screws to the developer, and with the final vote within sight, the lender triggers some contractual provisions which put a chain of events in motion which lead to the developer defaulting to compel the lender to continue funding and the lender chosing to foreclose instead.

In that instance, the representative for the lender clearly saw the value in the property and figured they could take it back and get the value. In the end, the bank failed to recognize that the developer had “cultivated” the political relationships to get the final vote. The new guy in town had none of this political cloout, so the vote went against the bank and the project was denied.

The developer lost his entire investment, and the bank lost more than 80% of theirs due to greed, stupidity and predatory lending.

That's a BIG loss

I don't have the property records, but the details of who lost what aren't really that important. What matters is that this property lost $884,880! OMG! That is so much money! He buys this place in the summer of 2007 when rumors of a collapsing housing bubble abounded. But he knew better, right?

He tried to sell it for $1,950,000 back in early 2009. Clearly, this owner was a delusionall fool.

At least he isn't the biggest loser in Irvine….

Irvine Home Address … 8153 SCHOLARSHIP Irvine, CA 92612

Resale Home Price … $998,000

Home Purchase Price … $1,823,000

Home Purchase Date …. 8/3/07

Net Gain (Loss) ………. $(884,880)

Percent Change ………. -48.5%

Annual Appreciation … -16.3%

Cost of Ownership

————————————————-

$998,000 ………. Asking Price

$199,600 ………. 20% Down Conventional

4.85% …………… Mortgage Interest Rate

$798,400 ………. 30-Year Mortgage

$203,131 ………. Income Requirement

$4,213 ………. Monthly Mortgage Payment

$865 ………. Property Tax

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

$166 ………. Homeowners Insurance

$1124 ………. Homeowners Association Fees

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

$6,368 ………. Monthly Cash Outlays

-$1023 ………. Tax Savings (% of Interest and Property Tax)

-$986 ………. Equity Hidden in Payment

$371 ………. Lost Income to Down Payment (net of taxes)

$125 ………. Maintenance and Replacement Reserves

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

$4,855 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,980 ………. Furnishing and Move In @1%

$9,980 ………. Closing Costs @1%

$7,984 ………… Interest Points @1% of Loan

$199,600 ………. Down Payment

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

$227,544 ………. Total Cash Costs

$74,400 ………… Emergency Cash Reserves

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

$301,944 ………. Total Savings Needed

Property Details for 8153 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 3

Sq. Ft.: 2000

$499/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Modern

View: yes

Year Built: 2007

Community: Airport Area

County: Orange

MLS#: S649539

Source: SoCalMLS

Status: Active

——————————————————————————

Expansive views of the nature preserve, mountains and twinkling city lights from this highly upgraded Penthouse (1). Two bedrooms plus den/office, 2.5 baths poised on the 15th and 16th floors of the magnificent Plaza Irvine. Live and entertain in grand style from the gourmet kitchen with Viking appliances, custom countertop with backsplash. Enjoy the custom hardwood flooring, handsome fireplaces both in the master suite and living room, surround sound and PLasma TV in HD. First class service and top of the line amenities. Experience an urban lifestyle that is second to none!

Warren Buffet owns a manufactured home company whose clients have not gone delinqent on their payments despite the economic hardship.

Irvine Home Address … 4 SAGE #32 Irvine, CA 92604

Resale Home Price …… $284,900

This all to mobile home

Is calling after you

Well, this all too mobile home is killing me

And there's nothing that you can do to set me free

Steely Dan — This All Too Mobile Home

Last week we discussed how Texas demonstrated that access to home equity and the desire to spend it fueled the housing bubble. Today, we are going to look at how loose lending standards and low down payments were directly responsible for the loan delinquencies leading to foreclosures.

Many market observers have contended that unemployment, not toxic mortgages, is largely responsible for the high delinquency rate. Other factors such as land use regulation have also been identifies as potential culprits. It is difficult to firmly establish that low down payments and high debt-to-income ratios are responsible for the high rates of mortgage delinquency because the same terms were available everywhere.

If we could find a group of American home buyers who did not have access to the crazy mortgage market of the bubble, then would have a basis of comparison. Fortunately, there is such a group: manufactured home buyers.

Buyers of manufactured homes generally can't get the same kind of financing as a site-built home. Most sellers of manufactured homes either provide their own financing or have relationships with shady lenders. Therefore, these buyers operate completely outside of the normal financing mechanisms that went haywire during the housing bubble. Any differences in performance between loans in these two systems should be very instructive.

Buffett’s Subprime Housing Solution

Mar. 3 2011 – 12:05 pm — Matt Schifrin

Last weekend after Berkshire Hathaway released Warren Buffett’s annual letter, there were a flurry of articles and blog posts hanging off Warren’s every word.

One part of his long letter that didn’t get a huge amount of ink was the section on Clayton homes, a big manufactured home company that Berkshire owns.

By all rights the company should be in the crapper like most of the other mobile and manufactured home companies. Palm Harbor Homes of Texas went bankrupt and is now being purchased by another troubled firm Cavco Industries. Another, Skyline Corp., has seen its market cap halved.

There is a housing depression out there and modular homes aren’t exactly flying off the shelves.

However, as you will see from the following excerpt from the Berkshire Hathaway annual letter, things are holding up fairly well at Clayton. Business is way down, but importantly Clayton’s net loss percentage of average loans has stayed low at 1.72% in 2010.

As Mr. Buffett points out, Clayton’s average buyers have low credit scores and they don’t get the same government backed benefits as buyers of “site” built homes. Clayton lends to the subprime crowd. However, unlike the cowboys employed during the housing boom by men like Angelo Mozilo of Countrywide Credit, Clayton lenders knew that their companies would be holding onto the loans they originated.

Says Warren, “If we were stupid in our lending, we were going to pay the price. That concentrates the mind.”

Here is Buffett’s excerpt on Clayton Homes:

At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.) Sales would have been terrible last year under any circumstances, but the financing problems I commented upon in the 2009 report continue to exacerbate the distress.

To explain: Home-financing policies of our government, expressed through the loans found acceptable by FHA, Freddie Mac and Fannie Mae, favor site-built homes and work to negate the price advantage that manufactured homes offer.

We finance more manufactured-home buyers than any other company. Our experience, therefore, should be instructive to those parties preparing to overhaul our country’s home-loan practices. Let’s take a look.

Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47% were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable credits.

Nevertheless, our portfolio has performed well during conditions of stress. Here’s our loss experience during the last five years for originated loans:

Year Net Losses as a Percentage of Average Loans

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.53%

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27%

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17%

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86%

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.72%

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income.

Prior to when housing markets were a Ponzi scheme, lenders used to have conservative guidelines for down payments and debt-to-income ratios. Lenders knew that if there was some financial distress in the family that there was enough margin for distress that most would keep making their payments. Warren Buffet's experience with Clayton Homes demonstrates the wisdom of this approach.

Look at the low default rates and losses associated with Buffet's lending. These were subprime borrowers who went through the Great Recession, and their default rates remain under 2%. Considering the default rate on site-built homes using so-called financial innovation is near 10%, it's fair to say that Warren Buffet's underwriting standards were much better. Why is that?

In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

So if there is risk of loss, lenders take lending more seriously. Hmmm… Despite the common-sense nature of this idea, the lending industry has strongly resisted the Dodd-Frank requirement of keeping 5% of the loans they originate on their books. These fools are worried about the losses on 5% of their portfolio while Warren Buffet is retaining 100% of his.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

Warren Buffet is right. Higher down payment requirements and debt-to-income values at less than 31% (28% is better) results in fewer loan delinquencies and foreclosures. It really is that simple.

Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.

But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

To read Berkshire Hathaway’s 2010 shareholder letter click here.

Doesn't it make sense that higher down payment requirements and lower debt-to-income ratios makes for a more stable housing market? The more equity people have, the less likely they are to go underwater and consider strategic default. The lower the debt-to-income ratio, the easier it is for borrowers to make payments, particularly during times of financial distress.

Of course, stricter underwriting standards means we will issue fewer loans and seller fewer houses at lower prices. Few in the real estate community want that, so the pressure will remain to lower standards and inflate another housing bubble in under the guise of increasing affordability. Warren Buffet proved that larger down payments and tighter lending standards are a more viable long-term business strategy.

Livin' Large

The owner of today's featured property spent every penny of his free money the moment it materialized. This guy had his mortgage broker on speed dial.

• He paid $275,000 on 12/11/2002. Prices were too high then, but they were to go much higher. The owner used a $247,500 first mortgage and a $27,500 down payment.
• On 12/11/2003 he refinanced with a $253,000 first mortgage.
• On 6/11/2004 he refinanced with a $332,000 first mortgage.
• On 3/18/2005 he refinanced with a $368,000 first mortgage.
• On 4/28/2006 he refinanced with a $404,000 first mortgage and a $50,500 HELOC.
• Total property debt is $454,500, assuming he maxed out the HELOC. Don't you think he did?
• Total mortgage equity withdrawal is $207,000. That's a huge take over a three and a half year period, almost $5,000 per month. No taxes, all cash.

He must have had a good time.

Foreclosure Record

Recording Date: 01/18/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/18/2010

Document Type: Notice of Default

Irvine Home Address … 4 SAGE #32 Irvine, CA 92604

Resale Home Price … $284,900

Home Purchase Price … $275,000

Home Purchase Date …. 12/11/2002

Net Gain (Loss) ………. $(7,194)

Percent Change ………. -2.6%

Annual Appreciation … 0.4%

Cost of Ownership

————————————————-

$284,900 ………. Asking Price

$9,972 ………. 3.5% Down FHA Financing

4.85% …………… Mortgage Interest Rate

$274,929 ………. 30-Year Mortgage

$57,988 ………. Income Requirement

$1,451 ………. Monthly Mortgage Payment

$247 ………. Property Tax

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

$47 ………. Homeowners Insurance

$277 ………. Homeowners Association Fees

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

$2,022 ………. Monthly Cash Outlays

-$136 ………. Tax Savings (% of Interest and Property Tax)

-$340 ………. Equity Hidden in Payment

$19 ………. Lost Income to Down Payment (net of taxes)

$36 ………. Maintenance and Replacement Reserves

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

$1,601 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,849 ………. Furnishing and Move In @1%

$2,849 ………. Closing Costs @1%

$2,749 ………… Interest Points @1% of Loan

$9,972 ………. Down Payment

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

$18,419 ………. Total Cash Costs

$24,500 ………… Emergency Cash Reserves

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

$42,919 ………. Total Savings Needed

Property Details for 4 SAGE #32 Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1123

$254/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Traditional

Year Built: 1976

Community: Woodbridge

County: Orange

MLS#: P771720

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

FANTASTIC BUY ON THIS 3 BR 1.5 BA TOWNHOME VALUE PRICED FOR QUICK SALE! TILE ENTRY, FORCED AIR HEATING, OPEN & BRIGHT KITCHEN WITH GRANITE COUNTERTOPS AND NEWER MAPLE CABINETS, SEPARATE LAUNDRY ROOM, NEWER SLIDING DOOR IN DINING AREA, PRIVATE PATIO, GOOD SIZE BEDROOMS, AND CARPORT. SUPER MOTIVATED SELLER. SUBMIT!!!