Irvine doesn’t have any great cashflow properties. Today’s is cashflow positive, but it is still have to believe in appreciation to pay these prices for small condos.

Address: 228 Orange Blossom 34 Irvine, CA 92618
Asking Price: $130,000

I’m givin’ up, on everything
Because you messed me up
Don’t know how much you
Screwed it up
You never listened
That’s just too bad
Because I’m moving on
I won’t forget
You were the one that was wrong

Forgotten — Avril Lavigne

Investment wisdom of yesteryear has been forgotten. People started drinking kool aid and convinced themselves they can make and spend a fortune through real estate appreciation alone. They were wrong. This mistake caused The Great Housing Bubble, and the result is foreclosure, ruined credit and even bankruptcy. Most have not learned this lesson yet.

{book5}

Time to Payoff

When people examine investments, they often look at rates of return to compare between asset classes. Rates of return are a valuable metric. When thinking about retirement finance, rates of return become less important than steady cashflow. We need a new measure of success for reaching your retirement goals: Time to Payoff. The Time-to-Payoff is the amount of time it takes to retire the debt used to acquire the asset (house). It is a handy tool of those who use Accelerated Amortization.

Today, I want to look at another feature of cashflow investing: debt retirement. In Real Estate, Cashflow Investment and Retirement I noted, “… you can take the excess rent and put it toward the mortgage paying off the debt more quickly. Remember, the goal is to have maximum free cashflow in retirement, so you want to pay off those debts.” Retiring debt is part of the cashflow investment mindset; it is diametrically opposed to speculation.

Paying off debt is as difficult as dieting — there is always a temptation — whether it be spending or eating. The success rates for debt retirement are no better than they are for weight loss. Perhaps we should have a TV Show for the Biggest Saver.

Calculating Time-to-Payoff is a challenge. It requires looking at the available sources of cashflow and the impact the property has on its owner. There is a level of cashflow that can be diverted toward debt service that otherwise does not impact the owner’s life.

For example, if a property is about $600 per month cashflow positive before debt or taxes, the debt service payments can actually be closer to $900 per month before the owner is truly cashflow negative. How can this be? Isn’t paying out $300 a month more in payments making you cashflow negative? Not really. Part of that payment is equity that is paying down debt, so that is not a true expense. The interest will be tax deductible for most wage earners, so the owner can adjust paycheck withholdings to compensate for the difference in payment. In short, the property has no net financial impact on the owner.

If the property is cashflow positive — which it must be for this analysis to work — there will be money that can be put toward debt service. If the maximum available cashflow is put toward debt service, how quickly does the loan amortize? That is Time to Payoff.

If you invest in the Time-to-Payoff way, your property investments will have no impact on your financial life — plus or minus — until you retire. There is no demand on your income to service the investment, and there is no net benefit for you to spend on your lifestyle. Let’s just say, it isn’t a lifestyle alternative many people were choosing during The Great Housing Bubble.

{book2}

IHB Investor Report

A few weeks ago, we introduced IHB Investor Reports. After reviewing the comments and some further reflection, we have updated our reports to include new features — one of which is the Time-to-Payoff calculation. Today’s featured property is as close to an investor property as I could find here in Irvine. The deal still isn’t very good unless you are betting on appreciation.

One of the changes we made was to run the report based on what we believe to be the most likely transaction price. It does nobody any good to run a report based on an asking price that is either WTF high or so low that you know 20 bids will be over the ask. The comps are what guide short-term pricing.

Another feature we added is a chart showing the impact of different downpayment and interest-rate scenarios. Rather than run multiple financing scenarios, I set up the spreadsheet to automatically run 165 of them and report the results in terms of cash-on-cash rates of return. What you will notice is that low downpayments and low interest rates increase returns at any given price. BTW, you don’t want to know how it is calculated…

=($D$51-(-PMT(H$145/12,$C$57*12,($C$54-$C$54*$F150))-1*($C$63)*((($C$54-$C$54*$F150)*H$145)/12+$D$42)-1*(-PMT(H$145/12,$C$57*12,($C$54-$C$54*$F150))-(($C$54-$C$54*$F150)*H$145)/12)))*12/($C$54*$F150+$D$71+$D$72+$D$73)

IHB Cashflow Investor Brokers Opinion of Value — 228 Orange Blossom.pdf

Getting an IHB Fundamental Value Report

We are up and running and ready to serve. If you want to see an IHB Fundamental Value Report for either your own home or a house you are looking to purchase, you can request a report at our newest navigation stop: Reports. You will be automatically signed up for our introductory emails and our periodic newsletter when you request a report. In order to avoid responding to robot submissions, we will process your
request when we receive confirmation from your email address.

Address: 228 Orange Blossom 34 Irvine, CA 92618

Asking Price: $130,000

Income Requirement: $23,927
Downpayment Needed: $26,000

Purchase Price: 62,500
Purchase Date: 10/29/1997

Net Gain (Loss): $59,700
Percent Change: 108.0%
Annual Appreciation: 9.1%

Monthly Payment $673
Monthly Cash Outlays $925
Monthly Cost of Ownership $653

Redfin Property Details for 228 Orange Blossom 34 Irvine, CA 92618

Beds 1
Baths 1 bath
Size 471 sq ft
($276 / sq ft)
Lot Size n/a
Year Built 1976
Days on Market 359
Listing Updated 8/3/2009
MLS Number F1786080
Property Type Condominium, Residential
Community Orangetree
Tract Cm

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

Charming end unit. Lower level one bedroom with full bathroom and kitchen. Inside laundry. Living room and patio area overlooking water stream and soothing sounds of a waterfall. 1 car port. Association has pool, spa, tennis courts and clubhouse. Excellent location next door to Irvine Valley College. Near 5 and 405 Freeways, Irvine Spectrum Entertainment Center, Business District, Shopping. Located in Building # 12.

Very low interest rates make prices affordable. We used to have unsustainable loan programs; now we have unsustainable loan terms. Affordability at these price points is fleeting. It is an opportunity for home ownership most people should pass on.

Irvine Home Address … 145 Roadrunner Irvine, CA 92603
Resale Home Price …… $649,000
{book7}

The people were intrigued
His wife held back her fears
The headlines gave acclaim
He’d realized their dreams.

Faster than a bullet from a gun
He is faster than everyone
Quicker than the blinking of an eye
Like a flash you could miss him going by
No one knows quite how he does it but it’s true they say
He’s the master of going faster.

Faster — George Harrison

Most people realize their dreams of home ownership when they purchase a house. This is not ownership; it is debt slavery. You don’t own the property until the debts are retired. Real home ownership is the reward for those who master paying debts faster.

Affordability is a measure of people’s ability to raise money to obtain real estate; it is a function of financing. During The Great Housing Bubble, financial innovations dramatically increased the amounts people were able to borrow; unfortunately, Affordability Products Make Prices Unaffordable. The affordability was short lived because the loan programs themselves were unstable. The collapse of these loan programs resulted in a massive credit crunch that removed affordability from the market; prices fell.

During The Great Housing Bubble, the loan programs were unstable and interest rates were too low because lenders were not property pricing risk. Now, the Federal Reserve has artificially engineered unsustainably low 4.5% Mortgage Interest Rates? to compensate for the affordability lost when toxic loan programs got crunched. In short, we substituted unsustainable interest rates for unsustainable loan programs — the key word being unsustainable.

I have predicted that we will see a 2011 Inflation Spike. If inflation does go up, mortgage interest rates will go higher because banks will not loan money at rates lower than the level of inflation because they would come out behind. So what happens when interest rates go up?

Is it about the payment?

It is worth noting here that lower prices does not increase affordability. What? Yes, that is right, lower prices does not necessarily increase affordability. A house loan of $460,509 at 4.5% has the same payment as a $317,995 loan at 8%. The loan balance is 31% smaller, but the payments are the same.

From a cashflow investment perspective — assuming the property will never be sold — the Federal Reserves efforts to lower interest rates has increased affordability. Like the loan programs the FED initiative replaces, ultra-low interest rates are not sustainable.

So why shouldn’t you be buying now?

1. Most people will sell their home, so resale value does matter.
2. You can never refinance into a lower payment or faster amortization schedule.

I wrote about point #1 in Temporary Affordability and the Third Foreclosure Wave:

If there are properties in which you would be willing to live for the
long term, and if they can be had for at or below rental parity, then
you are only hurt by rising interest rates and declining prices if you must sell while resale values are depressed (an event that happens more often than most believe). Eventually—cue
the 20 year holding time—fundamentals will rise to support prices at
higher interest rates. On an inflation adjusted basis, you can never
recover from overpaying up front, but in nominal terms, there will come
a point when you can get out at breakeven. Keep in mind, you are
trapped in an underwater situation once interest rates start going up
and values start going down; however, you are trapped in a property that still costs you less than renting, so you are far better off than the typical homedebtor trapped in their homes today.

From a purely cashflow perspective, buying now is not a problem; however, in the real world, people need to sell their homes for many reasons. If they are underwater when they need to sell, bad things happen. Are you willing to take that risk?

It point #2 that I want to examine more carefully today. In Real Estate, Cashflow Investment and Retirement I noted, “… you can take the excess rent and put it toward the mortgage paying off the debt more quickly. Remember, the goal is to have maximum free cashflow in retirement, so you want to pay off those debts.” Retiring debt is part of the cashflow investment mindset; it is diametrically opposed to speculation. Retiring debt is the key to retiring from work. The faster you can
accelerate the repayment of debt, the sooner your investments are paid
off, and the sooner you can retire.

Pay more when you can

There are methods anyone can use to accelerate their home mortgage payments: (1) pay more when you get a raise and (2) make extra payments. One of the advantages of home ownership is that you have a stable house payment while renters face yearly increases. Why not take that raise and put some of the extra into your payment? If you get a 3% raise, you should be able to put 3% more toward your mortgage. If you do this, a 30-year amortization drops to 20 years.

Another method people use to pay down their mortgages is to make extra payments. If you are like the many people who are paid every two weeks, you get what seems like two extra paychecks a year. If you make one extra payment a year, you can pay off your mortgage five years early. If you can make two extra payments a year, you can pay it off almost eight years early.

If you combine both methods, you can pay off your mortgage in 16.5 years!

This plan does not require heroic efforts. You are putting the same percentage of your income toward housing, and you are spending part of two extra paychecks per year. It that too much to ask in order to pay off your debts early? Good financial planning can accelerate your retirement by many years. Do you want to work longer than you need to?

Refinancing for accelerated amortization

During The Great Housing Bubble, and even now, most people who refinance do not accelerate their amortization. If given the chance, most people will suck the equity out of their home and spend it. The more conservative ones will refinance into a lower payment and enjoy more spending money that way. What I am proposing is the most conservative alternative; take out no money, make the same payment, and pay off the debt quicker.

Those that fail to learn the lessons of history are doomed to repeat its mistakes. What did you learn from The Great Housing Bubble?

{book3}

Irvine Home Address … 145 Roadrunner Irvine, CA 92603

Resale Home Price … $649,000

Income Requirement ……. $119,450
Downpayment Needed … $129,800

Home Purchase Price … $830,000
Home Purchase Date …. 6/26/2007

Net Gain (Loss) ………. $(219,940.00)
Percent Change ………. -21.8%
Annual Appreciation … -9.6%

Monthly Mortgage Payment …. $3,362
Monthly Cash Outlays ……….. $4,219
Monthly Cost of Ownership … $2,858

Property Details for 145 Roadrunner Irvine, CA 92603

Beds 3
Baths 1 full 1 part baths
Size 1,610 sq ft
($403 / sq ft)
Lot Size n/a
Year Built 2004
Days on Market 1
Listing Updated 10/1/2009
MLS Number S591179
Property Type Condominium, Residential
Community Turtle Ridge
Tract Whgl

Beautifully upgraded single level home in Turtle Ridge’s Whispering Glen. This lovely home features maple flooring in most rooms, a gourmet kitchen with granite counters and GE Profile stainless steel appliances, a stone faced fireplace in the living room, a separate dining room, a large master bath with separate shower and tub, a large walk in closet, an inside laundry and an attached two car garage with built-in storage units. The home is currently configured as two bedrooms and a den, but the den can be converted back to a third bedroom. Highlighting this home is the very private back yard and patio area that looks out onto a lush greenbelt. It provides a wonderfully serene setting that is a true delight. The association also has a resort-like pool and spa area.

If my property information is correct, this was an all-cash purchase by a knife catcher. Perhaps the $220,000 loss will cause him to rethink his investment strategy….

A strong housing market requires a healthy economy. California’s economy is a disaster. Let’s take a closer look today at the way it is.

Asking Price: $675,000
Address: 28 Bombay Irvine, CA 92620

Standing in line marking time–
Waiting for the welfare dime
cause they cant buy a job
The man in the silk suit hurries by
As he catches the poor old ladies eyes
Just for fun he says get a job

Thats just the way it is
Some things will never change
Thats just the way it is
But dont you believe them

The Way It Is — Bruce Hornsby

California is proud state with a long history. Now it is a mess. We have been living for the day for too long. Will we make another 100 years?

I was recently emailed a report (090906_labor_day.pdf) about the California economy. Here are the highlights:

The Recession Has Battered California’s Job Market

• Two years of job losses erased four years of job gains.
• California has approximately the same number of jobs as it did nine years ago.
• A smaller share of Californians is working today than at any point since the late 1970s.
• Recent job losses have been deeper than those of prior recessions.
• Nearly all major sectors of California’s economy have lost jobs during the downturn.

California’s Unemployment and Underemployment Rates Reached All-Time Highs

• California’s unemployment rate hit a record high of 11.9 percent in July 2009.
• More than one out of four unemployed Californians (28.2 percent) had been jobless for more than six months in July 2009 – the highest level ever recorded.
• Nationally, there were nearly six job seekers for every job available in June 2009.
• The monthly number of jobless Californians filing initial claims for unemployment insurance (UI) benefits increased by approximately 152,000 (81.9 percent) between June 2007 and June 2009.
• Many Californians are likely to run out of UI benefits before they can fi nd work.
• The number of underemployed Californians more than doubled in two years.
• Nearly one out of five working-age adults (18.5 percent) was “underutilized” in July 2009.
• Unemployment rates for California’s men and Latinos have risen steeply.

The Recession Has Diminished Workers’ Earnings

• Workers’ hourly wages lost purchasing power across the earnings distribution as the recession deepened.
• Reduced hours of work diminished many workers’ weekly earnings.
• The gap between low-wage and high-wage California workers widened during the past generation.

Recent Income Gains Were Not Broadly Shared

• The bulk of recent income gains went to the wealthiest Californians.
• Recent uneven income gains continue a longer-term trend.
• The top 1 percent of taxpayers has nearly doubled its share of AGI since the early 1990s.
• The share of income going to the top 1 percent of US taxpayers is at a 79-year high.

I am sure the rich fat-cats on Wall Street are suffering too…

Don’t worry, I am sure our inflated house prices will continue to rise.

Perhaps not…

Salinas, California, 1939.

Asking Price: $675,000

Income Requirement: $127,796
Downpayment Needed: $135,000

Purchase Price: $975,000
Purchase Date: 9/27/2006

Net Gain (Loss): -$340,500
Percent Change: -30.8%
Annual Appreciation: -10.3%

Address: 28 Bombay Irvine, CA 92620

Beds: 4
Baths: 3.75
Sq. Ft.: 2,630
$/Sq. Ft.: $257
Lot Size: –
Property Type: Detached, Condominium
Stories: 2
Community: Northwood
County: Orange
MLS#: T09088634
Source: MRMLS
Status: Active
On Redfin: 35 day

Beautifully upgraded home in Irvine gated community. Granite counter tops, ceramic tile floors, down stairs master. Large back yard as well as front yard. Upstairs additional bedrooms along with very private suite and loft. Perfect for guests! End of Cul de sac!! NO SHOWING TILL AFTER Thursday 8 20

I wonder if the owner had to sell their SUV and buy the Mini…

This house was purchased at the peak with 100% financing. The owners gave up paying ages ago, but they took the free ride.

Foreclosure Record
Recording Date: 02/23/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000080972

Foreclosure Record
Recording Date: 06/04/2008
Document Type: Notice of Default
Document #: 2008000268212

What will be left of California after the recession is over?