Category Archives: Short Sale

Alan Greenspan Embarrasses Self with Feeble Defense of His Failed Philosophy and Policy

Alan Greenspan refuses to go to pasture quietly; therefore, bloggers like me need to remind everyone that Alan Greenspan is a dangerous fool who plunged the world economy into a near catastrophic depression and caused properties like today's to become elevated in price far beyond any rational measure.

Marquee at Park Place at Night

Irvine Home Address … 3131 MICHELSON Dr 1702 Irvine, CA 92612

Resale Home Price …… $899,999


When you're a disgrace to the human race?

No committment, you're an embarrassment,

Yes, an embarrassment, a living endorsement,

The intention that you have booked,

Was an intention that was overlooked.

This is a serious matter,

Too late to reconsider,

No one's gonna wanna know ya !

Madness — Embarrassment

Alan Greenspan is an embarrassment–an embarrassment to himself and to everyone who believed in him and his policies. If there is any one individual that deserves the most blame for the Great Housing Bubble, it is Alan Greenspan.

In the post, I Pity Alan Greenspan, I recapped the status quo:

When Alan Greenspan stepped down as Federal Reserve Chairman in 2006, he was highly regarded by most experts and the wider general public as the man responsible for over 20 years of economic prosperity. Guided by his core beliefs in limited regulation and the wisdom of market participants to limit their own risk, he pursued policies during his tenure that have since proven to be disastrous.

If Alan Greenspan had died shortly after leaving office, he would have perished in ignorance of the problems he created. He would never have known the beating his professional reputation would take when the economic system he helped promote came crashing down. Ken Lay died before he could face justice, and his wife got to keep all the money. If Ken Lay had lived on, he would have faced nothing but suffering in his later years. Like Richard Nixon before him, Alan Greenspan will live on to wrestle with his failures, and also like Nixon, Greenspan will likely spend the rest of his life trying to convince a dubious public that his actions were justified and what he did was not wrong.

Alan Greenspan has publicly admitted to making some mistakes. His feeble defense of his actions usually center on the idea that the problems that brought down our financial system were too big for the FED chairman or anyone else to prevent. This is bullshit, and he knows it. The root of the problem is in the deeply held philosophical beliefs that he acted upon his entire career.

Alan Greenspan strongly believes the participants in the economy are aware of the risks they are taking on, and they are carefully managing those risks. In his world, government regulation to curb the excesses is an unnecessary hindrance to economic growth. Like Ronald Regan and the entire Conservative movement that he inspired, Alan Greenspan believed that government is not the solution, it is the problem.

The failures of Alan Greenspan and those who failed to regulate our financial markets have lead to the economic catastrophe we are facing. Everything Alan Greenspan believed his entire career was wrong. He knows that now; although, he will likely spend the rest of his life trying to deny it. He will live out his life in disgrace partly responsible for the suffering of millions of people around the globe.

I don't feel sad for him. I chose the word "pity" carefully. To feel sadness for someone's actions, you must feel compassion for their plight. Pity masquerades as compassion, but there is a lack of empathy in the emotion of pity–A lack of empathy often caused by the fact that certain tragedies are self-inflicted. The attitudes, beliefs and actions of Alan Greenspan caused his own downfall. I do not feel sad for him; I pity him.

For more information, please read Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve

In case anyone forgot, Alan Greenspan denied the existence of a housing bubble as evidenced by articles like this one from 2004: Fed's Greenspan Doubts 'Housing Bubble' Thesis.

"A number of analysts have conjectured that the extended period of low interest rates is spawning a bubble in housing prices in the United States that will, at some point, implode," Greenspan said. "Their concern is that, if this were to occur, highly leveraged homeowners will be forced to sharply curtail their spending.

"To be sure, indexes of house prices based on repeat sales of existing homes have outstripped increases in rents, suggesting at least the possibility of price misalignment in some housing markets. A softening in housing markets would likely be one of many adjustments that would occur in the wake of an increase in interest rates.

"But a destabilizing contraction in nationwide house prices does not seem the most probable outcome. Indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much," Greenspan said.

Often public officials have to make statements they don't really believe in order to prevent panic in financial markets, but the discourse above is outside what would be required as a vague Greenspan-speak; The comments display a deeply held and woefully wrong Weltanschauung; in short, he really believed it.

In an astonishing turn (not really), Alan Greenspan is defending his actions, Rich People Things: Alan Greenspan's Window Is Always Open. The author takes him to task:

Well, this is awkward. Alan Greenspan, hailed for most of his nearly two-decade run as chairman of the Federal Reserve as a market savant of the first order, is now assailed from all sides for the Fed’s apparent role in overinflating the country’s garish housing bubble. The charge is a fraught one, reports Fortune magazine’s Geoff Colvin, since should it stick, it will fundamentally reshape perceptions of Greenspan’s legacy at the central bank. Already the sweep of the emerging indictment is such, Colvin writes, that “four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat."

But Greenspan is not a goat who will go quietly into the good night. He takes vigorous issue with the criticism of Fed policy that is now fueling all the anti-Greenspan rancor: that from the pivotal years of 2002 to 2005, when mortgages remained artificially low and housing prices continued to drift ever higher above the realm of consensual reality, the Fed failed to put the brakes on the downward drift of interest rates. This critical oversight, Greenspan’s critics charge, meant that the Fed kept pumping the derivatives-fed fiction that no serious risks were accruing in the market long past the point of any empirical support.

Greenspan’s rejoinder is that the true causes of the 2008 housing crash were global—that prices kept spiraling upward because of a global savings glut, which channeled capital’s insatiable quest for exotic new forms of market expression into the opaque wonderland of securitized debt. Emerging market economies such as China kept unleashing new investments that, Colvin writes, “naturally pushed interest rates down globally—thus the decoupling of mortgage rates from the Fed funds rate, and the global nature of the housing boom.”

To detractors who point out that this upsurge of global capital didn’t really so much, you know, exist, Greenspan has an elegant rejoinder. As Colvin summarizes, it goes as follows: “You have to look at intended saving and intended capital investment, not actual saving and investment. After all, saving and investment by definition will always balance.” The mere existence of an overabundance of capital was enough, in other words, to prompt markets across the globe to keep their mortgage rates artificially low—thereby permitting housing prices across the globe to ratchet up ever higher.

Do I need to point out that Greenspan's look-at-intent-rather-than-reality defense is bullshit–Embarrassing bullshit? The kind of bullshit that makes you cringe and feel so sorry for the man that you want to run away and hide for him. An embarrassing bullshit that doesn't even pass the giggle test. Perhaps there is a special island where we can put David Lereah and Alan Greenspan to save themselves from further embarrassment. They should get Lost.

If it were only embarrassing, it could be easily forgotten and dismissed, but this fool still has the ability to influence public policy, and if our legislature or bureaucrats believe him, we may repeat Greenspan's grievous gaffes. Hopefully, wiser men (like Paul Volcker) will prevail and Greenspan's debt disease will be cured. I have my doubts.

Who should lose?

Alan Greenspan believed in the ability of financial markets to properly disperse and discount risk. Who do you think he saw as absorbing $900,000 losses on units like today's featured property?

Marquee at Park Place at Night

Irvine Home Address … 3131 MICHELSON Dr 1702 Irvine, CA 92612

Resale Home Price … $899,999

Income Requirement ……. $187,416

Down Payment Needed … $180,000

20% Down Conventional

Home Purchase Price … $1,752,500

Home Purchase Date …. 2/17/2006

Net Gain (Loss) ………. $(906,501)

Percent Change ………. -48.6%

Annual Appreciation … -16.3%

Mortgage Interest Rate ………. 5.05%

Monthly Mortgage Payment … $3,887

Monthly Cash Outlays …..….… $5,740

Monthly Cost of Ownership … $4,400

Property Details for 3131 MICHELSON Dr 1702 Irvine, CA 92612

Beds 2

Baths 2 baths

Home Size 2,062 sq ft

($436 / sq ft)

Lot Size n/a

Year Built 2006

Days on Market 3

Listing Updated 2/10/2010

MLS Number U10000651

Property Type Condominium, Residential

Community Airport Area

Tract Marq

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

Penthouse Suite…2 bedroom plus den. Highly upgraded…ultra luxury with 24 hour concierge. HOA dues were just lowered below $1,000. Unit comes with 2 parking spots next to elevator…

ultra luxury? Where do we go from there? Mega luxury? Super-duper luxury?

For your ultra mega super-duper luxury home, you get two assigned parking stalls? For $1,000 a month HOA dues, I should be unconcerned where the staff parks my car… Oh, wait. You mean I have to park it? What are residents getting for $1,000 a month? Hosed.

Housing Guru Calls for Principal Reductions

No, not me. John Mulkey, Housing Guru from Waleska, Georgia, calls for principal reductions. Today we examine his arguments and a beautiful short sale in Shady Canyon.

96 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 96 CANYON Crk Irvine, CA 92603
Resale Home Price …… $4,500,000


Who are you?
Who, who, who, who?

I woke up in a Soho doorway
A policeman knew my name
He said “You can go sleep at home tonight
If you can get up and walk away”

I staggered back to the underground
And the breeze blew back my hair
I remember throwin’ punches around
And preachin’ from my chair

Who Are You — The Who

So who is John Mulkey, Housing Guru from Waleska, Georgia? He is a realtor who posts on Active Rain to network and find business. He expresses opinions shared by many realtors — and he couldn’t be more wrong. He managed to write a post I interpret as genius parody, a channeling of sheeple energy so full of unintentional irony that it casts reflective light on the tormented souls of the clueless masses.

Punishing Foreclosure Victims Only Continues The Pain For All Of Us

“While news stories, articles, and blogs continue to be written about “Strategic Default” and how those facing foreclosure shouldn’t be allowed to walk away or have their mortgage balance reduced, punishing foreclosure victims only continues the pain for all of us.
The problem we face isn’t one of a few hundred or even a few thousand
who carelessly spent beyond their means;”

It is way, way more than a few thousand who carelessly spent
beyond their means. Mortgage Equity withdrawal was fueling the US
economy for the last decade
. The attempt at minimizing the issue is
hereby exposed as fraud.

“this issue touches tens of
millions of U. S. homeowners, the majority of whom acted responsibly,
and with the knowledge available to them at the time. Most thought they
were making wise choices. How
can we blame the homebuyer for not seeing the fallacy of never-ending
home price escalation?”

The sheeple bought on the foolish advice of realtors, the experts, probably using a toxic loan per the foolish advice of their mortgage broker, another expert. I will acknowledge that we cannot blame homebuyers; we should blame realtors and mortgage brokers who peddled that bad advice as experts.

“In their recent testimony before Congress, the
heads of the big banks said they didn’t see it. Jamie Dimon,
Chairman and CEO of JP Morgan Chase said, “Somehow we just missed that
home prices don’t go up forever,” an erroneous assumption shared by the
U. S. Treasury.
And if the “brilliant” minds on Wall Street
didn’t see the crash coming, who could expect those on Main Street to
have superior knowledge? Regardless of what Mr. Dimon may have
known, few anticipated the intensity of the housing crash or the scope
of its reach.”

When I read this quote, I burst out laughing. The author of this post was using this quote as support for his argument that experts failed and therefore he is not responsible for anything. The irony of the quote and the subtle sarcasm in Mr. Dimon words completely escaped the author. And for the record, many people from Wall Street to Main Street saw this coming, me included.

“It’s time to stop blaming the home purchaser and to
accept the only workable solution for both them and for the housing
market in general. It’s time to see beyond what we perceive as the
“morality” of the solutions for those facing foreclosure, and to look
to what solution best serves the country as a whole. And that is to
reduce the principle of homes underwater to their current value.”

WTF? The reasons for me not wanting to give money to my underwater neighbor are many and complex, and “putting aside morality” and taking one for the team are not likely to persuade me to change my mind. Remember, responsible homeowners are NOT losing their homes. Who am I supposed to pity? The genius whose idea of personal finance is a Ponzi Scheme?

I have an idea; why doesn’t the author start writing personal checks to the lenders himself. Isn’t that what he is asking us to do? Somebody has to lose a great deal of money, and as someone who had nothing to do with the fiasco, I really don’t want it to be me. I don’t want the government to use my tax dollars to bail out anyone, much less a HELOC abuser who looks down on me as a lowly renter.

an action would immediately help to stabilize a large portion of the
market, and would protect neighboring homes from further declines in
value. It would not affect the bank’s or investor’s equity, for the
homes are only worth what they’re worth; and foreclosure sometimes
results in below market returns.”

The problem with banks is not the equity in the property, it is the book value of their loans. Writing off the balances would wipe out our banking system, that is the problem. The author thinks this has something to do with home values; it doesn’t. This crisis has everything to do with bank loan balances, capital ratios, and borrowers making payments. Since he has incorrectly defined the problem, any solution he comes up with will be erroneous.

“Those who speak of the inherent
unfairness of such a solution fail to consider the ultimate damage of
continued foreclosures, the consequences of which will depress home
prices for years.”

So what? Home prices are what they are. What difference does it make to society if home prices are up or if they are depressed? If people are living in their homes and making payments, it should not matter. Depressed or stagnating prices does rob realtors of their ability to stoke buyer fears to inflate housing bubbles, but it also makes housing affordable for real families and stimulates the economy by freeing up personal income for personal spending rather than spending on debt service.

“If we’re serious about solving the foreclosure
crisis, let’s address the underlying cause—homes worth less than their

The underlying cause of default is not negative equity. Negative equity is motivating defaults because the sheeple were told by realtors and mortgage brokers prices would go up forever, and when that did not happen, they bailed. Negative equity merely exposes the poor underlying motivation for home ownership: making a profit, and the people are making a rational business and investment decision when they default. Perhaps if realtors didn’t create false expectations through their ridiculous representations about appreciation, then negative equity will stop being a problem because owners will pay less attention. In addition, negative equity will stop occurring because people will not buy for foolish reasons and inflate housing bubbles.

“I’ve recently seen comments from some
who said, “I don’t care if my home declines in value, I don’t want to
save those who acted stupidly.” And while I doubt that those making
such statements really aren’t concerned about future decreases in the
value of their own home, I do think they want to punish those who they
perceive as taking advantage of the situation.”

Did this guy just call everyone who disagrees with him a vindictive liar?

“However, the problem
extends beyond housing, and millions will continue to suffer until we
begin to restore economic order and sanity. We must do something; and
the palliative measures of government have demonstrated their
inadequacy to bring solutions. What is needed is bold action, from
leaders unafraid of the political consequences. Whether it’s
legislation to allow for “cram-downs” or forcing banks to lower
principle balances on homes underwater, to fail to enact a workable
solution is to allow the morass to continue; indeed to perpetuate it.”

I agree with his conclusion that failing to act will cause the morass to perpetuate.

Great! Bring it on!

Populist appeals to self-serving instincts give false hopes to many, and contrary to the author’s desires, such false hopes from posts like his only serve to allow the morass to continue; indeed to perpetuate it.

Negative equity is not a a complicated or confused situation, and the defaults and foreclosures are not a social problem requiring government intervention. Calling for someone else to pay the price, notably shifting the entire burden of poor decision making from borrowers to lenders and US taxpayers is never going to sit well with me.

Lenders are more culpable than borrowers, but not that much more, and I am not thrilled about seeing lender’s share of the losses increase as long as I am guaranteeing them.

No twist of logic or compelling narrative is going to remove the moral hazard; principal reductions to restore equity are wrong, and I will speak out against them as often and as loudly as I can.

96 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 96 CANYON Crk Irvine, CA 92603

Resale Home Price … $4,500,000

Income Requirement ……. $943,473
Downpayment Needed … $900,000
20% Down Conventional

Home Purchase Price … $5,700,000
Home Purchase Date …. 5/11/2007

Net Gain (Loss) ………. $(1,470,000)
Percent Change ………. -21.1%
Annual Appreciation … -8.5%

Mortgage Interest Rate ………. 5.11%
Monthly Mortgage Payment … $19,568
Monthly Cash Outlays ………… $25,200
Monthly Cost of Ownership … $17,980

Property Details for 96 CANYON Crk Irvine, CA 92603

Gourmet Kitchen Award

Beds 5
Baths 6 full 2 part baths
Home Size 9,489 sq ft
($474 / sq ft)
Lot Size 28,766 sq ft
Year Built 2009
Days on Market 373
Listing Updated 1/20/2010
MLS Number C10006941
Property Type Single Family, Residential
Community Turtle Rock
Tract Rb

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

Come see this beautiful Tuscan Style Estate with views of the canyon and city lights in the gated community of Shady Canyon! There is approx 9,489 square feet of living space including a separate pool house with 3/4 bathroom and kitchenet. The gourmet kitchen and butlers pantry has ample space to prepare for dinner parties yet functional for everyday cooking. Take the elevator to the basement for the theater room and an additional room that can be transformed into a wine room, gym or bonus craft room. The main floor boasts a library/study, formal living room, informal living room, TV family room, gourmet kitchen with butlers pantry. Outside you will find a pool and spa, built in BBQ and bar area, outdoor fireplace with seating area, three separate water features including the entry fountain. This Estate is awesome!

Gourmet Kitchen Award

Two gourmet kitchens? How many do you need? Do you often have visiting gourmets that need a place to work?

A few weeks ago in Foreclosures Ravage Irvine’s High End, I profiled 63 CANYON Crk Irvine, CA 92603, a new build in Shady Canyon where the owner walked and let the lender take back the property. On that property, the lender is holding out for an unrealistic asking price hoping to break even.

Today’s featured property is another big lender loss on the way. They are advertising the property as a short sale to generate interest, but I question if they will find much. Everyone knows more of these properties is coming, and nobody wants to be a knife catcher. Many will anyway.

How long before they give up on the short sale and move this property?

Foreclosure Record
Recording Date: 12/23/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 09/21/2009
Document Type: Notice of Default

A Theory of House Prices and Housing Markets

Why are house prices what they are, and where are house prices going? Today’s posts answers those questions by providing a conceptual understanding of house prices and housing markets.

508 ORANGE BLOSSOM Irvine, CA 92618 kitchen

Irvine Home Address … 508 ORANGE BLOSSOM Irvine, CA 92618
Resale Home Price …… $135,000


Ho, ho, ho
It’s magic, you know
Never believe it’s not so
It’s magic, you know
Never believe, it’s not so

Magic — Pilot

Californian’s believe house prices go up by magic. Real estate appreciation is religion in California as people blindly accept the Truth of never-ending price increases. Few question current prices or wonder why current prices go up as most fool themselves with wishful thinking, cockeyed optimism, and kool aid intoxication. Most people do not understand real estate prices — they think they do — every Californian is an expert on real estate, after all, we have about half a million realtors, but few people really understand markets. Motivated by greed, blinded by ignorance and enabled by lenders, borrowers inflated The Great Housing Bubble.


A foundational understanding of house prices and housing markets is critical. From 2003 onward, with exception of those who purchased houses with conservative financing, which was rare, most buyers bought in ignorance. Some were undeniably stupid and irresponsible, but most were simply ignorant going with the herd believing everyone couldn’t be wrong. Well, they were wrong, and the errors they made are easily identifiable and correctable with a better conceptual understanding of house prices and housing markets.

My understanding of housing markets permeates my posts, but the foundational work upon which I base my posts comes from my education and experience — something unique to me and heretofore undocumented; consequently, this post lays down foundational concepts of house prices and housing markets for future reference.

Three primary variables determine house prices

House prices are set by supply and demand in the market, but demand is arguably more important because house prices cannot rise higher than buyers’ abilities to pay. Therefore, this discussion will focus first on demand, then on how supply impacts prices set by market demand.

The three variables directly responsible for determining house prices are (1) savings, (2) interest rates and (3) allowable debt-to-income ratios. A buyer’s ability to bid for real estate is limited by their savings (and their willingness to put savings toward housing) and their borrowing. Amounts borrowed depend on interest rates and underwriting standards. Of the various loan underwriting standards, the most important is the allowable debt-to-income ratio because it is the direct link between income and the loan amount.

Notice that borrower income did not make the list, at least not directly, because borrower income is only important to the degree it is applied toward making debt service payments. The allowable monthly payment when amortized over 30 years at current interest rates yields the borrower loan balance. The current price-to-income ratio distortion is caused by the combination of very low interest rates and very high allowable DTIs. As I noted in, House Prices Will Decline in 2010, prices can fall even when interest rates are low if lenders simultaneously reduce allowable DTIs. In fact, the credit crunch which began in August of 2007 is crushing the housing market due primarily to declining allowable DTIs. The credit crunch is not over, and IMO, aggregate DTIs have not bottomed for this cycle.

Irvine debt-to-income ratios 1975-2009

Borrower income is important because it serves as a measurable base for market demand. Aggregate incomes rise with economic growth and inflation, and since income plugs in to the house price equation through the allowable debt-to-income ratio, house prices rise in concert with local incomes. Over the long term house price appreciation and income growth must move together; trees cannot grow to the sky.

A Buyer’s budget

Each prospective buyer investigates current financing terms as part of their process. Lenders apply current underwriting standards and determine the loan balance they will approve and downpayment required before they will fund. Since loan plus downpayment equals maximum bid amount, prospective buyers house-shop with the budget established for them by their lender. As is human nature, most people spend their full budget.

Every buyer goes through this basic process, and since financed purchases dominate the resale market, price levels of individual properties become tethered to the incomes of individuals who desire that property. For instance, today’s featured property is at the bottom of Irvine’s property ladder. If high wage earners suddenly became enamoured with living in condos like this, prices would rise substantially. The substitution effect to similar resale and rental properties keeps income, price and quality in balance.

number of households by income range Irvine

Link to Census data table for Irvine

Irvine has a large number of high wage earners, and its income distribution is not as “downward tilting” as other cities. As a result, wage earners at the mid to high end tend to settle for less in Irvine than they could obtain in other markets because the product in Irvine is not McMansion dominated. The opposite exists in cities like Palmdale where a sea of McMansions trickles down to the maids and field hands at the bottom of the income distribution.

High wage earners can both borrow more and save more of their disposable income. Also, high wage earners are generally long-time wage earners who probably already own a home, so in addition to their formidable saving power, many high wage earners also transfer stored equity from one property to the next, assuming they did not spend it.

A distribution of prices based on income

If you take the income distribution for Irvine, apply conservative underwriting standards of four-times income, a reasonable downpayment and an allowance for stored equity, the resulting distribution of housing prices looks like the chart below.

Loan equity savings and house prices

So why doesn’t our market look like that? Well, to a large degree, it does, although low interest rates and residual bubble inflation has increased the above numbers to an unsustainable level. In addition, the current market is mismatched between the number of people capable of supporting house prices and the number of houses for sale at various price points.

For instance, according to the data, about 22,000 of our 69,000 households can support prices over $750,000. That is 32% of the market. When more than half of Irvine properties have comparable values sustainable by less than a third of the population, something has to give. If you look at what is for sale, over 40% of listings are over $750,000, and as we
know, much of this market is tied up in Shadow Inventory.

As inventory is released at the mid- to high- end, prices of individual properties will decline, but the median will not. People will still spend the same amount on housing, but they will get more for their money. That plus the changing mix from low to high will make the median less reliable. Just as the median has overstated the decline to date in most markets, it will show strength later where only weakness exists. If mortgage interest rates do not rise, the story of 2010 may be a rising median with continually falling prices on individual houses.

Demand, supply and football

Demand is measured by a borrower’s ability to put money toward real estate, and contrary to popular belief, desire is not demand. Excess supply lowers base market prices established by demand. To better illustrate this concept, consider the following football analogy:

Sellers (supply) are blitzing linebackers and buyers are offensive linemen. If more linebackers blitz than offensive linemen block, then the offense gets thrown for a loss. If more sellers want to sell than buyers want buy, then prices decline; buyers have to be enticed from the sidelines. However, if enough offensive linemen pick up the blitzing linebackers and push the scrum forward, the offense advances the ball. If buyer demand exceeds seller offerings, prices go up as sellers have to be enticed from the sidelines.

In football, the offense generally advances the ball just as buyers generally advance prices with their rising incomes. However, in football, each team is limited in the number of players. In housing markets, no limit exists which can create enormous supply and demand imbalances. When subprime lending took off, we sent hundreds of offensive linemen on the field, and they pushed prices across the goal line. Now, we have a much smaller and leaner offensive unit facing a defense composed of the zombie debt holders who previously were celebrating in the end zone.

Lenders are ordering linebackers not to blitz to prevent further losses, but the number of linebackers building on the defensive side of the ball ensures the offense will not be advancing the appreciation ball very far (imagine being the running back buried in the picture). Such is the nature of overhead supply — banks may hold on to properties to prevent a loss, but they will sell swiftly if they can get out at breakeven, and realistically, being an unruly group of zombies — cartels are inherently unstable — a few linebackers are going to blitz anyway.

BTW, I am still mourning the Packer’s loss in the playoffs….

It starts at the bottom

The entry level buyer utilizing only their savings plus a loan is the foundation of the housing market. If you follow the chain of move ups backward, it eventually leads to the entry level buyer, and as a result, nobody in the real estate market gains move-up equity until the entry level buyer does. If owners of entry level properties do not gain equity over time due to price declines or stagnation, they do not have the equity necessary to move up, and neither will any other seller in the move-up equity chain.

I want to be careful here because the equity move-up market does not function like most people think it does; buying a home is not the first stop on the equity train leading straight to a Laguna Beach mansion. Each step up also requires an increase in income to support a larger mortgage. With each step homeowners transport their equity — at least those who did not spend it through HELOC abuse — and bid up prices on the next property rung. Over time this produces significant stored equity in neighborhoods most desired.

During the rally of the Great Housing Bubble, subprime financing doubled or tripled the borrowing power of the entry level buyers. Rich Toscano pointed out (sorry, I can’t find the link) housing prices in San Diego rose $250,000 across all property classes in 2004. If you add $250,000 to the average loan balance of your move up buyer, the owner selling that entry level property just received a $250,000 windfall they can use to bid up prices at the next level. This reverberates through the entire system and inflates housing bubbles.

Hard Landing Las Vegas

Move-ups must come down

If you examine the three main sources of buyer funding; loan, savings and equity; all three have been under pressure since 2007, and this trend will continue.

Loan balances have been getting smaller because lenders had to go back to rational underwriting standards. Incomes only supported about 50% of the average loan balance in 2006, and the greatest single cause of lower house prices, by far, has been smaller borrower loan balances. The Federal Reserve temporarily helped by lowering interest rates, but mortgage interest rates will almost certainly rise making future loan balances even smaller.

Personal savings rates went negative during the bubble, and much of the reason for our current economic contraction is that people stopped spending and started saving again. With the long term erosion in savings rates experienced during the bubble, fewer borrowers have sufficient savings to buy a home, and those that do have savings have less of it. The result is smaller downpayments — at least outside of Irvine.

Equity has been declining because during the bubble, everyone spent it, and after the bubble, everyone lost it. I have documented on numerous occasions the perils of mortgage equity withdrawal and HELOC abuse. Equity has been crushed by falling prices since 2006 with exception the delusional high end where move ups terminate. The foundation of the housing market is crumbling from below, and only the lack of transaction volume sustains high-end bubble equity. With equity disappearing at the bottom of the market, the high end has nobody to sell to but each other. There is a limit to how many properties even Nicolas Cage can own.

What is required for a healthy real estate market?

The low end of the market is resetting. Based on payment affordability, it is inexpensive to own a low-end Irvine condo like today’s featured property. Prices may go down further as interest rates rise, but payment affordability on these low-end condos is at a bottom. That is a good thing because until these condos find a pricing bottom, the housing market is doomed. There is no chain of moves ups when there is no equity.

Before there will be a sustainable market recovery, we need (1) entry-level units like these to find a pricing bottom, (2) unemployment to go down, (3) wages to go up, and (4) people to start saving. We may be finding a bottom at the low end (I still have doubts), and savings rates are improving, but the savings baseline is zero, unemployment is still rising, and wages are still stagnant. We do not have the building blocks of a sustained housing market price recovery. When the stars and the moon align, loan balances expand, downpayments enlarge, and move-up equity accumulates; those are the three essential elements of an appreciating market.

Once we return to sanity after a few more years of decline and clean up, lenders will be responsible (which worries me) to ensure the growth of loan balances never again exceeds our collective ability to pay. Everyone enjoys the ride up, but once we cross the threshold of insolvency, the market collapse is truly devastating. Let’s not do it again.

508 ORANGE BLOSSOM Irvine, CA 92618 kitchen

Irvine Home Address … 508 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price … $135,000

Income Requirement ……. $28,529
Downpayment Needed … $4,725
3.5% Down FHA Financing

Home Purchase Price … $92,500
Home Purchase Date …. 6/28/1991

Net Gain (Loss) ………. $34,400
Percent Change ………. 45.9%
Annual Appreciation … 2.0%

Mortgage Interest Rate ………. 5.18%
Monthly Mortgage Payment … $714
Monthly Cash Outlays ………… $1,150
Monthly Cost of Ownership … $950

Property Details for 508 ORANGE BLOSSOM Irvine, CA 92618

Beds 1
Baths 1 bath
Home Size 512 sq ft
($264 / sq ft)
Lot Size n/a
Year Built 1977
Days on Market 5
Listing Updated 1/14/2010
MLS Number P717447
Property Type Condominium, Residential
Community Orangetree
Tract Cm

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

LOWER UNIT. Great, cozy one-bedroom condo with its own deck off LR slider to lovely stream w/bubbling water, rocks, plants, view of little bridge over stream. Eating area-counter in kitchen, master bedroom suite with dressing area, separate commode and shower over tub, walk-in closet. Own covered parking space, plenty of guest parting space–easy for your guests to find your home! REAL ONE-BEDROOM-NOT A STUDIO. HAS OWN INSIDE WASHER & DRYER. Lake Condos have two community pools, spa, gym, basketball court, tennis court, playground and clubhouse. There is a golf course across Irvine Center Drive. Excellent location next door to Irvine Valley College, UCI down the road (think bike to school). Near 5 and 405 Freeways, Irvine Spectrum Entertainment Center, Business District, Shopping. Located in Building #23. GREAT INVESTMENT OPPORTUNITY. BEST BUY/LEAST EXPENSIVE 1-bedroom CONDO in all of Irvine-the safest city in the USA!

There is a golf course across Irvine Center Drive. This is true, but I doubt anyone living on less than $1,000 a month housing costs is playing much $100+ per round golf on a world-class Tom Fazio golf course… unless you live to golf perhaps.

Personally, I like when the agents upload the floorplan. I wish more listings did this.

Notice the less-than-stellar 2% annual appreciation since 1990. If it were for a drop in interest rates from 10% to 5%, this property would be priced below its 1990 purchase price (1990 was the peak of the last bubble). Twenty years, and the only appreciation on this property is due to a change in financing terms.

Look at the financing requirements for this home: Income Requirement $28,529, Downpayment Needed $4,725, 3.5% Down FHA Financing. If that isn’t affordable, I don’t know what is. Of course, people making $30,000 a year may not have $5,000 saved up for a downpayment, but that is the reward prudent renters are supposed to receive — less competition when bidding on property.

High End Auction Properties Abound

Today’s featured property is one of many floating like flotsam the foreclosure pipeline.

76 FANLIGHT Irvine, CA 92620 kitchen

Irvine Home Address … 76 FANLIGHT Irvine, CA 92620
Resale Home Price …… $1,150,000


Turn on your heartlight
Let it shine wherever you go
Let it make a happy glow
For all the world to see
Turn on your heartlight
In the middle of a young boy’s dream
Don’t wake up too soon
Gonna take a ride across the moon
You and me
He’s lookin’ for a home
Cause everyone needs a place
A home’s the most excellent place of all

Heartlight — Neil Diamond

The lyrics to this song appeal to me on many levels. Wishful thinking and kool aid intoxication resonates in the boyhood reverie of days of boundless abundance when prices were shooting to the moon because we are running out of land, because everyone needs a place, and because Orange County is the most excellent place of all….

Don’t wake me up too soon….

If we could only recapture that moment. Have you ever awoke from a fantastic dream and wished you could quickly fall back asleep and pick up where you left off? Isn’t all of Orange County hoping they will wake up one day and realize it was all a bad dream and prices really haven’t gone down?

Irvine’s Auction Market

The failure of the Great Housing Bubble will ultimately be recorded on the auction block. Amend, extend, pretend cannot continue forever; lenders will foreclose and boot out the money renters who occupy the lender’s property. I recently heard Christopher Thornberg quip, “A rolling loan gathers no loss.” Lenders will modify who they can, short sale some for expediency, and foreclose on the rest — the rest being a plethora of properties.

I am focusing more attention on the auction market in preparation for an upcoming in-depth look here on the blog.

Today’s featured property is scheduled for auction February 4, and a number of high end homes clog the pipeline (I am defining high-end as Irvine over $800,000) as you can see from the list below:

Fifty-four properties over $800,000 are scheduled for auction over the next few months and another 39 are in preforeclosure. No catastrophic supply problem, but this does not include the shadow inventory of those who have stopped making payments but the lenders have not served with a Notice of Default. When the NODs begin in earnest, they will show up here in the auction market. The over $800,000 market will become more active because borrowers in these price ranges have few refinance options, and they are not eligible for loan modification programs. Borrowers with debts over the $729,000 conforming limit are basically screwed.

$1,150,000 Approved Short Sale

The bank doesn’t want to buy this property at auction. It was in escrow, but fell out, so the lender is praying someone will pony up $1,150,000 before they have to take their chances at auction. There have only been two auction prices over $1,150,000 in the last 6 months.

Trustee Sale Discount

Cash is king. If the lender does not find a buyer at $1,150,000, this property will probably go to auction on February 4 (At this point, they have given up on the borrower, so why would they postpone it further?)

Often properties go at a significant discount in the auction market as compared to the resale market where financing abounds. Fifteen percent, even twenty percent or more can be saved; however, for what are obvious reasons, desirable properties listed on the MLS with few unknowns like today’s featured properties get discounted the least. I haven’t researched the comps to have an opinion on the auction value of this property, although a cursory glance suggests it may sell between $1,050,000 and $1,100,000, unless the lender bids it up to $1,150,000 and takes the property.

If this sells at auction for $1,050,000 it will represent nearly a 30% drop from the original purchase price of $1,464,500 back in 2006. Is 30% off the bottom for Irvine’s high end? I don’t know, but it is certainly closer to the bottom than to the top.

76 FANLIGHT Irvine, CA 92620 kitchen

Irvine Home Address … 76 FANLIGHT Irvine, CA 92620

Resale Home Price … $1,150,000

Income Requirement ……. $245,492
Downpayment Needed … $230,000
20% Down Conventional

Home Purchase Price … $1,464,500
Home Purchase Date …. 9/12/2006

Net Gain (Loss) ………. $(383,500)
Percent Change ………. -21.5%
Annual Appreciation … -6.8%

Mortgage Interest Rate ………. 5.27%
Monthly Mortgage Payment … $5,092
Monthly Cash Outlays ………… $7,130
Monthly Cost of Ownership … $5,300

Property Details for 76 FANLIGHT Irvine, CA 92620

Beds 5
Baths 4 baths
Home Size 3,531 sq ft
($326 / sq ft)
Lot Size 5,494 sq ft
Year Built 2006
Days on Market 112
Listing Updated 1/14/2010
MLS Number S590545
Property Type Single Family, Residential
Community Woodbury
Tract Wdmf

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

JUST FELL OUT OF ESCROW. NOW APPROVED AT $1,150,000!!! Absolutely gorgeous 5 bedroom, 4 bath home in prestigeous neighborhood in Woodbury at an amazing price! Rare, premium corner lot! Granite counters, huge tumbled stone shower in master bath plus soaking tub, custom outdoor BBQ kitchen, 2 bonus rooms,and lots more upgrades! This home is priced to move fast! Please see private remarks for restricted viewing hours.


That price is so good it warrants four exclamations points — not three — no, three exclamation points does not convey the incredible excitement that erupts from every buyer’s bones when they see $1,150,000!!!! I need a cold shower….

ET bought a home on here earth, and he has recently been spotted lightening up and enjoying earthly pleasures — his finger is in high demand.

If you want to investigate bidding on today’s featured property or properties like it, contact us at It is up for auction on February 4.

Irvine Housing Blog No Kool Aid

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing
the Irvine home market and combating California Kool-Aid since
September 2006.

Have a great weekend,

Irvine Renter

Come back again
I want you to stay next time
Cause sometimes the world ain’t kind
When people get lost like you and me
I just made a friend

Heartlight — Neil Diamond

House Prices Will Decline in 2010

Despite the optimism for a better 2010, house prices are not going to rise, HELOC money is not coming back, and the giant house party of the 00s has come to an end. Properties like today’s are a symptom of our collective hangover.

Irvine Home Address … 34 CAPISTRANO Irvine, CA 92602
Resale Home Price …… $840,000


The party’s over
It’s time to call it day
They’ve burst your pretty balloon
And taken the moon away

It’s time to wind up
The masquerade
Just make your mind up
The piper must be paid

The Party’s Over — Nat King Cole

People have not accepted the fact that the The Party’s Over. Even our government and banking oligarchs are trying to re-inflate the housing bubble to avoid the consequences of their greed and incompetence. The mainstream media is full of stories about the bottom for house prices, many are planted by the NAR or their shills, but these stories reflect a concerted effort to either sell overpriced homes or keep people paying oversized loans. Some reporters and bloggers are telling the truth, and today I want to examine why house prices will decline in 2010, and why I am only predicting a small decline in the aggregate median numbers.

Prices are too High

The basic argument as to why prices will fall is not complex; prices are still too high by historic measures. As a recent article quipped, “…we
still have a 30% fall ahead of us and, as you know, we have a 30% fall
behind us. Better send in your mortgage payment.”

Calculated Risk put it this way: “House prices are not cheap nationally. This is apparent in the
price-to-income, price-to-rent, and also using real prices. Sure, most
of the price correction is behind us and it is getting safer to be a
bottom caller! But “cheap” means below normal, and I believe that is
incorrect.”The efforts of the Federal Reserve and the GSEs to reinflate the housing bubble have made payments affordable, but only falling prices is going to make houses truely affordable by conservative metrics.

Mortgage Interest Rates will go up

This is also a simple argument; interest rates are nearly zero, and based on the long-term chart, it looks like rates must move higher.

Perhaps the best evidence for concluding interest rates have bottomed and will soon move higher comes from Ben Bernanke, Chairman of the Federal Reserve, who recently refinanced his ARM to a fixed-rate mortgage. Our central banker converted to fixed because he knows the FED is not going to push interest rates lower. Actions speak louder than words, and Ben Bernanke called the bottom in fixed-rate
interest financing without saying anything.

How high will interest rates go in 2010? Morgan Stanley thinks they could hit 7.5% in 2010. That would be an unmitigated disaster for the housing market.

Lenders would rather see Real Estate’s Lost Decade. They don’t care if real estate prices go up as long as debtors are making their payments, but further price declines will create more losses, and they would rather see a slow and orderly increase in mortgage interest rates to support prices. It probably will not happen that way.

Foreclosures will Increase

CNN Money recently published an article titled, 3 reasons home prices are heading lower, where the authors cited (1) foreclosures, (2) rising interest rates, and (3) the end of the tax credit. Rising interest rates was mentioned above, and tax credit props made my list of caveats as to why people may not want to buy now. Foreclosures and Shadow Inventory made my list of 2009 Residential Real Estate Stories in Review, and it is the biggest unknown facing the market — it isn’t unknown as to whether or not this inventory exists; it does, what is unknown is when this inventory will hit the market. This inventory may be released and push prices lower more quickly, or it may be withheld to stop prices from falling. The lending cartel may wish for a slow release, but the instability of the cartel will probably make for a quicker one.

The median declines less than the values of individual properties

The changing mix — more sales will occur at the high end — will serve to make the reported median higher, it will not reflect increasing quality in what people are getting for their money, particularly individual properties at the high end which is likely to fall much more than the 2%-5% I am predicting.

The high end is rather unique because current comps are so few and far between that is is difficult to accurately measure what those houses are worth. Our market is characterized by high end delusion with many more properties currently asking prices that only a few buyers can afford. The plethora of high-end inventory — when the actual distress is reflected in the market — will cause large declines in the values of these properties. This will reverberate through the housing market as people substitute up to better properties for less money.

The net effect of more high-end transactions at lower price points is that the median changes very little; people are still spending the same amount of money, but the quality of what buyers get for this money is much higher. We can see 10%-20% drops in the prices of high end properties without much impact on the median, and this is exactly what I believe will happen.

For evidence of these forces in the market, examine today’s featured (previously) million dollar plus property.

Irvine Home Address … 34 CAPISTRANO Irvine, CA 92602

Resale Home Price … $840,000

Income Requirement ……. $180,523
Downpayment Needed … $168,000
20% Down Conventional

Home Purchase Price … $1,127,000
Home Purchase Date …. 6/9/2006

Net Gain (Loss) ………. $(337,400)
Percent Change ………. -25.5%
Annual Appreciation … -7.8%

Mortgage Interest Rate ………. 5.33%
Monthly Mortgage Payment … $3,744
Monthly Cash Outlays ………… $4,910
Monthly Cost of Ownership … $3,690

Property Details for 34 CAPISTRANO Irvine, CA 92602

Beds 4
Baths 3 baths
Size 3,000 sq ft
($280 / sq ft)
Lot Size 4,090 sq ft
Year Built 2002
Days on Market 68
Listing Updated 12/31/2009
MLS Number S600110
Property Type Single Family, Residential
Community Northpark
Tract Bela

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

Beautiful home in Northpark gated community with main floor bedroom with full bath, berber carpet, customized ceramic tile, granite counter tops and much more. In addition, there are also fountains in the front and back entrance.

The owner of this home paid $1,127,000 and timed the peak of 6/9/2006. He used a $845,250 first mortgage, a $169,050 second mortgage, and a $112,700 downpayment. The second mortgage on this property is listed as a HELOC, so the lender loss is completely dependent upon how much the borrower took out. I assume the max as this was opened at the closing as a purchase money mortgage. Perhaps someone more knowledgeable can comment on the recourse implications of a purchase money mortgage HELOC. How much use disqualifies a HELOC for non-recourse protections? This owner is probably asking an attorney these same questions, and I suspect the answers will not be favorable.

Homeowners are extremely leveraged. Without a return on their investment, many will succumb to the weight of their debt service payments and wash through the foreclosure system.

Watch the foreclosure phenomenon here under the telephoto lens of the Irvine Housing Blog.