Category Archives: WTF

Loan Modifications Make Payments Affordable

The current government loan modifications programs offer borrowers true payment affordability — if borrowers want to take advantage.

111 HILLCREST   Irvine, CA 92603  kitchen

Irvine Home Address … 111 HILLCREST Irvine, CA 92603
Resale Home Price …… $3,188,000


I watch the ripples change their size
But never leave the stream
Of warm impermanence and
So the days float through my eyes
But still the days seem the sameAnd these children that you spit on
As they try to change their worlds
Are immune to your consultations
They’re quite aware of what they’re going through

(Turn and face the strain)

Changes — David Bowie

Changes. Borrowers and lenders both want changes; borrowers want payments they can afford, and lenders want borrowers to make payments. There is supposed to be a meeting-of-minds before a loan is funded, but now in our era of retroactive loan qualification, lenders are forced to cope with lax underwriting standards of the bubble through loan modifications.

The Coto Housing Blog recently featured an excellent post on loan modification programs simply titled Loan Mods:

“The loan modifications in the news and brought forth as the second coming are government sponsored loan mods. The government wrote the qualifications and the government wrote the terms and the government is paying both the lenders and the borrowers to modify their loan according the terms the government has decided is best. HARP is government sponsored loan mods for Fannie and Freddie guaranteed loans. HAMP is for non Fannie/Freddie loans. But there are qualifications. The loan must have originated before January 1, 2009. The borrower must be able to prove they are having difficulty making their payments. The amount owed on the first mortgage must be equal to or less than $729,750. The loan must be for your primary residence. DTI must be more than 31%.

There are three terms that HARP or HAMP may modify and those three terms are approached in a specific order. The second term will only be modified if the first modified term does not bring the DTI equal to or below 31%. And the third term will only be modified if the second term mod does not bring DTI below 31%. The first term is the interest rate which will be lowered to bring DTI to 31% with a minimum rate of 2%. Not bad, eh? Wouldn’t you like you have your interest rate lowered to 2%. If the modified interest rate is below the market rate, the modified rate will be fixed for a minimum of five years as specified in the modification agreement. Beginning in year six, the rate may increase no more than one percentage point per year until it reaches the rate cap indicated in the modification agreement. The cap is equal to the prevailing market interest rate on the date the modification is finalized as published by Freddie Mac based on a survey of its customers. This cap means that your rate can never be higher than the market rate on the day your loan was modified. If the modified rate is at or above the prevailing market rate, the modified rate will be fixed for the life of the loan. Simply, after five years, the interest rate will increase 1% per year until it gets to about 5.2%. …

The 2nd term that can modified is the length of the loan, and it can be extended up to 40 years to bring the borrowers DTI under 31%. …

The 3rd term that can modified is the principal, although under the conditions of HARP and HAMP, the principal may be foreborne, that is, the principal can be reduced for the period of the loan, but must be paid back when the house is sold, or foreclosed on, or borrowed on. … It changes a non-recourse portion of the loan into recourse.

Borrowers are enrolled in a three month trial period paying an amount equal to or less than the amount agreed upon in their loan modification agreement. If the borrowers do not make their new payments on time during the trial period, their trial period is extended. If the borrowers do not turn in the appropriate documentation necessary to qualify for the loan mod, the trial period is extended. If the borrower fails to meet the requirements of the trial period is any way, the trial period is extended. Currently, no borrower who is enrolled in the loan modification program may fail. On January 31, some of the trial loan modification extensions will end, unless they are extended again. If the maximum time period for a foreclosure proceeding is reached while a trial loan mod is in effect, the foreclosure is canceled.”

I appears that amend, extend, pretend is an integral part of the system.

Notice that the first loan amount must be under $729,750. That means every loan in Irvine in excess of $729,750 is ineligible, and since our median peaked above this number in 2006, it is fair to assume many loans in Irvine are over this threshold.

If you have a loan under $729,750, the 2% interest rate is a sweetheart deal. In 2006 at 6.5% interest, the payment on $729,750 is $4,612 per month, but at 2%, the payment falls to $2,697 — the ridiculous payment of 2006 is affordable. However, if this is not affordable enough, the term can be extended to 40 years which takes the payment down to $2,210 — less than half the original payment. If that is not enough, principal forbearance can lower payments to whatever level is necessary for a few years (sounds like an Option ARM).

When you look at how the terms can be modified and how significant the reductions in payments really are, it is surprising that everyone is not successfully modifying loans. Of course, if you are 30% underwater, you probably don’t see the point, but payment affordability is not a legitimate borrower excuse.

111 HILLCREST   Irvine, CA 92603  kitchen

Irvine Home Address … 111 HILLCREST Irvine, CA 92603

Resale Home Price … $3,188,000

Income Requirement ……. $668,398
Downpayment Needed … $637,600
20% Down Conventional

Home Purchase Price … $2,150,000
Home Purchase Date …. 4/12/2008

Net Gain (Loss) ………. $846,720
Percent Change ………. 48.3%
Annual Appreciation … 21.7%

Mortgage Interest Rate ………. 5.11%
Monthly Mortgage Payment … $13,863
Monthly Cash Outlays ………… $17,770
Monthly Cost of Ownership … $12,650

Property Details for 111 HILLCREST Irvine, CA 92603

Gourmet Kitchen Award

Beds 5
Baths 3 full 2 part baths
Home Size 5,475 sq ft
($582 / sq ft)
Lot Size 15,023 sq ft
Year Built 1987
Days on Market 5
Listing Updated 1/20/2010
MLS Number U10000273
Property Type Single Family, Residential
Community Turtle Rock
Tract Cs

Exquisite family home perched on an oversized double lot at the top of Turtle Rock Crest featuring sweeping views from Catalina Island to the San Bernardino mountains. Recently completed remodel offering customized finishes and quality craftsmanship throughout. Dramatic entry with soaring cathedral ceilings leading to formal living and dining rooms, each with their own fireplace. Gourmet kitchen with dual island work stations with granite counters, custom cabinetry, walk-in butler’s pantry, built-in refrigerators and top of the line stainless steel appliances. Extensive use of hardwood and stone flooring, custom wainscoting and moulding throughout. Large family room with French doors opening to side courtyard with cascading fountain.Upstairs bonus room with panoramic views, balcony, custom built-ins and private bath. Gracious master suite with dual walk-in closets, exercise room and luxurious master bath. This is truly a rare offering and must be seen firsthand to appreciate.

First, I want to recognize the excellence in photography shown in these listing pictures. The photographer would probably lament the poor lighting caused by the gray sky outside, but the photos themselves are outstanding. These were obviously taken with a wide angle lens, but there is barely a hint of distortion. The angles the photographer selected took advantages of interesting reflections and shadows making for beautiful photographs that display the property very well.

Second, I have to wonder WTF the owner was thinking when he (1) overpaid in 2008 and (2) over-improved a property he overpaid for. If someone steps up and pays $3,188,000, then Orange County must have infinite capacity for supporting high end real estate, and everyone should start flipping those.

High DTIs Equal High Default Rates

The most obvious sign of a housing bubble is a high aggregate debt-to-income ratio… that plus WTF asking prices on properties.

18682 PORTOFINO Dr Irvine, CA 92603 rear yard

Irvine Home Address … 18682 PORTOFINO Dr Irvine, CA 92603
Resale Home Price …… $2,295,000

I’m Broke — Black Joe Lewis & The Honeybear

The California housing market is volatile, but people only see the ups. Trying
to capture appreciation, they “stretch” to get into a property by
putting larger and larger percentages of their income toward housing
(until the entire system collapses). This stretching is (1) recorded in
the aggregate debt-to-income ratio for a particular market and (2)
observed in the struggles of individual homeowners.

For the post Doubling Time, I produced a chart showing the DTI Ratio in Irvine over time.

Irvine debt-to-income ratios 1975-2009

As you might surmise, the peaks in the DTI ratios correspond to peaks in our three California housing bubbles.

Today, I want to move from the macro down to the micro;
the charts above show aggregate numbers and big-picture relationships,
but what about the individual? What struggles does all of this mean for
you and me?

From Mark Hanson (Mr. Mortgage):

Time-Tested DTI Standards Thrown out the Window

A long
time ago in a mortgage market far, far away (circa-2000 and before!)
there was responsibility in lending. Age-old underwriting standards
only allowed fully-documented debt-to-income ratios of 28% for housing and 36% for total debt (referred to as front and back DTI). On Jumbo loans, the ratios were
33/38 because Jumbo borrowers typically have more disposable income. On
occasion, banks would make exceptions to this rule if the borrower had
a large equity position or liquid reserves. At 28/36, homeowners can
pay debt, shop, take their annual vacation, and even save money. At
28/36 DTI a house is a place to live first and an investment, second.

year’s loan guidelines not only pushed the boundaries of risk by exotic
loan structure but also income leverage. Circa-2002, time-tested DTI
standards went out the window. Allowable DTI ratios on Prime loans rose
to 50% and much higher when considering that so many loans were made
with limited or no income documentation. Alt-A and Subprime full-doc
loans would routinely go to 55% DTI…

This is the main reason we have an inescapable foreclosure crisis
coming, and it is also why the FED is keeping interest rates so low.
The only way to take a relatively small payment and apply some of it to
principal is to extend the term of the loan and lower the interst rate.
The Federal Government’s loan modification program will (1) lower
interest rates to 2% (2) increase amortization to 40 years, and (3)
defer principal like an Option ARM; this still doesn’t make the payment
affordable. There are simply too many people in houses they cannot afford under any circumstances.


How bad is a 50% DTI?

Mark Hanson goes on:

1) What a 50% DTI Really Means?

  • Borrower Earnings: $100k per year
  • 50% Total DTI: $50,000 per year to housing PITI & all other debt on credit report
  • 25% Fed & State Taxes: $25,000 per year
  • Disposable income: $25,000 per year, or $2,083 per month

How does
this well-above average household SAVE MONEY AND pay for utilities
(power, water, cable, garbage, insurance (car, life, health), gas,
food, car payment, fuel, clothes, household maintenance and more on
$2,083 per month? How do they save an emergency fund or take even a
drive-away trip for the weekend? How do they shop this holiday season
when over a trillion dollar in consumer credit was taken away in the
past year?

A 50%
housing DTI turns the house into the largest investment of your life
and ruins most household’s balance sheet at the same time unless the
gross income – and disposable income – is much larger.

For most in a serious negative equity position, it is better to walk away.
Earning your way out of a $200k hole is impossible with disposable
income of $2,083 per month less expenses. Why not walk – the borrower’s
credit will be trashed for a few years but as long as they maintain
their credit rating on all other credit, their overall rating will not
be damaged for as long as their house remains underwater.

2) Now, let’s look at this with 28/36 time-tested debt-to-income ratios.

Bottom Line – 60% MORE disposable income each month.

  • Borrower Earnings: $100k per year
  • 36% Total DTI: $36,000 per year per to housing PITI & all other debt on credit report
  • 25% Fed and State Taxes: $25,000 per year
  • Disposable income: $39,000 per year or $3,250 per month

$3,250 per month, a $100k household can likely save $20k per year.
Still, this is not enough to make a real dent in a $200k neg-equity
position. But, with this much disposable income the homeowner is not
missing out on much and they are saving money, meaning their house is a
place to live.

What do households spend money in every year? The U.S. Census bureau provides the answers:

  • $200 billion on furniture, appliances ($1,900 per household annually)
  • $400 billion on vehicle purchases ($3,800 per household annually)
  • $425 billion at restaurants ($4,000 per household annually)
  • $9 billion at Starbucks ($85 per household annually)
  • $250 billion on clothing ($2,400 per household annually)
  • $100 billion on electronics ($950 per household annually)
  • $60 billion on lottery tickets ($600 per household annually)
  • $100 billion at gambling casinos ($950 per household annually)
  • $60 billion on alcohol ($600 per household annually)
  • $40 billion on smoking ($400 per household annually)
  • $32 billion on spectator sports ($300 per household annually)
  • $150 billion on entertainment ($1,400 per household annually)
  • $100 billion on education ($950 per household annually)
  • $300 billion to charity ($2,900 per household annually)

average homeowner household spends $22,785 per year, or $1900 per month
on the above. When making an allowance for some of the items that are
typically financed, the outgo is still roughly $1500 per month.

At 50%
DTI, the $100k earner with a disposable income of $2083 per month will
have extra monthly income of $583 based upon typical spending. That
does not leave a lot for savings, or items not listed such as auto
insurance, vacations, gas etc. That definitely is not enough to ‘earn
their way out’ of their negative equity hole.

the 36% DTI borrower will have an extra $1750 month, which allows for
living life and saving money, significantly reducing the chance of loan
default due to negative-equity..

Line – This shows vividly why 50% DTI – even with borrowers making
$100k a year and with 20% equity in their property – is in fact
over-leveraged and a recipe for loan default for any number of reasons


When you see the hopelessness of the circumstances of the individual
borrowers who either bought or refinanced at the peak, and it is
difficult to see how they continue making payments and have a life without
HELOC supplementation
(it isn’t coming back soon). If many
individual borrowers do not make it, lenders end up taking back large
numbers of foreclosures — which is what we are seeing today — and what we will be seeing much more of over the next three to seven years.

In the post Debt-To-Income Ratios: The Forgotten Variable, I wrote the following:

Lenders have gone back to their historic data to relearn
underwriting all over again. They know they must underwrite loans at
DTIs in excess of 40% in order to support current pricing, so they
limit these loans to people with significant downpayments, large cash
reserves, and high FICO scores. In other words, it is the smallest
possible borrower pool. Because the potential borrower pool is so
small, and because there is a foreclosure tsunami coming, prices will continue to fall.

Over time lenders will continue to lower their allowable DTIs
because the default rates will continue to be very high. As long as
there are high default rates, there will be more foreclosures, prices
will continue to fall, and the lenders will continue to lose money.
This downward spiral will cause allowable DTIs to shrink until 28% to
31% DTIs are the maximum borrowers will be able to find in the
marketplace. Anyone who thinks this credit crunch in mortgage lending
is a temporary phenomenon is sadly mistaken.

So far, despite the Government meddling, ratios are falling to their
historic norms. The one that isn’t is the price-to-income ratio. It is
being artificially held at over 5-times income with 5% interest rates.

With the Government manipulation it is difficult to predict where
pricing will bottom, but we can be a bit more certain about payment
affordability and DTI ratios. It isn’t likely that pricing will fall so
low that people are putting less than 25% of their income toward
housing. Many will chose to buy a larger house rather than save money.
When DTI ratios fall into safe zones, properties enjoy payment
affordability, and with stable loan terms of 30-year fixed-rate
mortgages, markets enjoy price stability — at least they are supposed
to — we have never witnessed the kind of market manipulation we are
seeing today. I don’t feel our prices are stable, and neither should

18682 PORTOFINO Dr Irvine, CA 92603 rear yard

Irvine Home Address … 18682 PORTOFINO Dr Irvine, CA 92603

Resale Home Price … $2,295,000

Income Requirement ……. $475,743
Downpayment Needed … $459,000
20% Down Conventional

Home Purchase Price … $585,000
Home Purchase Date …. 5/4/1995

Net Gain (Loss) ………. $1,572,300
Percent Change ………. 292.3%
Annual Appreciation … 9.5%

Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $9,867
Monthly Cash Outlays ………… $12,150
Monthly Cost of Ownership … $8,630

Property Details for 18682 PORTOFINO Dr Irvine, CA 92603

Beds 4
Baths 3 baths
Size 3,663 sq ft
($627 / sq ft)
Lot Size 20,971 sq ft
Year Built 2005
Days on Market 5
Listing Updated 12/8/2009
MLS Number S598269
Property Type Single Family, Residential
Community Turtle Rock
Tract Cust


When I read custom Turtle Rock Estate, I am not offended; there really are custom estates in Turtle Rock.

I don’t know what to make of these property records. The owner bought back in the mid 90s, and only opened one other loan; a $1,600,000 HELOC! Realistically, when you look at this borrower’s behavior, I don’t think this money was borrowed and spent — unless this frugal owner suddenly decided to spend $1,000,000 renovating his property. It does have nice grounds….

If this owner can get this asking price, he stands to make a fortune.

Gatsby's Egg

The housing bubble only impacted houses under $1,000,000. Houses over this price have continued to appreciate, right?

19001 ANTIOCH Irvine, CA 92603 kitchen

Irvine Home Address … 19001 ANTIOCH Irvine, CA 92603
Resale Home Price …… $1,258,000


Somewhere in the back of my mind Superadequacy
Secretly I know you will find
Way amongst the blushing and glow
Teach me all the things I don’t show

How I can flower bloom
Just over a day?
And at night
You’ve got to let the world change

Denial — Sugarbabes

Back on April Fool’s Day, I wrote a post talking about some of the ill-timed and poorly executed improvement projects around town. Today, I want to recognize an equally futile attempt at property improvement to add value.

According to the listing, the owners spent “Nearly $300K in quality upgrades.” Their timing could not have been worse. These owners bought right at the peak and then proceeded to over-improve the property. Of course, now they expect someone to pay not just for their first mistake of buying at the peak, but they want someone to pay for their second mistake of over-improving the property as well.

Anyone want to pay this WTF asking price and bail these people out?

“I lived at West Egg, the—well, the less fashionable of … the two, though this is a most superficial tag to express the bizarre and not a little sinister contrast between them. […] Across the courtesy bay the white palaces of fashionable East Egg glittered along the water …”

The Great GatsbyF. Scott Fitzgerald

19001 ANTIOCH Irvine, CA 92603 kitchen

Irvine Home Address … 19001 ANTIOCH Irvine, CA 92603

Resale Home Price … $1,258,000


Income Requirement ……. $259,296
Downpayment Needed … $251,600
20% Down Conventional

Home Purchase Price … $1,000,000
Home Purchase Date …. 7/21/2006

Net Gain (Loss) ………. $182,520
Percent Change ………. 25.8%
Annual Appreciation … 6.6%

Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $5,378
Monthly Cash Outlays ………… $6,710
Monthly Cost of Ownership … $4,770

Property Details for 19001 ANTIOCH Irvine, CA 92603

Gourmet Kitchen Award

Beds 4
Baths 2 full 1 part baths
Size 2,190 sq ft
($574 / sq ft)
Lot Size 8,925 sq ft
Year Built 1969
Days on Market 7
Listing Updated 11/23/2009
MLS Number S596936
Property Type Single Family, Residential
Community Turtle Rock
Tract Bm

Stunning… Customized home shows better than a model! Nearly $300K in quality upgrades. HUGE gourmet kitchen with walk around island, SS KitchenAide appliances, granite counter tops & stone back splash, beautiful custom designed cabinets with retractable hardware, separate breakfast area, & diamond patterned designer tile flooring. Master Bedroom was expanded & has dual walk in closets. Master Bath also expanded with dual sinks, high end fixtures, separate walk in shower & oversized tub. All baths completely upgraded. Entrance into the home is breath taking with hard wood flooring, vaulted ceilings, & chandelier. Customized lighting throughout. New windows & doors. Separate office area. Lush mature landscaping and professionally designed hardscape. Convenient walking distance to both Uni Hi and Turtle Rock Elem. Nothing left to do except close escrow. Just in time for the Holidays!

Nothing left to do except close escrow. Just in time for the Holidays!
Are we hearing the listing agents fantasies?

Do you see it too?

19001 ANTIOCH Irvine, CA 92603 front

If owners like this can get out without a loss, then everyone should just go out and buy. Apparently, it does not matter when you buy or how much you waste on improving a property, someone will always bail you out — that is the mindset of denial of a high-end property owner. Do you think it works that way?

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


Sell a Home: For Sale By Owner

The first of a three part series exploring an owner’s options when they decide they want to sell their real estate. Today’s featured property is part of a trend toward WTF listings in Quail Hill.

111 PAGEANTRY Irvine, CA 92603 kitchen

Irvine Home Address … 111 PAGEANTRY Irvine, CA 92603
Resale Home Price …… $1,449,000


Hey look me over
Tell me do you like what you see?
Hey,I ain`t got no money
But honey I`m rich with personality
Hey,check it all out
Baby,I know what it`s all about
Before the night is through
You will see my point of view
Even if I have to scream and shout

Baby, I’m a Star — Prince

Every man’s home is their shining star. Some dress it up with elaborate pretense; others pare it down with sublime beauty, but every owner adores their star just the same.

Whenever you are parting with a superstar they should be yanked from your grasp by an aggressive bidder who recognizes the regal beauty of your magnificent gem….


Channeling the fantasies of sellers everywhere….

Sellers almost universally believe their properties are more valuable than comparable properties if for no other reason than it is theirs, and they are entitled to a premium. You can imagine that pregnant moment for a listing agent when the seller is about to blurt out a price they want to offer… is it going to be reasonable or 40% over comps? Yikes!

Sell a Home Series

Today is the first of three parts where I examine the conditions, circumstances and options owners face when they want to sell their homes:

Sell a Home: For Sale By Owner

Sell a Home: Cash Listing Services

Sell a Home: Conventional Brokerage Listing


What Do Sellers Want to Accomplish?

The answer sounds easy: sell their house, but there is more to it than that. The terms and conditions of the sale matter greatly, and when examining a seller’s deeper motivations, we see they want to accomplish three important things:

  1. Sell their home and maximize their net gain
  2. Get through the process with a minimum of effort and stress
  3. Avoid legal and financial liability for problems with the transaction

When sellers ride off into the sunset cash-in-hand, they want to believe the transaction is complete and they got the most money with the least stress and effort. If they believe that, they are happy; if it is true, even better.

Sell their home and maximize their net gain

The net is what matters. When the seller gets his check from closing, he has no ties to the property, and the check is the sum of his remaining equity after all fees and costs have been paid, including the hefty realtor commission. Commissions are high enough that sellers are motivated to search for alternatives to eliminate the 6% fee coming out of the closing check.

In the end, agents must justify their fees to remain in business. Apparently, for all its flaws, this business model endures. Someone somewhere must be obtaining some benefit, so let’s see what those benefits are.

Get through the process with a minimum of effort and stress

Nobody wants to work or have any stress. If people could sit at the pool sipping Margaritas while someone sold their house and came back with a check, most people would chose to do that (have you been to a Lexus dealer?) To the degree sellers are willing to engage themselves in the process — work — they can save themselves money.

Many sellers have special expertise, they may have a real estate license, or they may just be brave and smart and know they can do it themselves. Sellers will find comfort (or stress) to the degree they have expertise in marketing and sales of real estate. If they have never done anything like it before, there is much to learn.

Avoid legal and financial liability for problems with the transaction

Nobody wants to have long-term financial liability. When a seller has that closing check in hand, they want assurance (or insurance) that the buyer cannot claw back at the money in that closing check later on.

Most people do not think about the liability involved because the transactions are usually handled through licensed brokers who have standardized forms they know how to fill out to ensure the transaction is proper. Brokers carry errors and omissions insurance to make sure an insurance company with deep pockets is there to step up if a serious problem occurred, and brokered transactions are generally financed transactions which will also have property liability and title insurance in case there are hidden claims on title (a big problem for trustee buyers). With the layers of liability protection in most transactions, sellers are secure. When they go FSBO, they need to figure out the insurances and liabilities on their own.

What prevents sellers from accomplishing their goals?

Sellers face four main obstacles achieving their objectives:

  1. Finding a buyer who will pay the most money
  2. Capturing the interest of motivated buyers who find the property
  3. Conducting the negotiation in a way that maximizes revenue
  4. Managing the documents necessary to properly complete the transaction

I will go over each of these goals as we explore an owner’s options. Real situations illustrate these obstacles best.

What are owner’s options for selling their property?

There are (3) main paths owners can take when they want to sell their properties:

  1. For Sale By Owner (FSBO)
  2. Cash Listing Service (MLS access)
  3. Conventional Brokerage Listing

For Sale by Owner is much maligned by realtors for a simple reason; each FSBO is a commission lost. They see an FSBO as a failure; I see them as someone who used their skills and talents to their advantage.

When I worked for a homebuilder in Florida, I designed and general-contracted my own house. I suppose I should be hearing from the American Institute of Architects and the Building Industry Association for cutting them out of a transaction, but I doubt they care. When I built my house, I saved 10% or more because I used my industry training to my advantage. Why shouldn’t FSBOs?

Eliminating the brokerage commission is tempting, and many people explore that option (like you today). If they did not already know, FSBOs soon discover the range of tasks and responsibilities that befall them acting as their own agents.

The Six Challenges of FSBO

There are six major obstacles an owner must overcome to sell their own home:

  1. Selling property is time consuming
  2. Marketing is difficult
  3. Negotiation is difficult
  4. Escrow is difficult
  5. Offers/buyers tend to be bottom fishers
  6. Buyers are difficult to find

Any of these six challenges cause owners who consider FSBO to either (1) change their minds or (2) attempt FSBO and fail to sell their property. The latter outcome is a complete waste of time and energy — which many owners go through before they explore some level of agent assistance.

Selling property is costly and time consuming

What is the value of a seller’s time? There is a time requirement to complete the tasks necessary to sell a property. Some FSBOs think that all they have to do is put up a Craigslist ad and wait for competing offers over their asking price to be emailed to them within hours, probably not going to happen.

When sellers decide to work with an agent, sellers still must (1) keep the property clean and (2) staged to a reasonable degree and (3) be flexible with showings; however, the marketing, negotiation, and paperwork tasks are handled by the agent — at the agent’s expense. If a owner goes FSBO, all the tasks related to the sale must be performed by the owner — and paid for by the owner.

If the property is staged and professionally photographed, and possibly even maintained at the expense of the agent, it is an expected part of doing business, but when owners are faced with these same tasks (the ones that cost money), few FSBOs do what is necessary to present the property at all much less do it well.

Marketing is difficult

Whether a task is easy or difficult depends on the talent and experience of the individual, but in social environment, the difficulty of a task can be noted in the results it produces. Have you noticed FSBO presentations are uniformly bad? Some of the awful ones I have profiled are not outliers. Go to Redfin and look for the little pink houses and see for yourself. Marketing is a major challenge for most FSBOs.

Negotiation is difficult

Some people are skilled negotiators, and others consider it conflict to be avoided. This is an area where a good agent really can make a difference, but it is a challenging thing to get sellers to believe. Sellers all want to believe they are great negotiators who will obtain top dollar; unfortunately, most sellers are far too emotional about their own property, and they fail to close the deal because of it. Some get offended by a buyer’s comments about their questionable taste and refuse to negotiate — the list goes on. After a few deals fall apart, the emotions of fear creep in, and FSBOs often succumb to a lowball offer below price levels they rejected earlier.

Most sellers are not seasoned negotiators who handle these transactions routinely and are trained not to let their emotions get the better of them (many agents aren’t either). Part of the advantage of routine handling is access to and familiarity with standard forms. Agents have standard forms parties recognize that helps facilitate negotiation by calling attention to important deal points and simultaneously providing escrow instructions that make the transaction close quickly.

Escrow is difficult

Many FSBOs get a deal with a handshake, and they are shocked when it does not close. There are many pratfalls that prevent deals from closing, the most important of which are financing and inspection. There are a myriad of details and disclosures most FSBOs know little about. Without assistance in preparing the documents, even preparing escrow instructions will be difficult as key terms may be missing or contradictory.

Services are available to help sellers with the three difficulties listed above, but this assistance often comes at a price. Sellers who go FSBO do so because they want to make more money. Few recognize where there is a need to spend a few dollars efficiently, so they spend nothing at all, and they do not get the help available to them to close the deal.

Offers/buyers tend to be bottom fishers (and FSBOs are the bottom)

Because FSBOs rarely present themselves well, they actually become targets for bottom fishers. Professional flippers in particular are fond of buying from FSBOs. The flipper reasons the seller has 6% more they can drop the price and still close the deal (which using the FSBOs own logic, they do); therefore, FSBOs are perfect targets for lowball fishermen. A patient flipper can catch a frustrated FSBO with an offer just before they give up; they know the FSBO is more likely to take the deal in the hand rather than two in the 6%-off bush. Professional flippers and bottom fishers make a living off FSBO frustration among other opportunities they exploit.

Buyers are difficult to find

By far the biggest problem faced by FSBOs is the difficulty in finding buyers. If they are not on the MLS, nobody sees them. The odds are long of finding the buyer willing to pay the most money by marketing a non-MLS property on Craigslist or with a printed flier. This is the primary reason FSBOs fail.

Once FSBOs realize nobody willing to pay market value is finding their property, they explore ways to get onto the MLS.

Cash Listing Services

Tomorrow, I am going to explore the good and the bad of cash listing services and discount brokers.

FSBO is a good option

I may be overselling the bad case, but I want to be clear and
accurate about the perils facing sellers trying to sell on their own. There is money to be saved here, and if owners
have the expertise to sell a property and save the extra money, they
certainly should do so; I know I will when the time comes again, but I
suppose since I am a broker now, that doesn’t count as FSBO anymore.


Today’s featured property was not effected by the bubble, and it has appreciated at 5.4% per years since 2004… WTF?

111 PAGEANTRY Irvine, CA 92603 kitchen

Irvine Home Address … 111 PAGEANTRY Irvine, CA 92603

Resale Home Price … $1,449,000 WTF

Income Requirement ……. $298,665
Downpayment Needed … $289,800
20% Down Conventional

Home Purchase Price … $1,064,500
Home Purchase Date …. 2/27/2004

Net Gain (Loss) ………. $297,560
Percent Change ………. 36.1%
Annual Appreciation … 5.4%

Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $6,195
Monthly Cash Outlays ………… $8,130
Monthly Cost of Ownership … $5,900

Property Details for 111 PAGEANTRY Irvine, CA 92603

Beds 5

Baths 4 full 1 part baths
Size 3,700 sq ft
($392 / sq ft)
Lot Size 7,800 sq ft
Year Built 2004
Days on Market 5
Listing Updated 11/26/2009
MLS Number S597065
Property Type Single Family, Residential
Community Quail Hill
Tract Sien

This rare, CUSTOM Plan 1 has been ENLARGED to 5 bedrooms–THREE of which are HUGE bedroom SUITES–with one suite + retreat down–4.5 baths, an upgraded tech center, situated on a PREMIUM CORNER LOT w/unparalleled PRIVACY & peek-a-boo views on one of the highest streets in Sienna w/a direct access 2-car garage + long driveway. The chef’s kitchen has a center island breakfast bar + nook, stainless steel appliances with a six-burner gas cooktop, granite counters, full designer tile backsplash, under-cabinet & recessed lighting, double ovens, microwave, a built-in fridge & walk-in pantry. The great room has a fireplace w/brick surround, built-in media center & an added 6 ft. picture window. The opulent master has a built-in media center & sitting area. The ENORMOUS BACKYARD includes a built-in BBQ w/Viking grill, covered patio, flagstone hardscaping w/a raised outdoor seating area, a fountain, & children’s play area. Quail Hill offers award-winning schools & a multiplicity of amenities.

rare, CUSTOM Plan 1? Do those words put together seem incongruous to you? Get your rare, custom tract home here….

My data source shows a couple of HELOCs on this property, buy nothing else. It may be owned free-and-clear and the HELOCs are emergency access to equity funds (a good arrangement if you limit it to true emergencies). These owners have plenty of room to negotiate, if they really want to sell the house, the price will need to come down significantly.

Doubling Time

Do houses double in value every 8 years? The rate of appreciation is volatile, but the stable rate of appreciation in Irvine is 4.4%, and it takes houses 16 years to double in price.

6232 SIERRA SIENA Rd Irvine, CA 92603 door

Irvine Home Address … 6232 SIERRA SIENA Rd Irvine, CA 92603
Resale Home Price …… $1,269,000


Fly, robin fly
Fly, robin fly
Fly, robin fly
Up, up to the sky

Fly, Robin Fly — Silver Convention

California real estate prices take flight fueled by kool aid intoxication and a firmly held belief that trees really can grow to the sky. The reality is that prices cannot go up faster than incomes without (1) raising debt-to-income ratios and (2) lowering interest rates.

We inflated prices beyond the limits of people’s ability to service debt, so the Federal Reserve has lowered interest rates to compensate. They can’t hold rates down forever.

The discussions about appreciation always come back to the question, “How quickly should house prices appreciate?” Today we are going to explore that question plus a related one, “How long should it take for a house to double in value?” Once we answer the first question, the answer to the second question is applied mathematics.

How Fast to Appreciate

Home prices do not go up by magic. I discussed this at length in Ownership Cost: Income, Payments and House Prices:

“Wage inflation is the slow increase in aggregate wages over time in
a given area. Wage inflation is a driver of price inflation because
workers will use wage increases to bid up the cost of goods and
services they demand. in a housing market, wage growth pushes up prices
as follows:

Assume a worker is earning $100,000 and can borrow $400,000 to bid
on property in today’s market. In one year, if this worker gets a 3%
raise (not this year), he will be making $103,000, and if other terms
do not change, he will be able to borrow $412,000. If he has also
increased his savings, the amount he can bid on real estate has also
increased by 3%.

A property that might sell for $500,000 today can sell for $515,000 in one year and it is no more expensive in terms of its financial impact; debt-to-income, savings impact, time of amortization — the key
variables remain the same. This is “normal” home price appreciation.”

If this is the mechanism at work, then what is the rate of wage inflation, and why do prices in California go up faster than wage inflation?

Wage Inflation

Since 1975, wages have grown by 4.3% annually in Irvine. This is well above the national average of 3.3%. This explains much of the health of our local real estate market and the long-term growth in prices we have witnessed.

Wage inflation has primarily caused the long-term rate of home price appreciation in Irvine to stand at 4.4% — at least that is the rate from 1984-1998, the last period that spans two market bottoms (see below).

Irvine, CA, Projections from Historic Appreciation Rates, 1984-2026

What is your prognosis for long-term wage growth in Irvine? Will we continue to outpace the country by 1% per year indefinitely? Will outsourcing and offshoring cause our wage growth to be below its recent 4.4% rate of growth? Over the long term, wage growth equals home price appreciation.

Declining Interest Rates

One reason we have seen prices rise faster than the general level of inflation and the local level of wage growth is due to the long-term trend of declining interest rates over the last 25 years.

Declining Interest Rates, 1984-2006

Note that I am only looking at interest rates since they stabilized after the inflation fiasco of the 70s. I don’t need to add the drama of the huge interest rate spike of the early 80s to make the point.

Lower interest rates make for larger loans. Part of the 4.4% yearly appreciation rate in Irvine over the last 25 years is due to steadily decreasing interest rates.

Debt-to-Income Ratios

Another reason for price increases greater than wage growth is our ever-increasing debt-to-income ratio. Since the late 1970s, lenders have been testing the limit on the DTIs people can handle before they default. Each time lenders enable borrowers to cross the threshold of 32% DTI (based on market aggregates), the market will continue higher due to irrational exuberance and kool aid intoxication until the music stops.

Take a look at the chart below that graphs the aggregate debt-to-income ratio in Irvine based on the national contact interest rate, Irvine income data and Irvine median home price data. The shaded areas have been added to show some key thresholds.

Irvine debt-to-income ratios 1975-2009

When the government first engineered loan modifications, they tried to modify people to 38% DTIs — which was a big drop for many — but the number is just too high, and borrowers redefaulted at very high rates. The recent rounds of loan mods have been at much lower DTIs.

Each time the aggregate market DTI moves above 32% (1979, 1987, 2003) the market enters its manic rally phase when prices move higher when they should be moving lower (contrast with 1994). Thirty-two percent represents a Ponzi limit in residential lending. Each time lenders develop a loan program to push DTIs higher (interest-only loans, Option ARMs), they simply create a Ponzi Scheme that inevitably collapses. When the market DTIs get down below 32% into the green range, prices stabilize near 28% DTIs — at least when the FED isn’t buying mortgage debt and directly controlling interest rates.

Doubling Time

So back to the original question, “how long should it take for a home to double in price? In Irvine, a home should appreciate at 4.4% per year to match wage growth. At 4.4% growth, a home will double in price in 16 years.

If you buy a home during a period of debt-to-income payment affordability, and sell during a period of very low affordability (time the bubble), you can make significantly more than 4.4% — as today’s 11.5% attests; however, the opposite is also true.

If you buy during a period of very low affordability, you may be at or below water for a very long time. People who bought in 1988, 1989 and 1990 saw no significant appreciation for a decade. What will be the fate of those who bought from 2003-2009? I have profiled many of them….

At 3.3% it takes 22 years for prices to double, at 4.4% it’s 16 years, at 7.2% it’s 10 years.

Many have made the analogy about trees growing to the sky to illustrate the problem of very high or differential appreciation rates. For those of you that like charts and graphs, below I show what prices will be like in 20 years if we step back to 2000 prices as a base (like the chart above) and project forward to 2030.

It is human nature to project short term uptrends to infinity. Californians believe they are capable of producing unlimited appreciation working within limited incomes, limited borrowing and limited savings. Prices occasionally appreciate quickly, and lenders enable unlimited HELOC spending which taxes the limits of homedebtor avarice, pride, lust, envy and gluttony. Wishful thinking enabled by lender greed; the California housing cycle.

6232 SIERRA SIENA Rd Irvine, CA 92603 door

Irvine Home Address … 6232 SIERRA SIENA Rd Irvine, CA 92603

Resale Home Price … $1,269,000

Income Requirement ……. $233,563
Downpayment Needed … $253,800
20% Down Conventional

Home Purchase Price … $429,000
Home Purchase Date …. 4/10/2000

Net Gain (Loss) ………. $763,860
Percent Change ………. 195.8%
Annual Appreciation … 11.5%

Mortgage Interest Rate ………. 5.00%
Monthly Mortgage Payment … $5,450
Monthly Cash Outlays ………… $7,540
Monthly Cost of Ownership … $5,590

Property Details for 6232 SIERRA SIENA Rd Irvine, CA 92603

Beds 4
Baths 0 full 3 part baths
Size 2,550 sq ft
($498 / sq ft)
Lot Size 6,625 sq ft
Year Built 1972
Days on Market 6
Listing Updated 11/18/2009
MLS Number S596070
Property Type Single Family, Residential
Community Turtle Rock
Tract Bm

10+++One of the best ever to come on the market in Turtle Rock Broadmoors! Charming single level custom home completely remodeled with over 750 sq. ft. added in 2008. Looks like it is right out of a magazine! Excellent floorplan with HUGE state of the art kitchen designed by well known designer Lynn Pries. This dream kitchen opens to HUGE family room w/high ceilings….HUGE Bedrooms..4th bedroom currently used as an open office area that can easily be converted. Quality craftsmanship throughout featuring all new windows,french doors, gorgeous wood floors, raised ceilings, remote control skylights, wainscoting, 2 air conditioners, epoxy garage floor, etc. etc. Enjoy relaxing on the darling porch with a custom brick fireplace and white picket fence. Worth your wait to finally buy without building your own. Architectural plans included for future expansion if needed! Sought after neigborhood! Best Irvine Schools: University High and Bonita Canyon Elementary. No Mello Roos & Low assoc.


This property was purchased on 4/10/2000 for $429,000. The owners used a $130,000 first mortgage and a $299,000 downpayment. They did increase their mortgage debt during the last nine years like everyone else did, but they only took out and spent about $300,000 — which was their original downpayment. They spent their initial equity, but the bubble has enriched them, and if they sell now before the high end collapses, they stand to make about $750,000.