Give It 2 Me — Madonna

They say that a good thing never lasts
And then it has to fall
Those are the the people that did not
Amount to much at all

I didn’t amount to much… much debt that is…

Isn’t this really the siren song of the Great Housing Bubble? Give It 2 Me.
The free money was available, and people took as much as was being
given out. There was no thought given to paying it back because the
house was responsible for that. Five to ten years from now, the houses
would be worth $2,000,000 and we would all be able to finance this sum
by continually rolling over Option ARMs with 1% teaser rates. Now that
this system has come crashing down, perhaps we should just forgive all
this debt and let the irresponsible fools who spent all this money get
a free pass. That seems to be the popular idea with our presidential
candidates. Any politician proposing a homeowner bailout should come
here are read the tales of HELOC abuse and ask themselves if these
people deserve a bailout. If they still think a bailout is a good idea,
you can be sure I will be maxing out my HELOC during the next bubble,
and so will everyone else. (That moral hazard thing is a real pain for policy makers).

In preparing today’s post, I looked at several properties. All of them, I repeat all of them, had mortgages in excess of the original sales price.

396 Quail Ridge, Irvine, CA 92603: Purchase Price $535,000; Total Debt $639,395

469 E Yale Loop, Irvine, CA 92614: Purchase Price $370,000; Total Debt $606,500

5302 Sierra Roja Rd., Irvine, CA 92603; Purchase Price $337,000; Total Debt $561,210

328 Dewdrop, Irvine, CA 92603: Purchase Price $369,500; Total Debt $514,650

2109 Ladrillo Aisle #85, Irvine, CA 92606: Purchase Price $200,000; Total Debt $438,600

44 Solstice, Irvine, CA 92620: Purchase Price $569,500; Total Debt $650,000 Option ARM, WTF Price.

I usually look for the most egregious HELOC abusers for my posts because they are the most interesing, but today, I am going to show you a typical property that I look at — an average HELOC abuser.

Asking Price: $739,500

Income Requirement: $184,875

Downpayment Needed: $147,900

Monthly Equity Burn: $6,162

Purchase Price: $254,000

Purchase Date: 6/26/1997

Address: 14111 Moore Ct., Irvine, CA 92606

So how does an average HELOC abuser manage their debt?

• The house was purchased on 6/26/1997 at the bottom of the market for $254,000. They used a $203,200 first mortgage, a $38,100 second mortgage, and a $12,700 downpayment.
• On 11/12/1998 they refinanced with a $240,600 first mortgage.
• On 4/3/2001 the opened a HELOC for $25,000.
• On 2/6/2002 they refinanced again for $265,000.
• On 6/20/2003 they refinanced again for $275,000.
• On 8/20/2004 they opened a HELOC for $100,000.
• On 12/26/2007 they refinanced again for $470,000.
• Total property debt is $470,000.
• Total mortgage equity withdrawal is $228,700

As you can see, this wasn’t too bad. It looks like they were probably paying off the yearly credit card bills. They got a bit more aggressive in 2004 and 2007, but these people managed to only double their debt loads — only double. That is conservative by Irvine standards. They will probably not be a short sale as they kept their debt growth to something less than bubble appreciation. Of course, if they don’t sell now, they will probably not have any equity left in a few years, but if they sell today, they will probably walk away with $200,000. The market is not exactly punishing this behavior — at least not for them.

Mortgage equity withdrawal was not an isolated phenomenon. It was not the exception; it was the rule. I come across about 1 property in 10 that did not increase their mortgage debt. It might not be that bad over all of Irvine, but it certainly is with houses that are available for sale today. There are some still clinging to the false hope that the foreclosures will not be too bad in Irvine. People have too much debt. Their incomes did not double as their debt did. Everyone who went to the housing ATM is in trouble, and from what I am seeing, that is nearly everyone…

It has been an eventful week here at the Irvine Housing Blog. We were picked up by Eschaton blog on Tuesday, and we had a 12,648 unique visitors. That is about 4 times our normal traffic. Then we were picked up by Slate Magazine and Newsweek through Daniel Gross’s column. I guess the collapsing real estate market has everyone’s attention now.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

.

What are you waiting for?
Nobody’s gonna show you how
Why work for someone else
To do what you can do right now

Don’t stop me now, don’t need to catch my breath
I can go on and on and on
When lights go down and there’s no one left
I can go on and on and on

Give It 2 Me — Madonna

The complete text of The Great Housing Bubble is spread out over 21 blog posts. Every word of it is there, including the end notes with extra information.

Welcome to The Great Housing Bubble

What Is a Bubble?

Conservative House Financing – Part 1

Conservative House Financing – Part 2

Conservative House Financing – Part 3

Fundamental Valuation of Houses – Part 1

Fundamental Valuation of Houses – Part 2

Valuation of Lots and Raw Land

The Credit Bubble – Part 1

The Credit Bubble – Part 2

The Housing Bubble – Part 1

The Housing Bubble – Part 2

The Housing Bubble – Part 3

Bubble Market Psychology – Part 1

Bubble Market Psychology – Part 2

Bubble Market Psychology – Part 3

Future House Prices – Part 1

Future House Prices – Part 2

Future House Prices – Part 3

Buying and Selling During a Decline

Preventing the Next Housing Bubble – Part 1

Preventing the Next Housing Bubble – Part 2

If you want this book emailed to you, sign up below.

Reflection — Christina Aguilera

Reflect for a moment on the history we are witnessing. Congress is going to pass a $700,000,000,000 bailout of the banking industry.

In presidential election years, legislation rarely gets through Congress. Everyone is too busy playing partisan politics and posturing for the election to pass laws. Late in the election cycle, Congress goes home to campaign, and nothing gets done. We are at that moment, and yet, despite 90% or more of the electorate being against the bailout, Congress is going to pass it, and President Bush is going to sign it into law. The bill is going to pass with bi-partisan support. This is no small spending bill. We are talking about $700,000,000,000! And we are spending this money when the government is already running huge budget deficits. Amazing!

That kind of bi-partisan support, in the face of overwhelming public opposition, on a bill that large is unprecedented. We really do live in interesting times.

The reason for needing this bill is actually quite simple: our entire banking system is insolvent. The losses hidden in off-balance-sheet investments exceeds the total capitalization of our banking system. If banks were to take write downs of these securities to their true market value (essentially zero,) we would not have a functioning banking system. It is bankrupt.

Imagine a life without banking: no loans, no credit, no commerce, no economic activity other than all-cash transactions. This would not put us into the Great Depression; it would put us into the Middle Ages. This is what Bernanke and Paulson told Congress behind closed doors, and the ramifications of this reality scared them $hitless. As it should. Congress had to act. It ticks me off, just like it does everyone else, but they had to act.

Now, we the taxpayers of the United States of America are going to have to pay for the reckless irresponsibility of those greedy and sometimes clueless individuals who were in charge of our financial system. This is the end game all of us writing about the housing bubble feared most. The responsible are going to pay for the irresponsible. Actually, it is worse than that — the responsible and the children and grandchildren of the responsible are going to be paying for the Great Housing Bubble. It is a reality we are going to have to accept. What is done is done.

Unfortunately, this will probably not be the end of the bailouts. Today, WAMU is being taken over by the JP Morgan. If the deal had not been reached, it would have been the biggest banking failure in history. It would have bankrupted the FDIC which would also have been looking for a federal bailout. Perhaps this bill will prevent other bank failures, or perhaps not. We dodged the WAMU bullet, but I wonder what back-door bailout prompted JP Morgan to buy an insolvent bank? The US auto industry will probably also get a bailout.

I want my bailout too. I wonder when they will be sending out the next round of stimulus checks…

For today’s featured property, we are going to look at another Turtle Ridge Dreamer. With all the discussion about a housing bubble, a massive government bailout, a severe recession and the utter collapse of our banking industry, it sure seems like a good time to sell a house. And although this house was purchased in 2004, it surely must have appreciated 60% since then. WTF!

Asking Price: $2,395,000

Income Requirement: $598,750

Downpayment Needed: $479,000

Monthly Equity Burn: $19,958

Purchase Price: $1,487,500

Purchase Date: 4/21/2004

Address: 48 Cezanne, Irvine, CA 92603

This is a beautiful home, but that description is a bit over-the-top.

These sellers must be living in an alternate universe, or are they…

This house was purchased on 4/21/2004 for $1,487,500. The owners used a $966,650 first mortgage, a $148,700 second mortgage and a $372,150 downpayment. On 11/15/2004 they opened a $250,000 HELOC. On 12/8/2005, they refinanced with an Option ARM for $1,400,000. On 1/23/2006, they opened a $100,000 HELOC. The paid $1,487,500, and they have $1,500,000 in debt, so they have extracted their downpayment. At this point, they have nothing to lose.

There was a time when loans over $1,000,000 were very uncommon. You don’t get a tax deduction for loans over this amount, and it was generally a sign of distress to see such an expensive home with little or no equity. The housing bubble changed all of that. So here we are standing on the edge looking into the abyss, and yet these owners think they can make a $900,000 profit on this home. Good luck with that.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

.

Look at me
You may think you see
Who I really am
But you’ll never know me
Every day, is as if I play apart
Now I see
If I wear a mask
I can fool the world
But I can not fool
My heart
Who is that girl I see
Staring straight back at me?
When will my reflection show
Who I am inside?
I am now
In a world where I have to
Hide my heart
And what I believe in
But somehow
I will show the world
What’s inside my heart
And be loved for who I am
Who is that girl I see
Staring straight back at me?
Why is my reflection
Someone I don’t know?
Must I pretend that i’m
Someone else for all time?
When will my reflection show
Who I am inside?
There’s a heart that must
Be free to fly
That burns with a need
To know the reason why
Why must we all conceal
What we think
How we feel
Must there be a secret me
I’m forced to hide?
I won’t pretend that i’m
Someone else
For all time
When will my reflections show
Who I am inside?
When will my reflections show
Who I am inside?

Reflection — Christina Aguilera

The IHB Forums are a great resource and there are many solid contributions being made there every day. Some of you have been hanging out there for well over a year and a half. 😉 If you haven’t stopped by, check it out. Recently, we had a new member, Cuatro, join the forums. He created a topic on Tips for leasing an IAC apartment. There is some great advice there so I thought I’d put it up on the blog for the weekend post:

{adsense}

Tips for leasing an IAC apartment:

Leasing Consultants (LCs) are NOT the enemy. Rather than viewing them
like other sales people, consider the following. The typical IAC
Leasing Consultant has zero interest in the amount of rent you pay for
your apartment. They are paid on a tier system that rewards the number
of leases they get signed per month…period. They will usually do
anything in their power to get you the best deal, because at the end of
the day, your signature on a $1200 studio pays the same as your
signature on a $3000 3×2. Their first and foremost priority is to fill
their property. (As an interesting aside, IAC LCs make between $32k
and roughly $85k per year…the primary difference is volume).

Visit the property when you are ready to make your decision. Never
give the impression that you won’t reserve an apartment on that first
visit. The sooner you tell them you are ready to move, the more likely
you are to get the best deal. NEVER say you are looking to move 45+
days from now. As a general rule, the best deals are on vacant
apartments. Vacant apartments must be moved into within 2 weeks. If
you are looking to move more than 2 weeks out, you are automatically
going to be offered apartments that are “on notice” with other
residents currently living in them. Discounts on these apartments are
rare and always significantly worse than vacant apartment specials.

Leasing teams are evaluated on a weekly and monthly basis. Many
times the best deals are found at the end of a week or month as they
try to wedge in those last minute deals.

IAC Considers the high season from March – August. But specials
tend to be directly based on the property’s availability and occupancy
for the particular week.

Know your market rent:

There are a few ways to go about this. You can check a property’s
rental-living.com website which lists market prices on available
apartments. But the easiest way is to just ask the leasing
consultant. Think of the market rent as the suggested retail price.
It’s your starting point and any discount you receive will be a
percentage of that original market price.

Know your discounts and specials:

IAC does not tend to lower market rents…ever. But they DO tend to
offer deeper and deeper discounts from those market prices to find the
sweet spot that their apartments rent at. Once a property reaches and
maintains occupancy/availability goals, discounts can evaporate
entirely.

Rent Discounts(Dependent on occupancy and availability): 3, 5, 7, even 10% discounts off market rents.

Concessions (Dependent on occupancy and availability): $250, $500,
$1000, half month, first month free, etc. Rent credits toward move in
costs. Often these are listed on a property’s rental-living website.
But always ask the LC if there is anything better. Some properties may
offer $500 off on 1 beds, but $1000 off on two beds. It is not unheard
of to be able to negotiate that $1000 on your 1 bed if you are willing
to hold the apartment on that visit.

First Visit Special (Always available): Save $100 off standard
security deposit when you hold an apartment on your first visit to the
property. Note that this will only be offered if your credit qualifies
you for the standard security deposit (standard deposits as follows:
$600 for studios and 1 beds, $700 for 2 beds, $800 for 3 beds, etc…).

Auto Debit Special (Always available): Sign up for the auto debit
program allowing them to take rent from your bank account at the
beginning of each month and save $200 off your security deposit
(regardless of the amount of deposit required from you).

Resident/Agent Referrals (Always available): These are “source of
business referrals” which typically cannot be stacked with other source
of business referrals and are not paid to you but someone else. You
must list on your guest card and on your applications how you heard
about the property. If it’s a current resident of the property you are
moving in to that referred you, that person can receive anywhere from
$300-$500 depending on the property. RE Agents can usually receive
$300. Listing the IAC info center as the referral source or using a
website coupon will often negate all other “source of business”
referral fees. I discourage you from trying to find someone on
Craigslist offering to be your referral. More often than not those
people have already been fished out by management and, even if they
don’t know it, are no longer eligible to receive referral fees.

Creative Specials (commonly offered at lease up properties but very
rarely advertised): Some communities have common rooms that can be
rented. Ask your LC for 6 hours use of the club room or maybe an
additional parking space. Perhaps there is additional storage on site
for rent that you can have thrown in.

{adsense}

Techniques for “Negotiation”

As mentioned above, you’re never really in heated negotiation with
an IAC LC. Their goals and yours tend to be in alignment. The one
thing they don’t want to see is you walking out the door.

Develop a friendly rapport with the LC. If you walk in the door with
the idea that you’re going to walk all over them and impose your will
during “negotiations” your LC will be far less motivated to help you
get the incredible deal you want. Smile, laugh, ask them about their
job, how they like it, what they want to do down the road, how they
chose to become an LC. Invest a little time getting to know them and
make them WANT to help you get the best deal.

Don’t bring up the 1st visit special, the auto debit deal, or the
referral fees until you and the LC have established the discount and
possible stacked concession. Focus on finding out what the current
discount is and if the property is stacking a concession with it.
Sometimes they have stacking incentives, a lot of times they don’t.
But the Auto Debit,1st visit specials, and referral fees can almost
always be tacked on to a deal at the end.

To be sure you’ve gotten the best deal, let the LC know you really like
the place and you’re soooo close to signing papers RIGHT NOW. Ask them
if there’s ANYTHING else they can offer. Encourage them to ask their
supervisor if they can do anything more. Give them the impression that
if they cannot find a way to sweeten the deal any further, you’re going
to check out another property and get back to them. Mention The
Village, Villa Siena, The Enclave, or the most recent IAC lease up to
make the LC uncomfortable. These properties are either the richest in
amenities or are lease ups offering decent incentives. At this point
if there is anything else they can offer, they will. If they’ve
already offered “the kitchen sink,” they will reluctantly let you walk
away and you’ve found the bottom line best deal at the moment. A great
IAC deal would look something like this:

7% rent discount

$1000 off 1st month

$400 friend referral

$200 auto debit

$100 first visit

(you may also be able to get all this on a shorter lease term when normally they only offer it on a full 12 month agrement)

Some Other Final Thoughts

Everyone loves finding the best deal. But always be wary of that
market rent. The deeper your discount is below the market rent the
more likely you are to see a triple digit rent increase when your lease
is up.

I’ve used a lot of words like, “usually”, “tend to”, “almost always”
to stress to the point that none of this can be viewed as absolute.
Different properties/managers behave differently. Some are more
liberal with discounts and exceptions than others. But in general you
should be able to gather some useful information here. Even if IAC has
an established practice that managers are not to deviate
from…sometimes they do and unless you’re willing to go to war over
that additional $200 incentive, sometimes you just have to accept it.

Recently IAC changed its qualification practice. For most leases they
no longer require proof of income or verification of employment.
Instead they decided to increase security deposits $100 across the
board and as far as I know they no longer waive application fees. They
still require you to qualify on the monthly income minimum of 2.7x the
rental amount…but as long as credit isn’t a huge problem, it looks
like they just “take your word for it” when it comes to the income and
employer you write on your application.

It’s never a bad idea to write glowing letters of appreciation about
staff you’ve had good encounters with. Usually hand deliver them to
the office or even ask management whom you can email at the corporate
level to share your praise. The more you can be remembered as “that
friendly resident who says nice things about us” the more likely you
are to have your maintenance requests handled quickly, your renewal
negotiations to go smoothly, and receive all the other pleasant
intangibles.

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

Thank you Cuatro for the great post! Please continue further discussion by following the link below:

Seasons of Love — Rent

How do you measure the impact of the decline? Five hundred twenty-five thousand Six hundred minutes? Is it measured in hundreds of thousands of dollars? Is it measured in the toll it is taking on families facing foreclosure? Is it measured in the lost opportunities of those trapped in their homes? Is it measured in the devastation to our economy or our banking system? How do you evaluate the real cost? I don’t have answers to these questions; I don’t believe that anyone does.

I have been watching the carnage in all financial markets recently with a curious fascination. I have never before seen deleveraging on such a massive scale. Recently the values of nearly every asset class has been declining: stocks, bonds, real estate, and commodities. This is happening because money is leaving all of these markets for the safe haven of cash. There is often an increase in saving and a curtailment of debt in a recession. This one is particularly interesting because it seems to be a classic “Minsky Moment” where deleveraging is forcing the sale of all assets — even good ones — to repay debts. This is monetary deflation in action. Cash is King again.

We are quickly seeing the end of the spring buying season. Instead of a
rally, we have witnessed a brief flattening, a step on the staircase to
market oblivion. What lies in front of us is the fall and winter both
literally and figuratively. Prices will likely begin to fall again this
autumn, and the winter months may see a very cold headwind. Now that the housing bailout bill has eliminated downpayment assistance programs, everyone is now required to have a downpayment. Also, the FHA raised its equity requirement from 3% to 3.5%. Since very few people were saving money during our failed experiment with 100% financing, demand — as measured by dollars available from lenders to qualified buyers — is going to plummet. The REO supply from the ARM resets and lower prices is going to continue to dump large quantities of must-sell inventory on the market. The stage is set for another equity crushing drop.

Asking Price: $524,900

Income Requirement: $131,225

Downpayment Needed: $104,980

Monthly Equity Burn: $4,374

Purchase Price: $690,000

Purchase Date: 3/10/2006

Address: 24 Seasons, Irvine, CA 92603

Beds:	3
Baths:	3
Sq. Ft.:	1,553
$/Sq. Ft.:	$338
Lot Size:	–
Property Type:	Condominium
Style:	Contemporary
Year Built:	2003
Stories:	3+ Levels
Floor:	1
View:	Mountain
Area:	Quail Hill
County:	Orange
MLS#:	P654361
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

When our speculator bought this property with a $552,000 first mortgage, a $138,000 second mortgage, and a $0 downpayment. Basically, he gambled with Chapel Mortgage Corporation’s money, and he lost. This property was purchased by the ABS trust it was packaged into for $462,088. That is a 33% decline from the peak purchase price. Interesting that no knife-catching flippers were willing to bid any higher. If this property sells for its asking price, and if the lender pays a 6% commission, the total loss will be $196,594.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

.

Five hundred twenty-five thousand
Six hundred minutes,
Five hundred twenty-five thousand
Moments so dear.
Five hundred twenty-five thousand
Six hundred minutes
How do you measure, measure a year?

Five hundred twenty-five thousand
Six hundred minutes
How do you measure the life
Of a woman or a man?

Seasons of Love — Rent