Jumbo Drops

How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on

The conforming loan limit through the GSE’s is currently limited to $625,000 in our area. This is down from the $729,750 temporarily allowed under the Economic Stimulus Act of 2008. Any loan larger than this amount is considered a jumbo, and jumbo loans carry a higher interest rate. The current spread on a 5/1 ARM (a method of financing I do not recommend) is only 9 basis points; however, the spread on 30-year fixed rate loans is 130 basis points. Also, jumbo loans generally have higher downpayment requirements than conforming loans. All this means that the jumbo loan market is thinner because fewer buyers have the cash for the downpayment or the income to qualify.

Since our real estate market is collapsing from the bottom up, the slice of the market starting to show stress now is the bottom of the jumbo market — $685,000 to $900,000. Homes priced to sell in this range are having a hard time finding buyers, and prices are starting to drop. Today’s featured property is a short sale priced at $775,000. It recently dropped its price $80,000 in an effort to chase the market.

My home is kind, man it pays to be blind

I want to share with you a couple of recent experiences I had that demonstrate to me the power of conformity and denial.

I have been arranging to speak at various groups active in my industry. There are a great many even in my industry that do not fully understand what is happening and why. One of these groups told me they would like to have me as a speaker, but only if I am planning to give a Pollyanna message of hope. Well, there is always hope, but the reality is not particularly positive, so I will not be speaking there any time soon. The reason is simple. They are in denial, and they want to maintain that even at the expense of seeing reality. I can not and do not live my life this way, so it is difficult for me to relate to this mentality, but I do understand their desire for denial and the reason for their enforced conformity.

I subscribe to a reporter lead service to try to generate free publicity. Yesterday, I had a phone interview with a reporter doing a story on people who cannot sell who are renting out their houses. I explained to her that those homeowners with a positive cashflow do not have a problem, but many bubble buyers cannot cover their cost of ownership with rents, and they do not have any good options. They can either sell the property today for a loss, or lose money each month until prices come back (which is going to take years). Many, if not most, of the people who try to rent it out will end up in foreclosure anyway. This reporter got upset with me because my message was not positive, and she had to spin this story in a positive light. I didn’t know what to say. All I can do it report reality. What she needed was someone from the NAR to tell her that prices will be back at the peak in two years and those who rent out their losing venture will be made whole soon. I couldn’t say that because it is not reality. Even the media is under pressure to conform to the culture of denial.

I have often wondered why our government sets up its method of reporting recessions so that it isn’t announced until it is almost over. Now that I see the powerful need for denial among the populace, I think I understand.

75 Rockport Kitchen

Asking Price: $775,000

Income Requirement: $193,750

Downpayment Needed: $155,000

Monthly Equity Burn: $6,458

Purchase Price: $985,000

Purchase Date: 7/20/2005

Address: 75 Rockport, Irvine, CA 92602

Beds:	3
Baths:	3
Sq. Ft.:	2,300
$/Sq. Ft.:	$337
Lot Size:	6,532 Sq. Ft.
Property Type:	Single Family Residence
Style:	Spanish
Year Built:	2000
Stories:	2
Area:	Northpark
County:	Orange
MLS#:	P663716
Source:	SoCalMLS
Status:	Active
On Redfin:	34 days

Highly upgraded house. Maple Hardwood Floors extends throughout main
floor, and stairs.Upgraded Granite kitchen counters, with a gourmet
kitchen with Cooking island. French Doors open to an ideal
Play/Courtyard fenced with a Custom Wrought Iron. Family room is open
& bright with Fireplace. Master Bdrm with 2 Balconies, Marble
Floor,Office Niche. Phantom screens on french doors.

This property was purchased on 7/20/2005 for $985,000. The owner used a $784,000 first mortgage, a $196,000 second mortgage, and a $0 downpayment.

If this sells for its asking price, and if a 6% commission is paid, First Franklin stands to lose $256,500.

This property is being offered for 21% off its 2005 purchase price.

{book}

Well I’m feelin’ left behind, Lord what a waste of time
They’re coming to get you, run on
How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on

You can call me crazy
You can call me wrong
Cause I was born a liar
Albatross fly on, fly on

My home is kind, man it pays to be blind
I promise to forget you run on
No swallowed pride, no conspiracy lined
Broken promise of the virtue, run on, Lord run on

You can call me lazy
But I know where I belong
Cause I was born a liar
Albatross, fly on, fly on
With your trust in love from your God above…

I believe the Albatross is me

You can call me lazy
You can call me wrong
Cause I was born a liar
Albatross, fly on, fly on

I should have seen the signs
Now the memories far behind
It was no big loss,
Fly on, Albatross yeah

Corrosion of Conformity — Albatro

For What It's Worth

For What It’s Worth — Buffalo Springfield

It’s time we stop, hey, what’s that sound
Everybody look what’s going down

House prices: house prices are going down. That sound is the weeping and gnashing of teeth of speculators and homedebtors everywhere.

A thousand people in the street
Singing songs and carrying signs

“Bail me out” printed on every sign. Banks, automakers, insurance companies, and of course, overextended homeowners.

Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid

Is market psychology starting to change? The next stage after denial is fear. Has the severity of the recession changed people’s opinions?

The Psychology of the Bubble

Actually, from what I have observed, the market psychology is different at different stratas of the market. The low end is already approaching capitulation. There is no more hope for people holding on at the low end. The middle of the market is starting to feel fear. Prices are starting to significantly weaken, and those priced near the median are starting to show larger discounts. The high end of the market is still in denial.

The high end has the least reason to hope. Their denial is rooted in the continuing activity of knife catchers, but jumbo rates are rising, and the knife catchers are nearing exhaustion. The collapse in both pricing and market psychology is working its way up the food chain.

{book}

Today’s featured property is a low-end condo approaching its 2003 purchase price. I featured a similar property over a year ago. 93 Tarocco was asking $389,000, and it was being touted as an “investment property”. The investor must not be very happy right now…

33 Tarocco Front

Asking Price: $274,900

Income Requirement: $68,725

Downpayment Needed: $54,980

Monthly Equity Burn: $2,290

Purchase Price: $235,000

Purchase Date: 2/13/2003

Address: 33 Tarocco, Irvine, CA 92618

Beds:	2
Baths:	2
Sq. Ft.:	995
$/Sq. Ft.:	$276
Lot Size:	–
Property Type:	Condominium
Style:	Cape Cod
Year Built:	1983
Stories:	1
Floor:	2
Area:	Orangetree
County:	Orange
MLS#:	S556458
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

lite-brite

Beautiful End Unit; very Private, Light & Bright; Great Location
Walking Distance to Irvine Valley College; nearby UCI, Irvine Spectrum,
Shopping Mall, Business area and major freeways. Custom Paint, New
flooring, Inside Laundry.

This property was purchased on 2/13/2003 for $235,000. The owner used a $188,000 first mortgage, a $47,000 second mortgage, and a $0 downpayment.

On 11/4/2003 he refinanced for $245,000.

On 9/27/2004 he refinanced for $275,000 using an Option ARM with a 3.66% teaser rate.

On 4/25/2006 he opened a HELOC for $72,500.

Total property debt is $347,500

Total mortgage equity withdrawal is $112,500 — a hard working little condo…

Washington Mutual took back the property on 11/13/2008 for $289,800 which is likely the outstanding balance on the Option ARM. If this is accurate, Washington Mutual actually has loans totalling $362,300 on this property. If it sells for its asking price, and if a 6% commission is paid, the total loss to Washington Mutual will be $104,270. I thought Washington Mutual was supposed to be a conservative lender…

What do you think this would rent for? $1,750? How much rent would be required for an owner-occupant to break even?

33 Tarocco

This is still 10% or more above owner-occupant breakeven. It is 10% above based on the calculations presented here, but since an owner-occupant who is at this income level isn’t going to see as large a tax break as I am showing here, it probably needs to drop another 20% to reach rental parity. Of course, the whole discussion of owner-occupant breakeven assumes there is someone willing to live in this place long term. In all likelihood, this will be bought by an investor looking for positive cashflow. When I wrote the post on 93 Tarocco, I quipped that the price would need to fall to $180,000 to find a rational cashflow investor. I think that price is about right for this one as well.

Remember the Arizona

A String of Pearls — Glenn Miller

Pearl Harbor Day was Sunday, December 7. One of the enduring images of “A date which will live in infamy” is the wreckage of the USS Arizona. One thousand one hundred and seventy-seven crewmen died aboard the USS Arizona that day. The sunken hull sits quietly submerged beneath the waves.

Americans were not prepared for World War II. Peacetime isolationism and lingering problems from the Great Depression left us ill prepared for the challenges our nation faced. We ultimately prevailed, and the peacetime that followed ushered in a new era of prosperity in the United States. We are only now getting a taste of the economic upheaval of the Great Depression, and as a society, we are equally unprepared for the consequences. We will survive, and hopefully we will begin a new era of prosperity. However, some of the images of The Great Housing Bubble will also endure (I hope).

{book}

Some historians have argued that the military made a critical error
having so many ships in port at Pearl Harbor. We did not anticipate the
attack, and we were not prepared for it. Like the USS Arizona, many homedebtors today are underwater. Their lack of preparation for this catastrophe has left them deeply in debt with little hope of recovery. For those who became dependent upon a lifestyle of mortgage equity withdrawal, this is the end of times. Many are hoping our new President will be a messiah. They cling to false hopes for a bailout that will allow them to go back to living the good life of Ponzi Scheme financing. That isn’t going to happen.

Today’s featured property is another HELOC abuser who lives on Arizona and is just as underwater as the ship.

22 Arizona Front 22 Arizona Kitchen

Asking Price: $848,900

Income Requirement: $212,225

Downpayment Needed: $169,780

Monthly Equity Burn: $7,074

Purchase Price: $538,500

Purchase Date: 1/28/1999

Address: 22 Arizona, Irvine, CA 92606

Beds:	3
Baths:	3
Sq. Ft.:	2,950
$/Sq. Ft.:	$288
Lot Size:	8,000 Sq. Ft.
Property Type:	Single Family Residence
Style:	Traditional
Year Built:	1999
Stories:	2
Area:	Walnut
County:	Orange
MLS#:	S556326
Source:	SoCalMLS
Status:	Active
On Redfin:	3 days

Highly Desired Gated Community of Harvard Square. Spacious Open
Floorplan With Formal Living Room & Dining Room. Kitchen Includes
Granite Counters, Breakfast Nook & Opens To Large Family Room With
Stone Fireplace. Large Bonus/Game Room. Master Suite Includes
Fireplace, Jacuzzi Tub & Large Walk-In-Closet. Entertainers Yard
With Stone Hardscape, Built-In-BBQ/Bar, Outdoor Fireplace & Pool
Sized Lot! 3 Car Garage With Storage Cabinets. Close To Central Park,
Pool, Sports Court & Tot Lot.

Why Is Every Word Capitalized?

This property was purchased on 1/29/1999 for $538,500. The owner used a $430,530 first mortgage, a $53,800 second mortgage, and a $54,170 downpayment.

On 6/26/2000 he opened a HELOC for $50,000.

On 10/18/2002 he refinanced with a $503,235 first mortgage.

On 11/15/2002 he opened a stand-alone second for $62,000.

On 12/28/2005 he refinanced with a $848,000 first mortgage.

On 7/13/2006 he refinanced with a $928,000 first mortgage.

On 2/13/2007 he opened a HELOC for $205,000.

Total property debt is $1,133,000

Total mortgage equity withdrawal is $648,670.

If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $335,034 despite the property selling for more than $300,000 over its original purchase price.

All these people using mortgages as options seem to be making out quite well during this price crash. What will you be doing during the next cycle when lenders lose their minds again?

{book}

4.5% Mortgage Interest Rates?

Shakey Ground — The Temptations

My car got repossessed this morning

Harder times I haven't seen in years

Able to throw me a life preserver

'Cos I'm about to drown in my own tears

The Federal Government is contemplating rebuilding the housing market on shaky ground by attempting to lower mortgage interest rates to 4.5%. Now that they control the GSEs, they might be able to do it — at least temporarily. The Federal government's current borrowing costs are very low. Current yields on 30-day treasury Notes are essentially zero, and the yield on 10-year Treasury Bills is at its lowest level since… I don't know if they have every been this low.

All this means that the government can act like a bank and loan profitably even at 4.5%. So why do they want to do this? It is one way of temporarily supporting prices giving them the ability to control the implosion.

Interest rates went down during the price decline in the early 90s. That softened the impact and made the decline take somewhat longer. When interest rates are declining, bubbles take longer to deflate, and the bottom is at a somewhat higher price point. When interest rates are increasing, bubbles deflate faster, and the bottom is at a lower price point. Mortgage Interest rates during the Great Housing Bubble were at historic lows so a repeat of the steady decline in rates witnessed during the 90s is not very likely. Higher interest rates translate into diminished borrowing, lower prices and a lower bottom. A lower bottom means large bank losses and a weaker economy. Therefore, the government wants to control and limit the drop in house prices as much as they can.

During the early 90s while prices were declining, interest rates were also declining from 10.6% in 1989 to 7.2% in 1996. These 30% declines in interest rates made housing more affordable and helped limit the price declines in the early 90s. If interest rates had not declined, house prices certainly would have dropped further than they did. If the Federal Government were to engineer a mortgage interest rate decline of 30% from the 5.8% they were during the bubble down to an unprecedented 4.1% to match the debt relief of the early 90s, it would help control the implosion, but it will only temporarily arrest the decline of prices. As with any government attempt to manipulate prices, it will probably have unintended consequences.

Of course, also like a bank, the government would be borrowing short to loan long, and if the government's cost of capital were to increase, they would lose a lot of money. In short, any attempt by the government to lower interest rates would be temporary. They would not hold to 4.5% interest rates forever as a permanent housing market subsidy. Therefore, anyone foolish enough to buy when interest rates are 4.5% would know that their future buyer (remember Your Buyer's Loan Terms) would be paying a higher interest rate. So what does that mean for future home values?

I don't know if I can state this emphatically enough, so I will type it in realtorese:

ANYONE WHO BUYS AT 4.5% INTEREST RATES IS A FOOL WHO WILL LOSE MONEY!!!

The table above should be very handy to anyone contemplating buying at 4.5% interest rates. You can calculate the loss of home value based solely on increasing interest rates in the future. It is possible we will see 10% interest rates again? You only have to look back to the late 80s/early 90s to see interest rates that high, and that is half of what it was in the early 80s. In my opinion, 8% interest rates are likely during the next several years. When the FED starts raising interest rates after the current crisis is over, 8% interest rates may come faster than you think.

{book}

Today's featured property is another speculative venture funded by easy money that is turning out badly. These are not too difficult to find.

2 Madagascar Front 2 Madagascar Kitchen

Asking Price: $539,900

Income Requirement: $134,975

Downpayment Needed: $107,980

Monthly Equity Burn: $4,499

Purchase Price: $589,000

Purchase Date: 2/26/2004

Address: 2 Madagascar, Irvine, CA 92618

Beds:	3
Baths:	3
Sq. Ft.:	1,750
$/Sq. Ft.:	$309
Lot Size:	–
Property Type:	Condominium
Style:	Spanish
Year Built:	2000
Stories:	3+
Floor:	1
Area:	Oak Creek
County:	Orange
MLS#:	S522833
Source:	SoCalMLS
Status:	Active
On Redfin:	286 days
Unsold in 90+ days

Quiet interior corner location at the end of the cul-de-sac. Upgraded with oak wood floors, ceramic tiles, wood blinds, recessed lighting, added garage cabinets, dinner lights, large rap around yard, long drive way, main floor bedroom with full bath, fire place in living room, master bedroom with private retreat. Gourmet kitchen, shows like a model!

The standards for gourmet kitchens must be falling. It appears you don't even need granite, or stainless steel appliances, or anything better than an apartment to qualify as a gourmet kitchen. I guess I need to remember that lies like this are what we pay realtors for.

This property was purchased on 2/26/2004 for $589,000. The owner used a $525,000 first mortgage and a $64,000 downpayment.

On 6/7/2005 he refinanced for $529,989 with an Option ARM with a 1% teaser rate, and he opened a HELOC for $90,000.

On 7/25/2006 he refinanced again for $592,000 with an Option ARM, and he opened a HELOC for $73,999.

Total property debt is $665,999.

Total mortgage equity withdrawal is $140,999 including his downpayment.

If this property sells for its asking price, Washington Mutual stands to lose $158,493.

{book}

Lady luck and the four leaf clover

Won't be as hurt as I feel all over

My life for one special occasion

'Til you leave in depth the situation

Well well well standing on shakey ground

Ever since you put me down

Standing on shakey ground

Ever since you put me down

My car got repossessed this morning

Harder times I haven't seen in years

Able to throw me a life preserver

'Cos I'm about to drown in my own tears

Well well well standing on shakey ground

Ever since you put me down

Standing on shakey ground

Ever since you put me down

Shakey Ground— The Temptations

Open Thread 12-6-2008

Jesus of Suburbia — Green Day

Irvine Renter will be speaking at the monthly meeting of the Green Party of Orange County on Sunday, December 7, 2008, at 2:00 at the offices of the Irvine Ranch Water District located at 15600 Sand Canyon Ave., Irvine, CA. Also speaking will be Dave Levy, a valued return Green Party visitor from Orange County Fair Housing Council. He will speak about public and private ways to protect the quality of life in Orange County by ensuring equal access to housing opportunities, an important way to foster diversity and preserve dignity and human rights. December’s GPOC meeting topic will cover the importance of housing in these uncertain times, and will focus on the Green Party’s Key Value of Social Justice. “Radical Housing for Radical Times” will concentrate on novel approaches to help reach the goal of affordable, stable, quality housing for all.

Everyone is invited, so if you are interested in hearing a discussion of this issue, please stop by.

Does anyone have any good news they would like to share? I have been reading all the headlines lately, and I can’t find anything even remotely positive going on in the economy or the housing.

I don’t care what topic it is on. You can make it personal if you like. Just give me some good news…

{book}

I’m the son of rage and love
The Jesus of Suburbia
From the bible of none of the above
On a steady diet of soda pop and Ritalin
No one ever died for my sins in hell
As far as I can tell
At least the ones I got away with

And there’s nothing wrong with me
This is how I’m supposed to be
In a land of make believe
That don’t believe in me

Get my television fix sitting on my crucifix
The living room or my private womb
While the moms and brads are away
To fall in love and fall in debt
To alcohol and cigarettes and Mary Jane
To keep me insane and doing someone else’s cocaine

And there’s nothing wrong with me
This is how I’m supposed to be
In a land of make believe
That don’t believe in me

Jesus of Suburbia — Green Day

Irvine Housing Blog

Established September 2006

Jumbo Drops

For What It's Worth

Sponsored Posts

Remember the Arizona

4.5% Mortgage Interest Rates?

ANYONE WHO BUYS AT 4.5% INTEREST RATES IS A FOOL WHO WILL LOSE MONEY!!!

Open Thread 12-6-2008