Over My Head

Over My Head — Fleetwood Mac

I’m over my head,
But it sure feels nice.

Isn’t that the reason everyone panders to their sense of entitlement and buys too much home? We all know that emotional longing to live well and have the very best. I am certainly not immune. Like many in my industry, I have had to live with a reduction in my income during the housing crash (I am lucky to have a job at all). The place I rent now used to be easily affordable, but now I am stretched to maintain my standard of living. Am I entitled to the life I had during the bubble? I certainly do not want to downsize and lower the quality of the place I live because I enjoy it. I am over my head, but it sure feels nice.

Everyone feels these desires to have more. Some people have less discipline than others when it comes to resisting these urges. During the bubble, lenders removed all external resistance, and the most irresponsible among us were given access to as much money as they wanted to buy a home. It shouldn’t be terribly surprising that we are having a lot of foreclosures now.

Of course, the assurances of realtors like Suzanne convince people they deserve it and they can do it. Well, sometimes they don’t deserve it, and they can’t do it. If you don’t fully understand what “pandering to a sense of entitlement” means, watch the Suzanne Researched This video above. It demonstrates the concept better than I could explain it.

Today’s featured property was owned by someone who overbought and simply could not afford the place they had. The property was purchased in 2004 with an Option ARM and a significant downpayment. The Option ARM consumed much of their equity, and the market took the rest. Now the bank owns it, and they are asking 15% off the 2004 purchase price.

9 Hollyhock Kitchen

Asking Price: $567,000

Income Requirement: $141,750

Downpayment Needed: $113,400

Monthly Equity Burn: $4,725

Purchase Price: $679,000

Purchase Date: 6/29/2004

Address: 9 Hollyhock, Irvine, CA 92602

Beds:	3
Baths:	3
Sq. Ft.:	1,700
$/Sq. Ft.:	$334
Lot Size:	4,027 Sq. Ft.
Property Type:	Single Family Residence
Style:	Other
Year Built:	1998
Stories:	2 Levels
Area:	West Irvine
County:	Orange
MLS#:	P661034
Source:	SoCalMLS
Status:	Active
On Redfin:	2 days

Great entertaining floorplan! Spacious open kitchen with Euro white
cabinets & center island. Roomy Master Bedroom with large walk-in
closets. Upgraded Wood Floors, Plantation Shutters. Master bathroom
with separate shower and bath tub and dual sinks. Home is light and
bright with an inviting feel…..and no HOA Dues!

This property was purchased on 6/29/2004 for $679,000. The owner used an Option ARM with a 3.67% teaser rate with an initial balance of $543,200. The remaining $135,800 was a cash downpayment. On 8/9/2005 the owner opened a HELOC for $98,000, but it isn’t clear whether or not they took the money. By 7/2/2008 the negative amortization and missed payments had ballooned to $600,555 which is how much WAMU paid at auction for the property. It looks as if the new JP Morgan Chase / WAMU isn’t messing around with their foreclosures. This property is priced to move.

I feel bad for owners like this one. They were likely moved by an emotional appeal for this property. The realtor told them they could have it, the mortgage brokers gave them a loan, and they sunk a great deal of their own money into the transaction. In the end, they lost the house, lost their money, and lost their credit. That must really suck.

{book}

You can take me to paradise,
And then again you can be cold as ice
Im over my head,
But it sure feels nice.

You can take me anytime you like,
Ill be around if you think you might love me baby,
And hold me tight.

Your mood is like a circus wheel,
Youre changing all the time,
Sometimes I cant help but feel,
That Im wasting all of my time.

Think Im looking on the dark side,
But everyday you hurt my pride,
Im over my head,
But it sure feels nice,
Im over my head,
But it sure feels nice.

Over My Head — Fleetwood Mac

The Great Housing Bubble

It has been a year-and-a-half of foreplay here on the Irvine Housing Blog. It has been a long time coming, but the book, The Great Housing Bubble, is finally here.

And yes, the mystery of my identity is gone.

The book is available for download as an ebook, or as a paperback on Amazon.com.

I am pleased to announce we will be having an Irvine Housing Blog party and book signing at 6:30 on Wednesday, November 12, 2008, at JT Schmids at the District. This is your chance to meet the people behind the screen names.

You have plenty of time to order and receive a copy of the book from Amazon. I will also have a large but limited number of books available at the signing. These will be available for a $15 “donation” to the IHB. You are under no pressure or obligation to buy a book or have it signed. All who wish to be a part of the IHB community and meet others in the community are encouraged to attend.

I hope to see you all there.

{book}

Its been such a long time
I think I should be goin, yeah
And time doesnt wait for me, it keeps on rollin
Sail on, on a distant highway
Ive got to keep on chasin a dream
Ive gotta be on my way
Wish there was something I could say.

Well Im takin my time, Im just movin on
Youll forget about me after Ive been gone
And I take what I find, I dont want no more
Its just outside of your front door.

Its been such a long time. its been such a long time.

Foreplay/Long Time — Boston

BTW, We have a private room, and although this is publically announced, it is a private party. Agitators will be asked to leave.

A Touch Too Much

Touch Too Much — AC/DC

Seems like a touch, touch too much
You know it’s much too much, much too much

I have written much on the Fundamental Valuation of Houses and the concept of rental parity. It has been my supposition from the beginning that prices were greatly detached from their fundamental valuations and were due for a crash. My prediction is for a 40% decline in Irvine’s median by 2012. Today’s featured property is a great case study in just how ridiculous the asking prices still are here in Irvine.

59 Trailwood Inside

Asking Price: $1,199,000

Income Requirement: $299,750

Downpayment Needed: $239,800

Monthly Equity Burn: $9,991

Purchase Price: $550,000

Purchase Date: 6/3/1999

Address: 59 Trailwood, Irvine, CA 92620

Beds:	6
Baths:	4
Sq. Ft.:	3,100
$/Sq. Ft.:	$387
Lot Size:	5,500 Sq. Ft.
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	1998
Stories:	2 Levels
View:	Park or Green Belt
Area:	Northwood
County:	Orange
MLS#:	S550161
Source:	SoCalMLS
Status:	Active
On Redfin:	9 days

Fantastic guard gated location on cul-de-sac street across from park,
swimming pool and hiking trail. Cathedral ceilings with guest suite or
two bedrooms downstairs, 4 bedrooms plus a loft upstairs, amazing
sunlight all day long, upgarded kitchen with granite, owner is
reasonable and open to creative financing. This home is part of Canyon
View elementray and Northwood high schools and includes two swimming
facilities, tennis courts, basketball and three outdoor BBQ areas. For
investors, this will rent for $4,200 per month easily!

upgarded? elementray?

“For
investors, this will rent for $4,200 per month easily!” I think he meant to say, “For kool-aid intoxicated speculators, the rent will cover half your cost of ownership.”

I was required to take courses in real estate economics in school, and in my professional career, I use this knowledge on a daily basis. It occurred to me that not everyone really understands this stuff, so many of the analysis posts I have written have sought to explain how real estate economics really works so people could better understand what they are getting in to when they buy a house. I wrote the post Speculation or Investment to try to show the key differences between those two styles of investment. I also wanted to make clear that people who bought houses in California at inflated prices are engaging in speculation and not investment. Many believe they are investing because they intend to hold the asset long-term; however since they are running a negative cashflow compared to renting, and since the only way they can profit is if prices become even more inflated, they are speculating, and since prices periodically crash to cashflow value, they are very likely to get burned.

59 Trailwood Cost Estimate

Today’s featured property is being touted to investors as a good deal. It is not. Any real investor would analyze the cashflow and quickly realize this is a really dumb investment. If it generates $4,200 in rent, and it costs the owner $7,528 net each month. This property loses $3,328 per month. This is in addition to the $9,991 you will lose each month in declining equity. Of course, the only reason someone would buy this is because they don’t believe they will lose $9,991 each month in equity; in fact, they believe they will make back their $3,328 and more through appreciation. There is no other way to look at it. I suppose you could argue that if someone could afford it and if they really wanted it, they would not mind losing $13,319 per month in ownership costs and lost equity, but if you really believe that, you are pretty gullible. Remember, Timing Does Matter.

The fact that there are knife catchers out there buying these properties shows how little the market psychology has changed. We are entering what will probably be the deepest economic recession since the Great Depression, interest rates are rising, and our entire financial system sits on the brink of apocalypse, and yet, there are still people who fear being priced out and believe house prices will rapidly rise soon. Amazing.

Just for the record, using the assumptions above, this property is worth $660,000 at rental parity for a GRM of 157.

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.

🙂

BTW, The Great Housing Bubble is now available on Amazon.com.

{book}

It was one of those nights
When you turned out the lights
And everything comes into view
She was taking her time
I was losing my mind
There was nothing that she wouldn’t do
It wasn’t the first
It wasn’t the last
She knew we was making love
I was so satisfied
Deep down inside
Like a hand in a velvet glove
CHORUS:
Seems like a touch, a touch too much
Seems like a touch, a touch too much
Too much for my body, too much for my brain
This damn woman’s gonna drive me insane
She’s got a touch, a touch too much
She had the face of an angel
Smiling with sin
The body of Venus with arms
Dealing with danger
Stroking my skin
Like a thunder and lightening storm

Touch Too Much — AC/DC

Once, Twice, Three Times…

Once, Twice, Three Times a Lady — Commodores

And now that we’ve come to the end of our rainbow
There’s something I must say out loud…

WHERE THE HELL IS MY POT OF GOLD?!

There was supposed to be a pot of gold here. At least that is what our third flipper thought. I have written on other occasions about the phenomenon of trading stucco boxes (Houses and Commodities Trading, and Houses Should Not Be a Commodity). People were buying properties, often not even living in them, waiting for a short time, and then selling them to another speculator who would do the same thing. It was a classic Ponzi Scheme dependent upon greater and greater levels of debt to perpetuate higher and higher prices. Today’s property is probably the finest example of this phenomenon I have encountered here in Irvine. Let’s take a closer look.

422 Quail Ridge Kitchen

Asking Price: $549,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Monthly Equity Burn: $5,825

Purchase Price: $680,000

Purchase Date: 5/4/2006

Address: 422 Quail Ridge, Irvine, CA 92603

Beds:	2
Baths:	2
Sq. Ft.:	1,654
$/Sq. Ft.:	$332
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2005
Stories:	2 Levels
Floor:	1
Area:	Quail Hill
County:	Orange
MLS#:	S550663
Source:	SoCalMLS
Status:	Active
On Redfin:	4 days

Step up to something really nice. This highly upgraded top floor Quail
Hills home has the feel and look that will make your buyers feel proud
to say their home now! Quail Hills is a fantastic community nestled in
the rolling hills of west Irvine. With parks, community pools, tennis
courts and surrounded by beautifully landscape greenbelts, it s a
pleasure to call Quail Hills home. Just minutes to the 405, the 133,
shopping, three parks, lots of areas to walk and play ! Well worth your
time to check us out !

highly upgraded? What does this mean? Can a property be just “upgraded?” Can it be “lightly upgraded?” Can it be “highly, highly upgraded?” Where does it end?

nestled… I am developing an aversion for that word.

The sales and mortgage history of this property gets a bit involved, but bear with me, it tells a great story of greed gone wild.

Flipper #1

This property was first purchased from the builder on 9/30/2004 (just over 4 years ago) for $502,000. Flipper #1 used a $400,000 first mortgage, a $76,750 second mortgage, and a $25,250 downpayment. He waited two whole months before opening a HELOC for $120,000 on 11/22/2004 withdrawing his downpayment. On 5/5/2005, about 6 months later, he opened another HELOC for $200,000 and paid off the first. On 5/26/2005 he sold the property to flipper #2 for $610,000 netting him $63,400 after a 6% commission. Not a bad profit for holding property around 9 months.

Flipper #2

Flipper #2 paid $610,000 on 5/26/2005. He used a $496,000 first mortgage, and a $124,000 second mortgage. If these numbers are correct, he cashed out $10,000 at the closing. He then sold the property almost a year later to flipper #3 for $680,000. If he paid a 6% commission, he only made $29,200.

Flipper #3

Flipper #3 paid $680,000 on 5/4/2006. He used a $544,000 first mortgage, a $136,000 second mortgage, and a $0 downpayment. His rainbow had no pot of gold. He is now a short sale asking $540,000

Look at these three transactions. Only the first one had any kind of downpayment, and he only had that in the property for about 60 days. Every penny of the remaining transactions was borrowed money. Of all the painful lessons lenders learned during the bubble, giving out 100% financing to anyone with a pulse has to be the most painful. If leverage is very low (large downpayments or low CLTV limits,) then speculators have to use large amounts of their own money to capture what become relatively small price movements. If leverage is very high (small downpayments or high CLTV limits,) then speculators do not have to put up much money to capture what become relatively large price movements. The more leverage (debt) that can be applied to residential real estate, the greater the degree of speculative activity that market will see. Also, the smaller the amount of money required to speculate in a given market, the more people will be able to do so because more people will have the funds necessary to participate. When lenders began to offer 100% financing, it was an open invitation to rampant speculation. This makes the return on investment infinite because no investment is required by the speculator, and it eliminates all barriers to entry to the speculative market. Further, it passes all of the risk on to the lender as the speculator can simply refuse to pay the debt and allow the lender to foreclose on the property. 100% financing, coupled with negative amortization loans, caused our market prices to get inflated, and its elimination is one of the main reason prices are falling now.

{book}

Commodores-three times a lady Thanks for the times that you’ve given me
The memories are all in my mind
And now that we’ve come to the end of our rainbow
There’s something i must say out loud

You’re once, twice, three times a lady
And I love you…
Yes, you’re once, twice, three times a lady
And I love you… I love you…

When we are together the moments I cherish
With every beat of my heart
To touch you, to hold you
To feel you, to need you
There’s nothing to keep us apart

You’re once, twice, three times a lady
And I love you… I love you…

Once, Twice, Three Times a Lady — Commodore

Slaves to the Payment

Slaves to the Pavement — Belvedere

distractions from the ordinary
real life just not good enough
explanations hard to come by

Is it so bad to live an ordinary life? We have it pretty good in Southern California. The weather is great, there are lots of activities, and with the wages being higher than the national average, it is not too difficult to support a family. I guess for many, a real life, a life of living within one’s means, is just not good enough. It takes HELOC dependency to fuel a better-than-average life for ordinary citizens. Why do we all have to live that way? Explanations are hard to come by. Have we have all becomes slaves to the pavement, or perhaps, slaves to our payments.

i wish i could safely say
all the right decisions were always made

Based on the unprecedented drop in prices and the equally unprecedented debt levels many homeowners took on, it is safe to say that all the right decisions were not made. When you reflect on what happened, and think about all the debt people took on, you come to one inescapable conclusion: nobody thought they would ever have to pay it back, certainly not from their wage income. In fact, many of them are not. Some sold their properties and transferred the debt to someone else, and some simply walked away from their properties and let the bank take their debt back. There has been a lot of conjecture on the walkaway phenomenon. Is it real? Will it get worse? Judging from what we see here everyday, it is easy to believe it will get much worse. People don’t want to pay the money back. It is that simple. If they can’t pass this burden on to someone else, they will default. People don’t go from wildly irresponsible to miserly and responsible overnight, if they ever change at all. I speculate that many, many more people will walk once they accept that prices are not coming back. When denial turns to fear and acceptance, the burden of the debt will become very real, and the crushing burden will be too much to bear. Until then, most will carry on with the fleeting hope that prices will recover in a couple of years and the titanic debts on their shoulders will be transferred to a greater fool when they sell their properties. The walkaway phenomenon is already observable in markets wiped out by subprime defaults. When the Alt-A and prime ARMs reset and the Option ARMs explode, Irvine will be no different.

Today’s featured property is another HELOC abuser who refinanced himself out of his family home. Faced with the prospect of paying back a debt that had more than doubled in 6 years, he chose to walk. He will not be alone.

Asking Price: $464,900

Income Requirement: $116,225

Downpayment Needed: $92,980

Monthly Equity Burn: $3,874

Purchase Price: $279,000

Purchase Date: 5/11/2000

Address: 4052 Belvedere St, Irvine, CA 92604

Beds:	3
Baths:	2
Sq. Ft.:	1,448
$/Sq. Ft.:	$321
Lot Size:	5,466 Sq. Ft.
Property Type:	Single Family Residence
Style:	Ranch
Year Built:	1971
Stories:	1 Level
Area:	El Camino Real
County:	Orange
MLS#:	U8004517
Source:	SoCalMLS
Status:	Active
On Redfin:	4 days

BANK OWNED! 3 BEDROOM HOME LOCATED IN EL CAMINO REAL MINUTES FROM
SCHOOLS, PARKS, AND SHOPS. BACKYARD WITH BUILT IN BBQ, BEER TAP, AND
FRIDGE GREAT FOR ENTERTAINING.

This property is nearing rental parity. With a GRM of 160, the rental breakeven would be $2,900 a month. With the low association dues and lack of Mello Roos, a GRM of 180 might be more accurate. With that GRM, the rental breakeven is $2,582. I don’t think it would rent for quite that much, but it might rent for $2,400. We are making real progress. In our current market, this is a pretty good deal. I don’t believe that this property will drop to much less than $400,000 (I suppose I should update the equity burn numbers…)

The previous owner made a steady living off the property:

The property was purchased on 5/11/2000 for $279,000. There was a $223,200 first mortgage, a $27,900 second mortgage, and a $27,900 downpayment.

On 7/29/2002 he refinanced for $275,000.

On 2/27/2003 he refinanced for $324,000.

On 10/28/2003 he refinanced for $365,500.

On 7/1/2004 he refinanced for $450,000.

On 10/11/2005 he refinanced for $527,200.

Total property debt is $527,200.

Total mortgage equity withdrawal is $276,100 including his downpayment.

Is there anything in this owner’s history of managing his debt that convinces you he had any intention of paying this money back?

BTW, Calculated Risk has a great post on Research: Housing Busts and Household Mobility.
It has a link to a scholarly paper on the economic impact of having a
society of payment slaves. Both the post and the paper are great
reading for anyone who wants to further explore this issue.

{book}

distractions from the ordinary
real life just not good enough
explanations hard to come by
living outside the institutions
waking in awkward situations
i wouldn’t have it any other way

i can’t recall a better time,
each day felt like the next would never come
i realize i couldn’t get enough
alternatives all felt like death
i wish i could safely say
all the right decisions were always made
ya we were young but we’re still here
happy to starve for another year

Slaves to the Pavement — Belvedere