Crescent Moon — The Carpenters
Green September
Burned to October brown
Bare November
Led to December’s frozen ground
Are we entering our Winter of Discontent? A great many people chased the easy money in real estate. Some lost their moral compass (assuming they ever had one,) and many abandoned fiscal discipline in favor living for the day. As a society we are going to pay for the excesses of the Great Housing Bubble with a severe economic recession. For those that were caught up in the folly of the bubble, it will be a very cold winter.
This recession will be severe because consumers, already burdened with onerous debts, will have to cut back spending to pay off their debts and begin saving money. None of this will happen quickly. Imagine you are a typical consumer carrying $20,000 plus in credit card debt, or an additional $200,000 on a mortgage. Now instead of receiving ever-increasing credit card and HELOC offers to fuel consumer spending, you are asked to pay off this mountain of debt. Most are already strapped to make their debt service payments. To come up with an additional $500 per month or more to start paying off debt is going to come out of whatever discretionary income a borrower might have had. This loss of consumer spending is going to depress demand which in turn will put more people out of work which will further depress demand: a downward spiral. Given how long it will take for the American consumer to pay off their enormous debt loads, this deleveraging will serve as a drag on the economy for quite some time. There is no quick fix.
The good news is that the America that will emerge on the other side of this severe and protracted recession will be the America we once knew. We will become a nation of savers who provide the investment capital for business through our savings deposits and stock market investments. Sure there will always be spenders, and many will not make the transition, but this recession will impact the deeply indebted to a far greater degree than it will to those who have minimal debts and who have saved their cash.
In accounting terms, your net worth is the sum of your assets minus the liabilities. Many sought to increase their net worth by taking on huge debt loads to finance assets that were supposed to increase in value. The mass deleveraging has ravaged asset values while having no positive effect on liabilities. If you look at the balance sheets of Americans, those will huge liabilities will be wiped out as asset values decline. Those with few liabilities will likely see a decline in their net worth, but not to the degree of those who are highly leveraged. This recession will cause us all to reassess our relationship to debt. As it should.
Today’s featured property was owned by a flipper who took out an Option ARM with a 1% teaser rate to speculate in the real estate market. He had some of his own money in the deal. He watched as his liability grew through negative amortization and asset values crumbled. This speculative flip did not have the desired impact on his net worth.
Asking Price: $699,000
Income Requirement: $174,750
Downpayment Needed: $139,800
Monthly Equity Burn: $5,825
Purchase Price: $900,000
Purchase Date: 1/6/2006
Address: 21 Crescent City, Irvine, CA 92602
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,477 |
| $/Sq. Ft.: | $282 |
| Lot Size: | 2,697
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | French |
| Year Built: | 2000 |
| Stories: | 2 Levels |
| Area: | Northpark |
| County: | Orange |
| MLS#: | S548728 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 19 days |
luxurious living space that brilliantly blends the traditional with the
contemporary: living room and dining room, but also a modern great
room; hardwood floors downstairs and brand new Berber carpeting
upstairs; dark wood kitchen cabinets, but also granite counters,
stainless steel appliances, and an island; large bedrooms, but a
spa-like master suite and retreat that is straight out of the
Ritz-Carlton. Northwood Park has three grand entrances all guard-gated,
conveniently located association pools, parks, clubhouse, sports
courts, tennis courts, and tot lots. Stately Eucalyptus trees line the
streets that are designed for neighbors to feel connected and to
encourage a real sense of community that other villages miss.
Top-ranked schools are close by as well as all of your shopping needs.
The quality of the writing on these descriptions is definitely improving.
This property was purchased on 1/6/2006 for $900,000. The owner took out a $675,000 Option ARM with a 1% teaser rate as his first mortgage, and there is a HELOC for $135,000 we can assume was used to purchase the property. The downpayment was $90,000 or 10%. If this property sells for its asking price, and if a 6% commission is paid, the total loss will be $242,940. The owner will lose his $90,000 plus his credit rating, and the lender will lose the rest plus some negative amortization.
{book}
Green September
Burned to October brown
Bare November
Led to December’s frozen ground
The seasons stumbled round
Our drifting lives are bound
To a falling crescent noon
Feather clouds cry
A vale of tears to earth
Morning breaks and
No one sees the quiet mountain birth
Dressed in a brand new day
The sun is on its way
To a falling crescent noon
Somewhere in
A fairytale forest lies one
Answer that is waiting to be heard
Crescent Moon — The Carpenters
