Hank Paulson, who art in Washington, hallowed by thy name. Thy fiefdom come, thy will be done, transfering wealth from Main St. to Wall St. Give us this day all your bread. And forgive us our debts, as we foreclose on those indebted to us. And lead us not into solvency, but deliver us from bankruptcy. For thine is the fiefdom, the power and the glory. For ever and ever. Amen.
How many bankers are uttering those words right now? How many are soiling themselves praying for the government to pass this bailout?
Personally, I have my doubts that any government intervention will help the situation. It certainly won’t make a difference for house prices. If it is passed, it may keep a number of insolvent banks on life support for a brief period of time, but their demise is inevitable. Perhaps this whole bailout is just a way for Bernanke and Paulson to control the implosion of the banking industry. I believe it would be far preferred to make the banks bring all these hidden assets back on to their balance sheets and value them at market. (Barry Ritholtz at the Big Picture wrote a very good post on Understanding the Significance of Mark-to-Market Accounting. I highly recommend it.) We would know immediately who is solvent and who is not. The insolvent banks will quickly go under, and the survivors will pick over the bones of the dead. That would be the natural recessionary purging that would occur absent a useless government intervention. Once this purging has taken place, then we can talk about infusing capital back into the banking system. It would be a far more efficient use of government money. What we are proposing to do now is very similar to what Japan did when their stock and real estate bubbles collapsed. The result of propping up all their banks was a decade of lost economic growth. This whole process is like removing a band aid. Remove it quickly and it is more painful, but then it is over. Take it off slowly, and it is arguably less painful, but the pain goes on for much longer. There is no way to avoid the pain.
Today’s featured property is yet another example of why the securities the government wants to buy are worthless. Bad loans like this one were packed up into asset-backed securities and sold to collateralized debt obligation structures. There they are loaded with more debt and sold to banks and investors who thought that they would be getting their money back with interest. The money is not coming back, and the various tranches of CDO’s have little or no value as a result.
This is a single level home located upstairs. Immaculate home with wood
floors, fireplace, cozy kitchen and 1-car detached garage. Walking
distance to Woodbridge South Lake, pools, parks, and schools. Close
distance to freeway 405 and shopping centers.
Did anyone pay down a mortgage during the bubble? I am starting to wonder. The owner of this property is yet another HELOC addict who managed to drain a tidy sum out of this tiny property.
This property was purchased on 1/22/2003 for $261,000 using a 208,800 first mortgage, a $26,100 second mortgage and a $26,100 downpayment.
On 11/26/2003 he opened a HELOC for $55,000 and took out a third mortgage for $26,489 taking out his downpayment.
On 8/12/2004 he refinanced with a $335,000 first mortgage.
On 8/31/2005 he refinanced again with a $386,500 Option ARM with a 2.62% teaser rate.
On 9/25/2006 he took out a stand-alone second for $25,000.
Total debt on the property is $411,500.
Total mortgage equity withdrawal is $176,600 including his downpayment.
Considering how small this property is, getting $176,600 out of it is pretty good. If it sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $120,100. That is about 30% off the peak appraised value.
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Our Father who art in Heaven Hallowed be thy name Thy Kingdom come thy will be done on earth as in heaven Give us to thee our daily bread And forgive our sins As we forgive each one of those who sin against us And lead us not to the time of trial But deliver us from evil For thine is the kingdom the power and the glory
Lead us not to the time of trial Keep us from evil For thine is the kingdom the power and the glory
Let all the people sing Amen In every tribe and tongue Let every hearts desire be joined To see the kingdom come
Let every hope and every dream Be born in love again Let all the world sing with one voice Let the people say amen
Yesterday was quite a day. It witnessed the defeat of the housing bailout bill (unless it is resurrected which is probable) and it saw some of the largest one-day declines in stock market history. The credit markets are still frozen, and we appear to be on the brink of a complete meltdown of our financial system. It must be a good time to buy a house… You do have to wonder what buyers are thinking right now.
It is hard to say why some neighborhoods get hit harder than others. Often times it is a combination of factors like age, desirability, amount of toxic financing, etc. The Lakes condo development has been getting hammered by foreclosures because it is old, undesirable, and full of toxic financing. The neighborhood containing today’s featured property is new — which of course means it is full of toxic financing — and it is in an undesirable location. The peak prices paid here were also WTF high. I have profiled 8 Orangetip and 10 Orangetip before. Both properties are remarkable for the extreme discount from peak pricing. Today’s featured property is no exception.
Today’s featured property is being offered for 38% off its peak purchase price.
This property is being offered for similar pricing to the two comps I profiled earlier. This one is not likely to get bids over asking.
Short Sale – Gorgeous corner 5 bedrooms 2 3/4 baths home built in 2006.
Upgraded Kitchen with golden brown cherry cabinets, absolute black
granite counter top, walk in pantry, stunning Italian hand carved
hardwood floor, food pantry and stainless steel appliances. Great room
on the top of the stairs leading to the master bedroom which features
double door entry, walk in closet, full bathroom with jetted tub and
travertine tiles in the shower, 4 bedrooms, 2 bathrooms upstairs and 1
bedroom, 1 bathroom downstairs. Fire place in family room, central heat
and ADT security. – BUYER TO VERIFY ALL INFORMATION INCLUDING
ASSOCIATION DUES.
This property was purchased on 1/27/2008 for $886,000. The owner used a $708,700 first mortgage, an $88,600 second mortgage, and an $88,600 downpayment. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $369,094.
I have been noticing a trend in short sales lately. At first, almost all of the short sales were 100% financing deals, and many still are, but now I am seeing more and more short sales where the owners have some money in the transaction. It makes sense that owners with some of their own money in the deal would be more hesitant to give up and take a loss. Seeing these kind of sales are a sign of capitulation in the market. Market capitulation does not happen all at once. People will not all give up at the same time. When we start seeing large numbers of people who put 20% down give up, we will be at the capitulation stage. For now, the local market is transitioning from denial to fear. The broader economic picture is deteriorating, and even the President acknowledged we had a real estate bubble. As the price drops continue this fall and winter, fear will begin to grip the market. When prices do not start to recover next year, fear will begin to change to capitulation and acceptance. It is only a matter of time.
. Follow me, don’t follow me I’ve got my spine, I’ve got my orange crush Collar me, don’t color me I’ve got my spine, I’ve got my orange crush We are agents of the free I’ve had my fun and now its time to Serve your conscience overseas (over me, not over me) Coming in fast, over me
(repeat verse)
High on the booze in a tent paved with blood, nine-inch howl, brave the night, chopper comin’ in, you hope.
We’d circle and we’d circle and we’d circle to stop and consider and centered on the pavement stacked up all the trucks jacked up and our wheels in slush and orange crush in pocket and all this here county hell any county it’s just like heaven here and I was remembering and I was just in a different county and all then this whirlybird that I headed for I had my goggles pulled off I knew it all I knew every back road and every truck stop
The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people’s inability to distinguish between desire and demand.
Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.
California’s residential real estate market is completely controlled by loan terms and the availability of credit. I first discussed this phenomenon in the posts Your Buyer’s Loan Terms and The Anatomy of a Credit Bubble. When credit terms are restrictive, when 30-year fixed-rate conventionally-amortized mortgages are the only available financing product, prices reflect the amounts of money people’s incomes can finance under those terms (as they were before the bubble). When credit terms are loose, when stated-income, Option ARMs, low interest rates, high DTIs and other terms and conditions allow people the ability to borrow two or three times the amounts available under restrictive terms, prices in the residential real estate market will be reflective of those terms (as they were in the bubble). Local supply and demand issues may temporarily halt the rise and fall to a new equilibrium level, but supply analysis alone completely fails to predict this new equilibrium or explain how prices got there.
Analyzing supply and calculating the time on the market is one method of trying to predict future price movements. The theory is that when inventory is low and sales volumes are high that prices must rise, and visa versa. This market snapshot of the balance between supply and demand can be useful, but it is notoriously unreliable because it does not examine the cause of the demand and it falsely assumes that demand is ever increasing. When you look at the chart below showing months of inventory from 2002-2007, you see a false spike in 2004. This signal would ordinarily foretell the collapse of market pricing, but since demand was stimulated in 2004 through the widespread sales of Option ARMs and the near elimination of lending standards, the inventory was quickly absorbed and prices continued higher. Similarly, right now in our market, inventory is down from the peak, and months on the market has fallen below 6 months. This would ordinarily be a signal of a price stabilization or future price increases. However, since credit is continuing to tighten and loan terms are becoming more restrictive, demand, as properly measured by dollars, will continue to weaken, and prices will continue to fall.
California has had a chronic housing shortage for many years. The
mechanisms for bringing supply to the market are slow and cumbersome,
and many local municipalities restrict the ability of developers to
bring new supply to the market or outright forbid it. It is not
uncommon in California for price points to favor the construction of
new dwelling units and for municipalities to forbid its construction.
In these circumstances, the normal mechanism for rebalancing supply and
demand do not function. In most states, when there is a demand for
housing, homebuilders will go to work and provide dwelling units to
meet this demand. The increase in supply blunts the price impact
greater demand has on market prices. This is why many states where
there are fewer land-use controls, they experience much less volatility in
their housing markets.
Of course, this is one other factor that contributes to the wild
volatility in California’s residential real estate market: irrational
exuberance (kool aid intoxication). In California’s markets, when
prices start to rise, fear and greed creates a positive feedback loop
that compels people to buy more (if credit is available) and drive
prices even higher. In other markets rising prices creates a negative
feedback loop that causes people to shun higher prices and not buy real
estate. This psychological reaction to market price fluctuations is
different for each market. Because supply delivery mechanisms are
dysfunctional in California, it is easier for Californian’s to drive
prices higher quicker than it is in other markets. This feeds the local
psychology and creates even more volatility.
Prices have already dropped 20%-25% in Irvine from their peak in
2006. This initial price drop did not occur because of foreclosures or
supply issues. It occurred because tightening credit has stopped market
participants, those desirous of real estate, from bidding prices as
high as they could in the past. The rate of decline is certainly
impacted by foreclosures and inventory problems, but the overall price
levels are determined by incomes and the amount of money people can
borrow based upon it. Credit will continue to tighten, and the amounts
people will be able to borrow will continue to decline. We have already
witnessed a spike in jumbo interest rates as risk premiums are being
priced in to the loans that are not backed by the GSEs. As the
repricing of risk continues, interest rates will continue to rise. This phenomenon will be most noticeable for jumbo loans (the high end is doomed). Also, as the
recession begins to impact incomes, the borrowing power of potential
buyers will be reduced even further. Currently, there are still many
5-year and 10-year ARMs being used to purchase real estate with very
high DTIs. As these products become less common (they are just dragging
out the foreclosure problem,) and as DTIs continue to decrease, bids
will decline, and prices will decline with them.
Some of the people I know that purchased in this market did so
because they saw the tightening credit as something that was going to
take away their ability to finance the sums large enough to buy real
estate. In short, they thought they would be priced out forever. This
reasoning puts the cart before the horse. The tightening of credit
terms is going to cause prices to fall because it directly determines
the market bids. Right now, the high end market is characterized by
very large bid/ask spreads. Sellers are holding out for wishing prices
while buyers are seeing their bids get smaller and smaller due to
tightening credit. Transaction volumes are very low, and while sellers
hold to their fantasies, there will be very few transactions. This will
not change until the Alt-A and Prime ARM resets force asking prices
lower. We have seen this phenomenon before. The low end of the market
in the areas most decimated by subprime ARMs is already at rental
parity, and there may be overshoot in these areas. The bid/ask spreads
in these submarkets are tight because there are few sellers bothering
with wishing prices, and sales are dominated by REOs.
In the post Houses Should Not Be a Commodity, I went into some detail on the stages of market psychology and buyer behavior. In this first stage of the decline, there are still people who are willing to extend themselves to the maximum to obtain real estate because they believe they must. The bubble psychology has not really changed, but the technical factors of credit availability and terms have begun to limit bids. This is why prices have only corrected about half way to date. In the next stage, people will start voluntarily reducing their debt-to-income ratios because they don’t want to stretch themselves to buy what is obviously a depreciating asset. I discussed that phenomenon in more detail in Our Changing Relationship to Debt. The next phase in the drop is going to be characterized by a reluctance to purchase exacerbated by even more stringent financing terms.
If you really want to understand the real estate cycle in California, you need to understand the credit cycle. The changing availability of credit and the fluctuations in the amounts of money financed with people’s incomes are the key determinants to price levels in our residential real estate markets. Right now, we are in a tightening cycle, and this will cause prices to continue to drop. Someday, long after our current credit crisis has passed and the credit markets recover, we will see a loosening of credit, and we may build another residential real estate bubble. Perhaps lenders and borrowers alike have learned the painful lessons of the Great Housing Bubble, or perhaps not. Greed springs eternal.
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Yeah… Lover, I’m on the street Gonna go where the bright lights And the big city meet With a red guitar…on fire Desire
She’s a candle burning in my room Yeah I’m like the needle, needle and spoon Over the counter with a shotgun Pretty soon everybody got one And the fever when I’m beside her Desire Desire
And the fever, getting higher Desire Desire Burning… Burning…
She’s the dollars She’s my protection Yeah she’s a promise In the year of election Oh sister, I can’t let you go Like a preacher stealing hearts At a traveling show For love or money money money money money money money money money money money And the fever, getting higher Desire, desire, desire, desire
Are you ready for the next Great Depression? How bad with the recession get? What have you done to prepare?
What do you think of this answer:
Astute Observation by WaitingToBuyByAndBy
2008-09-28 01:45 AM
IR, just remember, you asked:
I love irony: We are currently in a recession. Everybody knows it. Yet
the official proclaimer, the National Bureau of Economic Research has
yet to call it. I find it ironic the Calculated Risk blog been calling
recession since last December and most people on the street can provide
anecdotal evidence of recession yet the official government agency has
apparently not made up its mind about the matter.
So we go about our daily lives suspecting times are not as good but not really thinking about it… or acting on it.
Many here witnessed the run up in home prices during the bubble,
knew it to be unsustainable, and realized prices had no choice but to
come back down to earth. Many have also agreed prices will over-correct
running lower than fundamentals for a brief period due to buyer
psychology (fear of being a knife-catcher).
I find it ironic, then, to hear (at least in the recent past) that
while we are in a recession, and there is a chance of severe recession,
it will not be a depression.
Psychologically, we simply do not want to consider such ideas. We
cling to the idea that the government will do its thing, and then the
economy will do its thing.
The media has widely reported over the last few years the economy
has been driven by the American consumer. How many times have you
discovered it was cheaper to buy two of the same item than one? How
many “value-paks” have you purchased. Our economy has traditionally
built upon expansion, but for the last 5-7 years our economy has
actually been depending on it.
The American consumer was able to meet this demand and fuel the
economy for the last few years using Mortgage Equity Withdrawal, Heloc
Abuse, credit cards, and savings depletion, but just as houses can’t
increase in value just because prices go up, our economy can’t continue
to expand on borrowed money. Those days are over.
You might say, sure things are bad for real estate and for Wall Street, but my company is doing business just as it always has.
Now remember, all of those housing bulls kept saying “can’t happen
here” and “all real estate is local” and “there’s no such thing as a
national housing bubble” yet here we are.
If we’re willing to open our eyes and look around: lowest personal
savings rate since the great depression; biggest decline in home prices
since the great depression; highest number of foreclosures since the
great depression; T-bills yielding zero has not occurred since the
great depression; non-banks borrowing from the Fed for the first time
since the great depression;
The currently proposed bailout will be the largest economic intervention by the government since the great depression.
The depression is not coming. Like it or not, it’s here. To coin an
ancient ad for Palmolive dish soap, we’re “actually soaking in it”.
Of course your company’s sector (unless the financial sector) is
probably unaffected by all the commotion, your company probably seems
sound, your job probably seems secure. But wasn’t there that group that
recently got laid off?
Likewise, if you own a house you are probably not bothered by the
equity-destroying comps of your neighbors, that is, until those comps
completely wipe out your equity. Even then, it’s a paper loss unless…
for some reason… you need to move.
The economic dominoes are falling. If we have learned anything in the last year, it’s that nothing is contained.
As you might guess, I’m an occasional reader of this blog and also
CR (and that Nouriel Roubini guy). I don’t mean to be un-American or
panic anybody by calling this a depression. If my claims above are not
true, please correct me.
It’s fair to say we’ll know the housing market is getting better
once the number of foreclosures subsides and starts to diminish.
Likewise, we’ll know the current economic crisis is getting better once
government bailouts start diminishing in size, but if you look at the
numbers you can see we are currently heading in the wrong direction.
I would like nothing better than for all markets to regain
confidence and work through this crisis, but again there is no
foundation for this to happen. By it’s very nature a bailout should not
inspire confidence, it should indicate system failure.
Just as the housing market can not bottom until prices reach
fundamentals, our economy can not heal until its fundamentals are
tested and found to be sound.
For those of you interested in the new book, there is now a PDF link on the main blog
I have updated the analysis page on the main blog. Much of the text of the book is located there:
The following are links to the analysis posts of Irvine Renter:
3-15-2008 — Mortgage Default Losses — Parsing the distinction between default rates and resulting default losses on residential loans.
3-13-2008 — Floplords — A discussion of the phenomenon of accidental landlords.
3-12-2008 — Mortgages as Options — A look at how borrowers and speculators gamed the system using mortgages as option contracts.
3-11-2008 — Houses and Commodities Trading — An examination of the parallels between commodities markets and the behavior of residential real estate markets.
3-10-2008 — Mortgage Equity Withdrawal — An overview of the role mortgage equity withdrawal played in the recovery following the 2001 recession.
3-8-2008 — How Big Was the Bubble? — A review of statistical measures of price to evaluate just how big the housing bubble really was.
3-4-2008 — Systemic Risk in the Housing Market — The second of a two-part series. This posts examines the failures of
structured finance and suggests methods for addressing this failure to
prevent future housing bubbles.
3-3-2008 — Structured Finance 101 — The first of a two-part series. This post provides an overview of
what structured finance is, and how it was used to during the housing
bubble.
2-28-2008 — Affordability — A review of the concept of affordability and what it means for the housing market.
2-25-2008 — The Credit Crunch — A discussion of the causes and implications of the credit crunch.
2-18-2008 — Selling for Less — A look at the changing market environment where buyers are in control of the action.
2-4-2008 — What is Equity? — Looking at the components of homeowner equity and the factors that impact it.
1-28-2008 — Speculation or Investment — Comparing the motivations and activities of two distinct classes of
purchasers of real estate. Knowing the difference between speculation
and investment can make the difference between making and losing money.
1-14-2008 —Rent Versus Own — A detailed look at the cost of ownership and the various reasons to rent or own a particular property.
1-7-2008 — The Fallacy of Financial Innovation — Shattering the myth of “financial innovation” and reinforcing the
use of 30-year, fixed-rate, conventionally amortizing mortgages.
12-3-2007 —What is a Bubble? — The concepts and beliefs that when acted upon by the general public create an asset price bubble.
10-1-2007 — What Caused the Bubble Rally? — A detailed analysis of the conditions the preceded the bubble rally and the causes of its inflation.
9-24-2007 — A Buyer’s Market — A hard-nosed look at negotiating when market conditions change.
9-13-2007 — The Market Bottom — A review of the conditions that formed the last market bottom and why it formed at the price level it did.
2007-07-16 — Land Value 101 — A detailed explanation of how raw land is valued when used for residential construction.
2007-06-25 — Houses Should Not Be a Commodity — A discussion of the psychology of commodity market trading and why this is an undesirable element in housing markets.
2007-06-18 — Telling Good Analysis from Bad — An evaluation of Gary Watts Real Estate Outlook for 2007 and a
description of the characteristics of a robust market analysis.
2007-06-11 — The Reservoir of Schadenfreude — A whimsical look at the emotional phenomenon of taking pleasure in the misfortune of others.
2007-05-21 — The Day the Market Died — A look at the conditions which led to the bursting of the bubble with analogies to Don McClean’s American Pie.
2007-05-14 — The Anatomy of a Credit Bubble — A detailed, mathematical analysis of the impact changing lending
standards had on home prices. This is fundamental to understanding of
the mechanics of the real estate bubble.
2007-05-07 — Your Buyer’s Loan Terms — The precursor to The Anatomy of a Credit Bubble. It discusses house prices from the perspective of the future buyer of
your home. It demonstrates the impact changes in loan terms will have
on future buyers and how this will impact the amount your future buyer
can bid for your home.
2007-04-30 — Appreciation is Dead — Rapid home price appreciation has become an accepted truism in
Southern California. There are many reasons to believe this is not a
basic Truth of Life. This post examines the causes of appreciation and
explores the reasons why it may all be coming to an end.
2007-04-23 — It’s not the Borrowers; It’s the Loans. — The “subprime containment” meme has been used to quell the fears of
investors since the collapse of subprime lending in early 2007. This
post examines the spurious nature of the subprime containment idea and
explores the implications of the larger problem being hidden from the
general public.
2007-04-16 — How Homedebtors Could Avoid Foreclosure — A look at a potential financing mechanism which might be used to
assist homeowners who are underwater. It also examines the potential
implications of the widespread use of such tools.
2007-04-08 — Southern California’s Cultural Pathology — An exploration of the unique cultural beliefs which made the housing
bubble take hold in Southern California. This is a critical post to
understanding why the bubble was so pronounced here while in other
areas of the country it was not as extreme.
2007-04-02 — How Bad Could Bad Get? — A look at the worst case scenario for our housing market, and why it is not unrealistic.
2007-03-24 — Who is responsible for this mess? — A rant on the difficulty of identifying the party or parties responsible for our current problems.
2007-03-14 — Why the Sub-Prime Meltdown is a Problem — Many have postulated the sub-prime collapse would not impact housing
prices in more affluent areas like Irvine. This brief post debunks this
idea.
2007-03-11 — Predictions for the Irvine Housing Market — A prediction for the future of housing prices in Irvine based on an
analysis of emerging data and trends. This is the capstone post tying
together the series of posts from 3-1 to 3-9.
2007-03-06 — What is Past is Prologue — A review of the mechanics of the collapse of the last bubble to
provide a foundation for the projections of the market action in our
current market bubble.
2007-03-05 — How Sub-Prime Lending Created the Housing Bubble — A simple thought experiment to show how a loosening of lending
standards helped create a commodities market mentality and inflated the
housing bubble.
2007-03-03 — How Inflated are House Prices? — A discussion of the fundamental valuation of housing prices. This post
is essential reading to anyone wanting to understand how residential
homes should be valued.
2007-03-01 — Financially Conservative Home Financing — A review of available financing terms and a discussion of why the
new “innovations” in home financing are disasters in the making.
2007-02-27 — I am IrvineRenter (Inventory Cholesterol) — A brief introductory post and a discussion of the different types of housing inventory and how they impact prices.
Storm clouds spreading Black horizons oil slick the southern sky What prospects should I gather here to motivate my corpse to rise? Bloodshot My eyes reject the staleness of this day And ‘reason’ gives purpose for all the pills i have to swallow Driving My heart is dead and hollow Metal boxes racing by Ringing out the death of my life Machines buzzing Towers looming the antithesis of nature Entering this asphalt tomb- self – interest my prime dictator. Now that i stand to carry the weight – try to conceive me that it’s all for something? Now that i stand to carry the weight I lie to myself…am i living-dead? Four walls surround me with wires outstretched- the triumph of time over space The modus vivendi- each man for himself Each alone And each an island Get me out of this hole somehow…get me out of this hole right now…my great depression
This property just reduced its asking price from $849,000 to $699,000. The lender is going to eat another one…
Living the crazy life: Wasn’t this the best part of the housing
bubble? People got to live well beyond their means as their house
served as an additional wage earner. In fact, it was even better than
having another wage earner because there were no taxes taken out with
the HELOC. It was literally free money. Today’s featured property shows
just how this works.
Upside, inside out she’s livin la vida loca She’ll push and pull you down, livin la vida loca Her lips are devil red and her skin’s the color mocha She will wear you out livin la vida loca Come On! Livin la vida loca, Come on! She’s livin la vida loca.
Beds: 4 Baths: 3.5 Sq. Ft.: 2,600 $/Sq. Ft.: $335 Lot Size: – Type: Single Family Residence Style: Contemporary/Modern Year Built: 2002 Stories: Three or More Levels Area: Northpark County: Orange MLS#: P600579 Status: Active On Redfin: 57 days
From Redfin, “Largest Alder Creek Model. Two master suites. 2nd master suite with french doors & bath. 4 bedrooms and 1 large loft that can be coverted to 5th bedroom. Beautiful dining room decorated with custom wallpaper, a spacious living room with custom hardwood floor. Upgraded kitchen countertop & stainless steel appliances. More trees than other comparable properties. Offering the best price among other similar properties for sale and in NORTHPARK! “
More trees than other comparable properties. What? There are no mature trees shading this house. Did they plant a bunch of saplings in the back? This is crazy.
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This is not a rollback yet. Although, it probably will be before it sells. What makes this property really interesting is it clearly illustrates a HELOC implosion.
When this seller purchased the property back in 2004, they paid $840,000 and they borrowed $650,000 putting $190,000 down. So far so good. In December of 2005 they needed some kool aid for a Christmas party, so they took out a HELOC for $150,000. Fast forward one year, and in December of 2006, they threw another kool aid Christmas party and took out another $90,000. They now have a total of $240,000 on their HELOC and a total debt of $890,000 on their $870,000 house. Despite the large downpayment, they are now underwater and having a short sale. This house provided them with the median income in Irvine for over two and one half years.
As I stated earlier, they actually did better than that. To clear $90,000 a year after taxes, you would need to make closer to $140,000 a year in salary. Their house was earning $140,000 a year!
Assuming this seller was employed, their house was likely earning more than they were. Graphix has done some great work on the problems with local employment figures, and others have noted the dropoff in income from non-W2 workers like realtors and some mortgage brokers. Another hidden impact on the local economy is all the houses that have been put out of work by declining prices. Calculated Risk has done extensive projections on the Mortgage Equity Withdrawal phenomenon. The charts and graphs are pretty and informative. However, it is seeing individual people with properties like today’s that bring these lofty concepts into sharper focus.
How many lost jobs, lost commissions, and lost equity extractions can our local economy take? IMO, we are already in a recession locally, and it will get much, much worse.
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When I saw the street name Capistrano, I thought to go a different direction with this post. I just couldn’t get the Ricky Martin song out of my mind. For those of you who have different tastes, here is the song I didn’t use:
When the Swallows Come Back to Capistrano — Pat Boone
