But my heart’s of gold
I had to run away and hide
‘Cause I couldn’t go home
Just when things went right
Suddenly it all went wrong
Just take this song and you’ll never feel
Left all alone
I’m on my way
I’m on my way
Home, sweet home
Tonight tonight
I’m on my way
I’m on my way
Home Sweet Home — Motley Crue
“ Just when things went right, Suddenly it all went wrong” The ode to the 2005-2007 homebuyer…
There are some neighborhoods in Irvine that are so charming, you really need to go see them. This is one of those. I took many pictures here for my community profile on Irvine’s Woodbridge. The houses are small, but very well kept, and there is not a garage door to be seen. Add a white picket fence, and you have the American Dream — except for the prices of course…
Asking Price: $688,888
Income Requirement: $172,222
Downpayment Needed: $137,777
Purchase Price: $699,000
Purchase Date: 5/31/2006
Address: 15 Sweet Rain, Irvine, CA 92614
1st Loan $559,200
2nd Mtg. $69,900
Downpayment $69,900
Beds: 3
Baths: 2.5
Sq. Ft.: 1,571
$/Sq. Ft.: $439
Lot Size: 3,780 sq. ft.
Type: Single Family Residence
Style: Other
Year Built: 1980
Stories: Two Levels
Area: Woodbridge
County: Orange
MLS#: P585358
Status: Active
On Redfin: 69 days
From Redfin, “Outstanding Location! Inside Loop, backs to greenbelt, full driveway. Away from freeway noise, near park, pool, schools and lakes, walk to all amenities. Remodeled kitchen with hardwood cabinets, granite counter tops and mewer appliances. Updated powder room and guest bath with top of the line fixtures! Laminate wood floors, dual pane vinyl windows, French doors, textured ceilings. Custom speakers through out the house, extra storage spaces, No zero lot line (opportunity to add windows!)”
I want those mewer appliances. I hear they purr like a kitten.
.
.
These people bought at the peak, so they are being a bit optimistic to think they are only $11,000 underwater. If they manage to obtain their full asking price, they stand to lose $51,445. They have $69,900 in equity to lose, so there is a small amount of negotiating room before this becomes a short sale, assuming they haven’t HELOCed or used an Option ARM. Unfortunately, the price is too high as evidenced by the over 60 days on the market. They are probably going to become a short sale.
William Blake – Dante’s Inferno, Whirlwind of Lovers
Thus concludes yet another week at the Irvine Housing Blog. Join us next week as we continue to chronicle Irvine’s journey to ‘the seventh circle of real estate hell.’
Ooooh, now that prices are starting to come down, I’m liking the addition of the income requirement and downpayment needed.
Nice touch, keep up the good work.
—–
Along the lines of many of these stories, NPR had an interesting story on the crisis in adjustable rate mortgages yesterday on All Things Considered. Here’s a link to the story on the web:
http://www.npr.org/templates/story/story.php?storyId=14218075
Most of the discussion was pertaining to problems in Arizona, but they discussed the high rate of foreclosures in CA also. Worth a listen, the mainstream press is seeing the disconnect from reality, folks not using downpayments, etc.
On topic, there was an interesting story last night on NPR’s All Things Considered on this topic. Here’s a link to the story, worth a listen, discussing the crisis in adjustable rate mortgages, and how so many purchased homes with little or no investment.
http://www.npr.org/templates/story/story.php?storyId=14218075
Bummer. I’m off by a couple of dollars on the income requirement or would totally buy this house…NOT!!
I love all the optimistic people though. The power of positive thinking works right…
Shouldn’t this blog reference be to the 8th circle, rather than the 7th? The seventh houses the violent, while the eighth is home of the fraudulent.
Probably so. The reference came from an article in Slate Magazine in which we were linked:
http://www.slate.com/id/2171235/fr/flyout
I agree. The addition of the income requirement makes it all the more clear how ridiculous some of these prices are, considering the salary requirement and amount of money needed for downpayment compared to how much house you get.
Wish “The OC” was still on. Ryan could buy that now REO Newport compound for half and make Seth sleep in the poolhouse.
Maybe they knew something was coming…
It would be nice to know how many families in Irvine actually earn at least $170,000 per year.
“A stock washout on Wall St. Dow industrials down 200 as investors fear recession.”
Imagine if we tip into a recession with lending standards tightening and a high volume of REOs adding to inventory… Prices could decline very rapidly… A recession would seriously curtail the number of prime buyers waiting to enter the market once prices correct a bit. My wife and I have been looking and waiting, but if there was some immediate doubt as to whether I could maintain my current level of compensation, we’d definitely have to ride it out even longer.
My bet is that we are already in recession despite the Fed saying that housing hasn’t affected the broader market. The problem with recessions is you don’t know you’re in one until two quarters out. So, we’ll find out early next year.
These guys predict slower growth, but I think they are overly optimistic:
http://news.bbc.co.uk/2/hi/business/6979577.stm
I like it too. It shows how completely out of touch the prices are with reality. Now that investors, speculators, and flippers are gone only people looking to actually live in the home will be looking at purchasing. How many people making $172k a year are going to want to live in a 1500 sq/ft condo in Irvine?
I found this link while searching for household income. It is a marketing piece put together by TIC for prospective lessees in the newer Orchard Hills Shopping Center.
http://www.shoptheirvinecompany.com/uploads/51/2/OH%20insert5-07.pdf
I am not sure how to paste links, so you may have to copy and paste.
I like the concept in theory but I personally feel like the “rule of thumb” that has been applied is too conservative. It’s driven by a bias and backed up with rhetoric.
Like I said, in theory it is a great idea. But because there are SO MANY personal factors affecting these calculations, I really think it is actually does more harm than good to report overly conservative estimates. I’m starting to think that you are trying to fan the flames IR.
; 0 )
Have a great weekend.
I’m currious what percentage of those who purchased durring the bubble did so with a traditional 30 year fixed with a payment they could handle long term. It seems as though this crazy price rise was driven in large part by folks who took out loans that everyone should have known would not keep them in those houses for very long. This bubble allowed people to temporarily live in a fantasy land where a 60kyear salary allowed you to live in a 400k home. Just as the fantasy of supporting a 400k house on a 60k salary is finally over I should expect that the fantasy of getting 650k for a 2 bedroom condo should end as well.
Here is an older income study.
http://www.fullerton.edu/cdr/profilesv4n3.pdf
I am simply trying to show the result of credit tightening. The lenders who post on this board have backed up these calculations based on the assumption of tighter credit.
If credit does not tighten any further, lower income amounts may support higher prices. It doesn’t make the houses any more affordable, but it does make lower payments service larger debt loads.
If credit does tighten to where 30-year fixed mortgages, 20% down and 28% DTI become the norm (which I think is likely,) then these numbers are an accurate depiction of the upcoming market environment.
Besides, I will only buy based on those terms, and I am not alone…
And yes, at times I do fan the flames…
In 2005 and 2006 less than 20% of loans originated were 30-year fixed rate mortgages.
Interesting that the Irvine Company expects a $142,000 income to support a $1.2 million dollar price point.
The area of their study includes Northwood and Northpark. Within 3 miles of Orchard Hills, there are very few small condos or apartments to bring down the household income numbers.
Alright here is the 2001 IRS California Tables by Zip Code. I ran 92612 and found the average AGI was ~$80K while the average for the >$50K group was $160K. This wealth group made up 44% of the 92612 in 2001. Simply put almost half of the returns files in that zip code recorded AGIs oat $160K. For those of you who don’t own a home, AGI is typically quite a bit lower than Gross Income because of the mortgage interest deduction, plus once you start itemizing…
I bought during this bubble, albeit very early on. I purchased in late 2001, a $350K place with $50K down. A 1,600 square foot 3/2 detached condo, built by Cal Pacific, courtyard style that has been replicated many times – most recent incarnation is Cortile at Woodbury. Back then, everyone got to wait expectantly for their number to be called early in the morning on a glorious phase release day. We’d all get our coffee, head to the sales office, and give attaboys for the people that won the housing lottery.
I got my place because someone ahead of me, that had “won” the right to buy my home, bailed out. The builder called and said “first one to the sales office with a $10K check gets it”. I hung up the phone and raced there from the office with a checkbook. I beat out three other people that showed up after me… One woman was so upset she didn’t get to buy the place that she broke down into tears right there in the sales office and had to collect herself for five minutes while sitting on a bench outside. Boy how times have changed!
Financed the balance with a 5/1 ARM @ around 5.75%, then proceeded to refinance it three times between 2001 and 2003 to where it still stands today – 3.75% with my first adjustment coming in August 2008. As I knew I would start a family, and would likely want to upgrade in size, I never thought to get a 30-year fixed. Why pay a higher rate if you are just going to move in a few years anyway? Now, I am kind of wishing I had done that last refi into a 30-year, although my family income has grown so much during those years that the adjustment on a $275K loan balance won’t really phase me. I suspect there are many in a similar situation such as mine that the upcoming adjustments will really hurt. 2003 was probably the peak of refis (just a guess), and many probably elected 5/1 ARMs as I did. Some of those aren’t going to be able to handle the reset to 6+% from their rates in the 4-5% range.
Many of my friends that bought around the same timeframe did so with 3-7 year ARMs. A number of them have since refi’d into 30-year products, especially those intending to stay in their places until their kids are of elementary to junior high age. Daycare costs kill double-income families. We spend approximately $2400 per month (after-tax basis) for daycare / preschool for our two kids. Those bucks could go a long way toward purchasing a bigger/nicer house.
I thought that was telling as well. I do believe the plan for Orchard Hills was to make it Shady Canyon Lite development. More upscale than average Irvine. I would imagine that they are expecting slightly wealthier buyers in that particular area. Interestingly I found another link to the same type of page for Crystal Cove. The numbers there were high, but not nearly what I would expect.
Take a look at this.
http://marketing.irvinecompany.com/Misc/NewYork/TheCoastalCollection/CrystalCovePromenade/PressKit/CCP_Demographics.pdf
Keep the small house, and have your wife stay home with the kids.
IR, is that just O.C. mortgages, or nationwide?
They took out a HELOC on 03/06/2007 for $90,000
Thought about that, but she likes work too much and has the career that is recession proof – teacher in IUSD. Teachers in Irvine get decent pay, guaranteed raises, at least for the first 10-12 years of their career, good pensions (hard to find these days), and ultimate job security.
The incremental disposable income from her job is only $25K or so per year after daycare costs, but that, and the other perks – good benefits, lots of time off, upward movement on the salary scale, etc. was enough to keep her working vs. staying home.
We’re keeping our place for a while longer though…
http://factfinder.census.gov/servlet/DTTable?_bm=y&-state=dt&-context=dt&-ds_name=ACS_2006_EST_G00_&-mt_name=ACS_2006_EST_G2000_B19001&-tree_id=306&-_caller=geoselect&-geo_id=16000US0636770&-search_results=01000US&-format=&-_lang=en
C19001. HOUSEHOLD INCOME IN THE PAST 12 MONTHS (IN 2006 INFLATION-ADJUSTED DOLLARS) – Universe: HOUSEHOLDS
Data Set: 2006 American Community Survey
Survey: 2006 American Community Survey
Irvine city, California
Estimate Margin of Error
Total: 63,646 +/-2,875
Less than $10,000 4,633 +/-981
$10,000 to $14,999 2,015 +/-890
$15,000 to $19,999 1,159 +/-475
$20,000 to $24,999 1,973 +/-710
$25,000 to $29,999 1,233 +/-443
$30,000 to $34,999 1,069 +/-408
$35,000 to $39,999 2,021 +/-866
$40,000 to $44,999 2,071 +/-726
$45,000 to $49,999 2,353 +/-924
$50,000 to $59,999 3,108 +/-945
$60,000 to $74,999 6,169 +/-1,163
$75,000 to $99,999 8,666 +/-1,529
$100,000 to $124,999 7,924 +/-1,229
$125,000 to $149,999 5,279 +/-1,020
$150,000 to $199,999 6,495 +/-1,141
$200,000 or more 7,478 +/-1,145
As I recall (I can’t find the link), it was California. In OC, according to Newsweek’s Map of Misery, we had 36% Option ARMS thus leaving 44% other ARMS.
Well, at least their equity is no longer at risk 😉
Child Care costs are ludicrous (not that they’re not worth it!). That’s a tight spread on the extra income. The good news, as a teacher she must enjoy a great deal of time with the kids.
Do you have the same type of data related to # of housing units and prices?
I am thinking we should be able to see how far Irvine is over the barrell from the top down.
I don’t know where to find such data.
If you explore the census bureau site linked to above, you can find many data tables looking at a wide variety of variables. It is one of the best data sources on the web.
Also, keep in mind that the income statistics are only as relevant as the financing it can support. The days of borrowing 10 times income are past. The days of borrowing 3 times income are in front of us.
sounds like you could easily hop into a conforming 30 year fixed rate. You can crack below 6.0% with about a point in discount fees. Maybe 6.25 to 6.375 w/ no points
Thanks for the link. Its a great site.
True on the income side. I was just trying to follow up on my (and some others) interest in exactly what type of incomes people are making. Median and Average don’t tell us very much.
I am surprised by the distribution at both the low end and the high end. Both are “fatter” than I would have thought.
I am so NOT looking forward to the possible government-mandated requirement that in the near future some of my hard-earned, hard-saved cash go to help this “poor family” keep their house. Give me an effin break (pun intended). Let it crash! (IR – song idea for Christmas posting – let it snow…he hee heee)
My wife and I fit the income reqs and available downpayment for this one almost exactly. I would not walk across the street to piss on this place if it were on fire. Thank you very much, I’ll keep shelling out a realatively meager amount to IAC every month for something nearly as big and much nicer — and just keep padding my downpayment fund.
Ah maestro, if I am still in the same place when it comes time to adjust, it’ll be a 1-3 year I/O ARM. No reason to keep “investing” principal repayment into a home that is declining in value. Why willingly continue a negative ROI?
If I take that five hundy a month and pump up the college savings for the kiddies, or drop it in a Roth, at least I will get the benefit of averaging down if the stock market happens to be declining too. Could just put it in a money market and get the benefit of compounding instead…
Only reason I haven’t refi’d into an I/O now is my absurdly low rate on the current mortgage.
I hope you’re joking…
I agree with the standards of staying below 28% DTI and taking a 30-year fixed, but a 20% downpayment is only beneficial if the cost to finance that 20% outweighs the benefits – i.e. I’d rather save my 20% and let the lender risk that portion. If you have the cash, you’re flexibility is the same as having 20% equity, but you have more options.
Prior to the credit crunch you could finance that portion around 9%. If you’re buying a $700k house @ a 28% DTI, then your tax bracket effectively drops that 9% down to 6% (assuming you can avoid the AMT).
My opinion is that the first two standards are a given, but the downpayment issue must be researched for your individual circumstances.
Keep in mind these are stats for loans originated and does not differentiate purchase money loans from refis and HELOCs. All HELOCs are ARMs so that can skew the stats.
The elimination of piggy back loans will be one of the first casualties of the credit crunch. All the bank losses we have been documenting here have been on 2nd mortgages. These are often a total loss. What investor in their right mind would continue to invest in these?
The premium that will be required to compensate the investor for lender risk (“I’d rather save my 20% and let the lender risk that portion.”) is going to be so high as to make this form of financing impractical if it is offered at all. Would you still take out the second at 18%?
The bubble days of getting a second for a point higher than the first are over.
Nice little history of what’s occured so far. Any times/guesses on what’s next?
Timeline: Sub-prime problems
http://news.bbc.co.uk/2/hi/business/6945672.stm
Too bad they didn’t think to invest some of that $90,000 on windows, rather than leave the “opportunity to add windows” to the buyer. I think that line in the listing is the best I’ve ever seen…it’s like saying, “Hey, we know it’s a bit dark, but you can real easily just add some windows!”
LOL, your wit is ruthless …
Come on, really, realtors need to write better pitches … a good pitch won’t necessarily bring in more lookers but a bad pitch (MUST SEE!!!!) is going to frighten people away, and don’t even mention teh tipos and misssspellings (sic).
Sadly, no. I know that kind of thinking is part of what put us into the position we are today with real estate prices, but the problem with others was that they didn’t take a conversative enough or disciplined enough approach to viewing their assignment of investable dollars. They over-extended and invested too much in a single asset class, namely their homes which have now declined in value below their purchase prices. That singularity of investment focus will likely lead to foreclosures for many.
You are a trader and investor IR, you know that one of the keys to a lower risk and steadier accumulation of wealth is diversity of investment across asset classes. One of the reasons I didn’t buy a bigger place in 2005 and 2006 was it would have meant sacrificing 401k contributions, and I was leary of putting too many of my investment eggs into one basket – namely a pricey house in Woodbury.
If I have a non-performing or lower performing asset in my portfolio, I am not going to continue to invest in it, unless that incremental investment is likely to produce a gain that outpaces other investment choices. For the next 2-3 years, why should I pay down the principal balance on my mortgage if those dollars invested elsewhere could yield much better performance?
I am of course open to arguements to the contrary.
Am I reading this right – 7,478 households gross over $200,000?
As a percentage, it’s probably not that great, but it seems like a big number to me.
When it rains, it pours…
U.S. Economy: Employment Unexpectedly Drops in August (Update5)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aL2mmK04WUgE&refer=home
As a percentage, it’s huge. It’s just over 10%.
Irvine city, CA; Los Angeles-Long Beach-Santa Ana, CA Metro Area. Here’s the 2005 numbers. Note, over $200K increased over 800 households, $150-200K lost 800 households. And overwall, 2006 reports 3000 fewer households. Keep in mind, this is households, all people living under the roof. Not families or even people pooling money.
Total: 66,509 +/-3,424
Less than $10,000 4,428 +/-1,191
$10,000 to $14,999 2,302 +/-1,180
$15,000 to $19,999 1,553 +/-534
$20,000 to $24,999 1,569 +/-495
$25,000 to $29,999 1,452 +/-538
$30,000 to $34,999 2,113 +/-799
$35,000 to $39,999 1,927 +/-591
$40,000 to $44,999 2,234 +/-863
$45,000 to $49,999 2,110 +/-737
$50,000 to $59,999 4,766 +/-1,355
$60,000 to $74,999 5,837 +/-1,386
$75,000 to $99,999 8,819 +/-1,335
$100,000 to $124,999 8,866 +/-1,389
$125,000 to $149,999 4,508 +/-1,031
$150,000 to $199,999 7,220 +/-1,474
$200,000 or more 6,805 +/-1,068
Lendingmaestro,
Your input will be greatly appreciated here. You are in the frontline everyday. What kind of lending standard are you seeing re:
1. down payment
2. income requirement
3. piggy back loan interest rate
4. I’m just curious… Approximately, how many loan application do you see got approved and how many got rejected in OC. I know this will only be a rough number, but please share with us so we can get the feel of the market right now.
5. Any noticeable difference in rejection rate before and after the credit crunch in August.
I have been reading this blog religiously everyday for the past six months, and I have to say that YOUR’s, IR’s, nanowest’s, and a few other’s comments and inputs, are the most informative. Others’ comments just go off tangent to something which I don’t learn much.
Incredible story. Thank you for being willing to share it. Good luck and I hope everything works out for your benefit.
I don’t know man. I would tend to go with IR on this one. Though your house is a huge investment, and generally the largest single asset in your portfolio, I would seek to advise against viewing as any other investment.
1) You have to live somewhere. Unlike other investments which you can sell (or short), housing is something that you will always be long in some fashion.
2) Inflation, and by correlation, interest rates are still at very low levels by historical standards. Inflation can’t get any lower unless we are going into a Japan scenario. By opting for a short term ARM you are essentially betting the interest rates will not rise materially over the teaser period. The question is, is advantage earned on the investment returns on dollar spread between the ARM loan and a Fixed loan worth the risk of things going the other way?
3) Leverage. Mortgages are leverage vehicles. Small changes in rates can have material impact on your finances. Though you mentioned your mortgage was rather small so the leverage may not be that big a deal. Of course that begs the question. Why take the risk at all?
4) What are the return expectation for your other investments. I agree that local R/E is likely to be a loser from the investment standpoint, but I can’t think of too many places that are screaming buys right now. Yields on bonds are low. The S&P 500 P/E is in the mid double digits so not too bad, but we are headed into slower GDP if not outright recession so it is likely the E will adjust before the P. Yields on REIT and equities are low.
I do like IOs for sophisticated investors that have the depth of resources the help insure against losing their homes should rates move against them. Under those circumstances the loan can be viewed as a cheap source of financing. The problem is when things go bad, correlations tend to increase, so you have to understand the full measure of risk in your portfolio.
Here is the link to the Excel doc from the dept. of finance: http://www.dof.ca.gov/HTML/DEMOGRAP/ReportsPapers/Estimates/E5/E5-06/documents/E-5a.xls
Just click on the city/county tab. As of 2006 Irvine had 71,652 units. It is tough to determine the actual number of units that can be purchased individually because condos get classified as multiple units. On a per property tax bill all of OC calculates out at 80% of the total housing stock. If that is true for Irvine as well the number would be 57,322 that could be purchased individually. Or if you can find the number of units IAC has we could have another way to guess the number.
As for price I don’t know where you can find that. Maybe I will think of something that could give an estimate but without access to the actual sales data it will be tough.
When you look at additional tables like Aggregate Earnings and Wages, you see something different:
2006: Household Earnings: $6.070 Billion
2006: Household Wages: $5.603 Billion
2005: Household Earnings: $6.203 Billion
2005: Household Wages: $5.685 Billion
It makes sense that the aggregate drop based on the loss of 3000 households.
Computing the average shows 2006 Average household Earnings to be $95,371. 2005 Average to be $92265.
So households earnings have increase 2.2% in 2006, however the city “lost” 4.5% of it’s households.
CapitalismWorks, those are amazing numbers. Our family fits the coastal customer income profile, and I cannot imagine being able to afford anything larger than a broom closet in those coastal communities, especially if we were spending $22K/year on food and beverages!
drhousingbubble.blogspot.com posted some info about incomes the other day. I’d be willing to bet that under 5% of Irvine households earn that much, but that’s just a guess.
I think you’d be surprised how many families in Irvine have that much income. Remember, an elementary school teacher with a masters degree can earn $75,000 a year (for only 9 months of work) and any decent computer programmer can make $100,000 per year. A good salesman can easily make $100K or more per year and any doctor or lawyer will make that much easily.
I hear ya CW. Appreciate your thoughts and post. I have previously considered most of your points. Most are mitigated or trumped but the fact that I am already a potential buyer, sitting on a big wad of cash (used to all be at Countrywide Bank – best money market around, but I diversified to other places to be under FDIC limits just in case they went under) to be used for a down payment, so I have zero expectation that I’ll own my current property for more than 3 years. I’ll probably still be there when the ARM resets in 11 months, but unless this decline in real estate lasts 4-5 years in total, I can’t see not buying a bigger place before a 3-year I/O teaser expires.
That being said, there is always the remote possibility that we could have a big recession and maybe I won’t yet be into another mortgage before the adjustment comes on the I/O I do a year from now. If that were to happen, I’d expect mortgage rates to be lower (god help us if we have a big recession and mortgage rates are up materially from where they are today) so I’d have rate improvement on a refi.
What would I put the extra $ in? Probably gold or other commodities right now. Gold seems like it could have broken out of it’s recent trading range… Could test two-year highs soon. All this talk about recession, credit crunch, fear and panic to come in real estate – that screams flight to quality and gold should benefit from that down the line.
I especially like the improvements they made to ELT on the brouchure. There is a stream, lake, and whole bunch of stuff that will likely never happen.
They project average income to increase at 5% a year. median income to increase at 3.7%. And housing to increase 2.2%/yr. Projected average home value of $1.03 million in 2011. Starting 2006 value of $917K…
Dano:
that’s a myth, most of the people you talk about already own homes, are well established in their careers. you would be surprised that not many people make that much in IRVINE.
How old are you? I’m just trying to figure out where I fit in. Based on current prices, I’m trying to figure out who can truly afford anything at current prices. I’m not that old, and I thought I earned a decent living, but I’m not willing to buy now.
When my wife’s maternity leave is over, we’ll be near the income level to buy that place. Despite being close to that level, we’re trying to make our financial decisions based on my salary alone. It’s really not that difficult, and we’re comfortably renting at the moment.
The answers are posted below. And a Hell of a lot of people make that much.
Interesting article re: bank REOs and when/why they will have to drop prices to move home on the books.
Housing price drop looms
Bank-owned homes flood market
http://sacramento.bizjournals.com/sacramento/stories/2007/09/10/story1.html?b=1189396800%5E1517107
So far, bank-owned home prices are holding stable. But with the ranks of foreclosed homes rising, that will change. For the time being, lenders are holding homes and hoping their foreclosed homes sell for close to list prices.
But they soon could come under pressure from regulators and the market to unload the properties, whatever the cost.
…
“The investors and the asset managers have not faced reality, and they think they are going to get a lot more for these homes than anyone is willing or able to pay now,” said Ron Leis, broker and co-owner of the Coldwell Banker franchise in Carmichael, the Diez & Leis Real Estate Group. “They are going to have to take huge, huge losses. There is some pain that has to be felt.”
…
How long lenders are willing to wait before they start slashing prices isn’t clear, but it is certain they can’t wait too long. Regulators won’t allow lenders to hold property indefinitely, which will force aggressive discounting.
“Banks don’t want to be in the business of managing property,” said Anker Christensen, chief financial officer with River City Bank. He was previously a bank auditor with KPMG for 15 years.
“It is a Catch-22 position,” he said, because banks are not allowed to invest in real estate for speculative purposes. They are allowed to hold real estate for some time while getting it off their books. That’s where the market comes into play: The value of a property is the price at which two parties agree to a transaction.
Fair enough. Given given your very short time horizon and and kids (its amazing how small kids can make a house feel), probably not too much worry about. Just make sure you start the sales process early, and price appropriately.
I like commodities in general. Given global growth, I would expect commodities to continue to perform well. Typically commodities perform well in reflationary environments. A crash scenario would probably be detrimental to commodities along with everything else. Regardless use futures so you can earn the roll down.
Can’t we find the average home price somewhere? (As opposed to the median)
ipoplaya,
CapitalismWorks already mentioned it, but I wanted to reiterate the point about the interest rate risk you are taking. What if interest rates climb to 15%? If you don’t think it can happen look at the early 1980s. In fact, if the FED cuts rates and lets in the inflation genie completely out of the bottle, at some points interest rates will have to go very high to get things back under control. Your strategy may work, but it is not without risk, and I personally, would not do that.
The breakdown is not fine enough to be totally accurate, but it looks as if approximately 9000 households out of the total of 63,646 make over $175,000. That is about 15%.
Humor
Q: How do you reduce the glut of housing for sale?
A: *** you’ll just have to read the article to see the actual NAR economist answer *** I can’t do justice to that punchline compared to the article 🙂
http://www.pe.com/business/local/stories/PE_Biz_D_appleton-young07.33453a8.html
Sorry, that should read “CAR” (ie. California Association of Realtors) not “NAR”.
Heck, if rates climbed that high and I still owned, I’d just pay the darn mortgage off and pay no interest.
No reason to leave assets invested in other areas earning 6-8% annually if mortgage interest was costing 10% on an after-tax basis.
Countrywide Plans to Cut
As Many as 12,000 Jobs
http://online.wsj.com/article/SB118919813950820850.html?mod=hpp_us_whats_news
I am 99.96% certain that none of those households will be throwing in a bid on this place.
Mortgage news is the main story on the Yahoo homepage today. There’s even a picture of a house with a “Lender Foreclosure, Home Auction” sign in front of it. The homepage headline and link are below.
Tips for ARM borrowers
Calculate what your mortgage rate would be if it adjusted today
http://finance.yahoo.com/expert/article/mortgage/43808
I hope they aren’t hitting you with too many fees when you refi…
Report: Greenspan Says Turmoil Like ’98
http://www.forbes.com/feeds/ap/2007/09/07/ap4091764.html
All fuel for the Fed to justify a round of rate cuts.
Humor – pithy T-shirt sayings for the post-housing boom world
Broke is the new black
http://latimesblogs.latimes.com/laland/2007/09/broke-is-the-ne.html
Desperate Sellers Take Leaps of Faith
Whether It’s Feng Shui or Burying a Statue of a Saint, Tough Market Creates Believers
http://www.washingtonpost.com/wp-dyn/content/article/2007/09/07/AR2007090701142.html
Can you imagine a kiosk of these things in Spectrum Center 🙂 ?
http://stjosephstatue.com/
Of the wretched and the reckless
With elections looming, politicians pile in to the mortgage mess
http://economist.com/world/na/displaystory.cfm?story_id=9767843
For now, the appetite for big bail-outs remains limited. In a recent Fox News poll, 70% of respondents were against using taxpayer dollars to help out troubled homeowners, while 80% were against a bail-out for banks and mortgage companies. Outside the subprime sectors, recent statistics suggest that a large chunk of the rising defaults come from “non-resident homeowners”, the speculators and house-flippers for whom there is the least public sympathy. Those politicians who do want federal cash to help troubled borrowers are suggesting relatively small sums, mainly to help community organisations who advise and assist the indebted.
lendingmaestro,
Please see my comments/questions above in the middle of the page. Appreciate your input!
Zovall,
Do you think we could offer these for sale on the website? I think that would be hilarious.
As a mortgage broker, here is a little insight as to what is currently available as it relates to changes that occurred with the crunch that really hit on August 1st. Keep in mind that just because certain programs are still available does not necessarily mean that they are recommended.
100% financing is available for full documentation files
Rates on 2nds to 100% are 9 to 10.5%. Rates on 2nds to 90% are 8% to 9%.
Rates on conforming 30 year fixed w/ no points 6.125%
Rates on jumbo 30 year fixed w/ no points 7.375% (6.75% w/ 1pt). Rates on a 7 year interest only arm is at 6.5% w/ no points.
The main things that I have seen with the credit crunch has been severe limitations on loans with less documentation, retreat by several 2nd lenders in offering 100% financing and a spike in rates on jumbo loans. Of course the subprime arena has been severely affected.
What I am seeing now are a lot of purchases with 10-20% down. Many rate & term (no cash-out) refinances looking to extend their stability with 30 year fixes or longer term ARM’s.
“Rejections” are typically occurring with homeowners whose home value has dropped and they are underwater with their current loans.
Thank you for the information. Keep us posted as conditions deteriorate.
I heard from a loan officer at Countrywide that in ~2005/2006, over 50% of the loans originated (I think in the OC) were their option arm program.
Jumbos direct are a much cheaper than through brokers right now. The banks are charging 75-125 bps extra on broker originated loans.
I can’t imagine what I would look like at $22K in food in beverage. I would need a 4000 sq.ft house just to fit into.
ipo – if you refi, definitely seek a no point loan and given your short timeframe, consider a no closing cost loan (even though it will come with a higher rate). you must consider your breakeven point since your timeframe is ~3 years.
current rates to consider when you shop with your lender with no points:
30 year – 6.125%
30 year fixed interest only – 6.5%
3 year interest only – 5.875%
5 year interest only – 6.125%
7 year interest only – 6.25%
10 year interest only – 6.375%
This might be in certain instances but I have seen the following retail divisions offering similar or worse on jumbos (please keep in mind that the following has been gathered over the past few days and do not reflect rates from the same day).
Countrywide, Washington Mutual, Wells Fargo – 7% with 1 point
BofA – 7.125% with ~1.325 points (I do not know how they come up with the points)
I have heard that some credit unions are offering some great rates.
I would be interested in seeing what others have found with the local banks.
alrighty then, since the wifey took off to LA for the weekend to visit her sister, that leaves just me and the doggy and my IHB……deep breath
The Jumbo loan refi market has screached to a standstill. The number of people that have neg am loans in Southern California would blow your freaking mind. Borrowers sucked out cash, had an appraisal done that while within reason was at the hind end of the spectrum. Now that guidelines have tightened. THERE IS NOTHING THEY CAN DO.
I am not going to rip on brokers per se, and I know banks are partially responsible for this mess as well, but they really did a number on some borrowers. My younger brother is an AE with my bank, and we can both tell you this; prior to this summer the number of brokerages that were solely doing neg ams was astronomical. The reason why brokers pushed borrowers into neg ams was becuase they’d get paid a 3 point rebate, sometimes more. They’d advertise a “no cost loan” only because they’d make a killing on the back end. Imagine doing a 750k loan with a 3 point rebate. That’s 22,500 dollars!! And the borrower didn’t even know.
The reason why brokers are taking it up the tail pipe now is becuase investors are no longer buying these types of loans (except in rare circumstances.) Conforming 30 year fixed rates are not as profitable for the broker. Many brokers wouldn’t even know how to sell a fixed rate loan. My brother tells me stories everyday about how stupid some of these loan officers at brokerage firms are. They call in and all they want to know from him is….”what’s the max rebate for this loan.”
As a result of brokers, banks, and investors shitting where they sleep, the resulting disappearance of credit has manifested itself. Banks are having to totally revamp their entire business model. The majority of brokers will be out of business. The only ones that survive will be ones small enough to be adaptable yet well capitalized w/ little overhead.
100% financing has gone the way of the dodo. It is very hard to even qualify w/ stated income unless you are self employed. LG is correct that you can still qualify for high LTV full-doc loans, but few can. I know clients that make over a quarter of a mil a year but can’t qualify full-doc becuase they have credit cards, 2 mercedes pmts and a 2nd home in the desert.
So many people were living in an absolute fantasy land. They didn’t care about the amount of debt, they only cared about the payments. They didn’t stop to realize that these payments can and will change in the not too distant future.
The key thing right now is price. You can get wonderful loan products below 417k and below 80% CLTV. I just rate-locked a 30 year fixed for a 91 year old lady (bless her heart.). 417k FULL-DOC (good pension) with a 634 fico score. 6.25% with no points. Yet a FULL-DOC 500K loan with a 780 FICO will run you over 7.25%.
Prices MUST come down. It’s as good as a mathematical certainty as any.
I really appreciate your posts. Not being a lender, I can express my common-sense opinion, but I can’t provide the “in the trenches” view of the world you give us. Thank you for your contributions to this community.
Even though I am a broker, I agree with Lendingmaestro in that most brokers are idiots and employ idiots (I like to think that I do not fall into this category). A majority of these shops focused solely on subprime or solely on negative amortized loans. As a result, they will likely fold in the coming months.
However, I believe (I hope) that brokers will continue to be a major originator of home loans in that a “professional” broker will have access to a wide array of lenders and actually be proficient in understanding their products. A truly professional broker does not rely on an AE of a bank except for assistance in pushing files along in the process and on requesting exceptions. I often find that most AE’s don’t know their own products.
I am in even greater agreement with lendingmaestro in that home prices must fall. Unfortunately the body count will be high (I am in the minority in that I do feel bad for them). The crash (and it will be a crash) is part of the cycle. Artificially keeping rates low in hopes that prices will be sustained will be more harmful in the long run.
I know that most realtors and lenders seem to be praying for rates to drop so they can get business. There will always be business as long as you know where to look and how to get it.
Thank you so much, lg and lendingmaestro, for your comments. What both of you are saying will be reflected in the statistics coming out in Sept. or early Oct.
It’s amazing to see there are so many people who can still down 10-20% on SFH in Irvine, particularly in Turtle Rock where houses that make you want to puke are posting for generally above $1,000,000. They must have lots of equity on their current homes. I suspect not too many are first time buyers who can afford SFH in Irvine with the current credit sentiment.
It’s amazing to see people living paycheck by paycheck and spending like there’s no tomorrow. Sometimes I want to “interview” these people to see what’s going through their heads 🙂
Please keep us informed from your “frontline” everyday experience! Hope everyone has a wonderful weekend!
“Banks are having to totally revamp their entire business model. The majority of brokers will be out of business. ”
– Awesome!!!!!!!!!!!!!!!!!!
“100% financing has gone the way of the dodo.”
– Love it!!!!!!!!!!!!!!!!
“Prices MUST come down. It’s as good as a mathematical certainty as any.”
– Music to my ears!!!!!!!!!!!!!!!!!!!!!!!!!
Keep the good news coming! (Of course, I wouldn’t want you to lose your job, but I think you previously posted that your pretty secure, so that’s cool.)
Would you be sent to the seventh circle of hell for that? 🙂
Haha! Maybe we can get a cut of the sales we refer to them.
Great blog here!
This house is fairly close to where I live. These are called the “Cottage Homes.” My brother lived in a rented one for several years during the ’90s. These houses look nice on the outside, but they are of INCREDIBLY cheap construction. Everything on them is the lowest cost – cheap flat roof, thin single paned aluminum framed windows, incredibly low cost fixtures, thin walls, etc.
This one has had some minor mid-level older upgrades, but $688 is a complete joke.
Anyways, I’ll see you boys around, fasten your seatbelts, the next few years are going to be a wild ride in Irvine as housing prices “revert to the mean” (the mean being roughly the rate of inflation).