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
“A spa-like master suite and retreat that is straight out of the Ritz-Carlton”?
Haha – he forgot to add “with only HALF of the equity burn!”
At a 1% teaser, and if the heloc was at 6% or so, they were making a higher payment on the heloc than on the main mortgage!
That is exactly why speculators loved this loan so much. There are two things that make speculating in real estate difficult: large downpayments, and large debt-service payments. With 100% financing and Option ARMs, these two barriers to speculation were largely removed.
Is it your opinion that most of the foreclosures on speculators and fraudulent purchasers (default at payments 1-4) are already REOs? Are there many of them still going through the foreclosure process? If so, fewer foreclosures will have that never moved in, never lived in look.
1% Option ARMs were really only 1% for the first month (sometimes a couple or three months). The lender took advantage of the mathematical fact that a 1%, 30-year amortizing mortgage has about the same monthly payment as a 4% interest-only mortgage (which was market for loans based on the 1-month LIBOR rate at the time, plus a margin). The first month’s payment went mostly to principal–equivalent to about 1/4 of 1% of the principal amount, which is in the range of concessions that lenders normally offer. After that, the borrower kept making the same payment, which was roughly the right amount to cover interest at 4%/year. Of course, if LIBOR went up (as it has now done dramatically), the payment wouldn’t cover interest, which would be added to principal every month until the loan hit the neg-am ceiling (110% or 115% of the original loan amount), at which time the loan would convert to an amortizing ARM. For what it’s worth, it was and is illegal under the Truth in Lending Act to advertise such a loan without showing the limited time for which the discounted rate applies and, equally conspicuously with the rate, the annual percentage rate. A few conspicuous TILA cases filed by the FTC or a state AG (who were preoccupied with sexier “predatory lending” cases), or some effort by the OTS to limit purchases by big thrifts of these loans, could have made a big difference.
“A spa-like master suite and retreat that is straight out of the Ritz-Carlton”?
BWAHAHAHAHA, with a plastic shower enclosure? Oh my that is hilarious.
So you can also wave to the neighbors across the (short) way from the comfort of your bathtub at the Ritz-Carlton as well? I guess those hotels aren’t quite up to their reputation. Or maybe they only take in guests attractive enough that you’d want to watch them.
I really like this line:
[i]”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.”[/i]
I’m really hoping this recession will be the end of places with $5 coffee, $5 frozen yogurts, $20 hamburgers and $300 jeans.
Last weekend I spent the day going to liquidation sales at Mervyns and Linens and Things thinking I could find a good bargain. All I saw was a bunch of overpriced junk. I know it will be unpleasant for a lot of people, but I’m really not going to miss most of these newly popular retail establishments.
Let me 2nd that ‘overpriced junk’ comment. I expect a liquidation sale to have, you know, real honest-to-goodness discounted prices. Instead what you are likely to find is modest discounts; the only fire-sale pricing comes on the absolute junk that nobody else wanted.
I remember going to CompUSA when they were starting to liquidate and it was the same thing; 10% to 30% off retail, which really was not much of a bargain. I understand the liquidator wants to make as much as possible on the inventory, but WTF? Are there people out there who really think that 10% off retail is a liquidation price?
Unfortunately, I think what we are seeing now is the true America. Don’t believe me? Pick up “The Worst Hard Time,” which in the first third of the book discusses the wheat boom. For an older example, try “The Gilded Age,” by Mark Twain and Charles Dudley Warner – mocking the post Civil War boom and land speculation. Honestly, I think much of American history can be explained in terms of boom and bust with some wars in between.
I think some of this is due to computers modeling and simulating every possible thing we can throw at them. So, after lots of number crunching, it is found that the greatest recovery can be had by this mark down, then the next markdown, then selling off the inventory and losing the retail overhead, blah, blah, blah.
Gone are the days when a shop owner cuts the price in half, sells everything off and shuts down.
I concur. In fact, this is the same thing we’ve been discussing with houses and knifecatchers. Why sell at 50% off when there is someone out there willing to buy it at only 20% off.
“I’m really hoping this recession will be the end of places with $5 coffee, $5 frozen yogurts, $20 hamburgers and $300 jeans. ”
Sorry, but after all these bailouts (1 trillion so far), in a few years your going to look back and wish hamburgers were still $20.
Enjoy these prices while you can!
The $270/month dues are rough. I drove through this area this past weekend. I got the same claustrophobic feeling that I do in Turtle Rock. I find it a shame this relatively nice area (many parts of SoCal really) was built to max density with low intrinsic desirability instead of regular/larger homes on normal lots.
We are going to eventually buy a house in Irvine or nearby because we have to due to work, but we are also going to buy another one somewhere else that can be a real home instead of a uber-expensive, pseudo apartment like this one.
My guess is this place will easily fall to <$500k.
I don’t know why you got that claustrophobic feeling in TR. That area has some of the bigger lots in Irvine, with nice scenery to boot which I can’t say about this profiled neighborhood. Typical newer construction in Irvine like this ‘hood (unless you’re in Shady Canyon) is zero-lot line SFR (profiled) or 3 story condos that are all packed in.
To me, there’s no comparison to TR with this neighborhood.
Is it just me or have those credit card solicitations like Capitol1 which used to plug up my mailbox dropped off to near nothing recently?
This may be an upside to tighter credit and reduce wear and tear on my shredder.
Last week I got over 10 of these things, so no drop off for me.
My credit is in the low 800s, maybe they are turning all their attention to people they assume have no risk.
Do you carry a balance on any cards you may have? I payoff every CC in full every month, that may also have something to do with it.
Any other ideas?
Ya here’s an idea. Why don’t you have someone read your posts before you click ‘submit.’
You sound like exactly the type of person IR is hoping will dissapear after the recession.
“Oh durka, I have such great credit… everyone wants me… durka durka.”
I feel special. I just got another 0% offer from Washington Mutual to add to the three they sent me last week and the 40 they’ve mailed in the past month. Now I know why they went under. They wasted too much money on paper and postage.
Sorry I posted. I as actually thinking about how irritated I am still getting my mail box filled with these offers.
Sorry I ruined you day.
Like you, my credit should be ok as we dead beats pay off every month. This summer Chase said they were sending me a new card with a “practically unlimited” line of credit which is a pretty scary thought. It never came. Maybe Chase is losing their nerve in this game of chicken?
I’ll just enjoy this nice lull in the junk mail for now?
How about George Winston……Winter.
“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.”
That’s not bad with only $90000 lost. ( I wish I were in that good of shape with the 401.) It looks like in CA, the debt is “eliminated” with the sale of the house. Not bad, in the lots of placings the world the debt follow you. Friend’s parent walked away with only a 70 point deduction on their credit score. Not bad for over $200000 debt relief. I though it would be much worse. Better than stocks in which a real $200000 would be lost.
Newbie points out that the non-recourse status of CA. first mortgages and the really minimal hit you take on your credit rating conspire to make walking away so utterly and undeniably logical. Given the peril it puts us all in though I would think it ought not be so very attractive.
One of the redeeming features of the Mc Cain plan was to make these mortgages recourse.
I’ll BET you that right now your credit rating would get dinged more by a $10000 judgment than a $250K walkaway. That ain’t right-
I wouldn’t worry too much about people’s credit not getting dinged because there won’t be much credit to obtain in the next several years to come. Free money to anyone with a good credit score but no job, no assets, and no brains hopefully will be a thing of the past.
IMO credit ratings are artificially contrived financial measurements based on unsound data-collection practices to persuade lenders to lend money so that intermediaries (brokers) can benefit in the short term.
Financial institutions place too much faith and credit worthiness into credit ratings and not enough in cold hard cash and other liquidable assets, the employment and financial history of a client, and realistic market expectations.
I’m sure that most of you have heard that the credit card companies are now heading south. People are not paying or paying very late. Thus the CC companies are clamping down. If you are late one day they start calling you, I heard this on NPR they are also cancelling cards that do not have activity on them, but are in good standing, seems to me they are trying to reduce as much risk as they can. But seeing how our nation lives on CC I see this as another straw that will break the camels back.
This is the next crises, that the government will have to fix. There will be massive walk aways from credit card debt…..especially when people realize that the debt is not secured.
I wonder how many borrowers know that in a short sale the lender will 1099 them with the difference, thus owing the IRS taxes.
Welcome to last year.
Mortgage Forgiveness Debt Relief Act of 2007
http://www.irs.gov/individuals/article/0,,id=179414,00.html
With every job being lost, there are several others that get into danger of being lost as a consequence of cut in spending. That’s the impact the recessionary unemployment makes. With average negative savings rate and I would guess 90% in deep debt (net debt), I doubt that average american can even survive a single month without a paycheck, let alone those who literally live for Friday paydays. Its about to get very ugly and very voilent in the coming months.