Blossom — George Winston
The word “blossom” conjures up images and feelings of hope, renewal and possibilities for the future. But what happens when these dreams turn into a nightmare? What do you feel when your blossom becomes a turd? Our most famous “turd blossom” is Karl Rove, although I won’t pursue that thread much further…
Hope and optimism are wonderful qualities, and Americans are noted worldwide for our abundance of both. It is part of the American spirit. The Great Housing Bubble rally was a period of boundless hope, or more accurately stated, a period of irrational exuberance. Rational or not, periods of great prosperity fill everyone with hope for a better tomorrow. During the bubble, we pinned out hopes on the unstable ground of Ponzi Scheme financing. While everyone thought they were spending free money, they were really borrowing prosperity from the future. Now that the bills are coming due, the illusion of wealth and prosperity are gone; people feel hopeless and despondent.
Today’s featured property is a reflection of the American dream, circa 2005. The borrower overpaid for property using an Option ARM to acquire a property he really couldn’t afford. When properties are going up in value quickly, there is a strong incentive to overpay. Ten percent if a $1,000,000 is $100,000, whereas 10% of $500,000 is only $50,000. The more you paid, the more you made. It isn’t surprising that many people got in way over their heads, particularly when toxic financing and the elimination of standards made it easy to do.
Given the strong incentive to overpay, the foolish assurance that prices could not go down, and the willingness of lenders to give out practically unlimited funds, it should not be surprising to see properties like today’s coming on the market. Too many people have borrowed too much money. There are going to be many, many more just like it over the next several years. Even if people’s payments didn’t increase, their burdensome debt-to-income ratios would push them to sell. With the ARM resets coming and people’s payments set in increase significantly, it seems likely we will have a very serious foreclosure problem right here in Irvine.
Asking Price: $689,900
Income Requirement: $172,475
Downpayment Needed: $137,980
Monthly Equity Burn: $5,749
Purchase Price: $810,500
Purchase Date: 5/26/2005
Address: 42 Blossom, Irvine, CA 92620
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,300 |
| $/Sq. Ft.: | $300 |
| Lot Size: | – |
| Property Type: | Single Family Residence |
| Style: | Traditional |
| Year Built: | 2004 |
| Stories: | 2 |
| Area: | Northwood |
| County: | Orange |
| MLS#: | R809974 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
Level Detached Home Built in 2004 By Pulte Homes. Four Spacious
Bedrooms (One Bedroom Located Downstairs). Bright & Open Family
Kitchen With Preparation Island. Lovely Cabinets & Tiled Granite
Countertops. Cozy Fireplace & Media Niche in Family Room. Upgraded
Flooring Includes Wood & Plush Carpeting. Plantation Shutters &
Two Tone Paint Throughout. Attached Two Car Garage. Patio Area. Great
Tract Location. Northwood High School.
Why Is This Written In Title Case? I really don’t get realtor punctuation. Why ALL CAPs? Why Title Case? Do they think it makes their description stand out? I suppose it does. It makes it stand out, and it makes them look stupid.
This property was purchased on 5/26/2005 for $810,500. The owner used an Option ARM for $648,006, and a $162,494 downpayment. Not to worry though, he opened a HELOC on 1/3/2006 for $200,000, and on 12/29/2006 he increased it to $222,700. Rather than losing his $162,494 downpayment, it seems likely that he tapped these HELOCs and made $60,206. It is possible that he didn’t, I don’t know for sure. Either way, if he gets his asking price, and if he pays a 6% commission, the transaction will bring in $648,506. Since his original first mortgage amount was $648,006, it isn’t too difficult to figure out how he arrived at this asking price. I imagine he will be pretty firm on the price — at least until the property goes to auction in foreclosure.
This property is being offered for 15% off its 2005 purchase price.
{book}
Let’s assume this house does sell for its asking price and the first mortgage is paid off. In that case, either this guy lost his entire $162,494 downpayment, or the bank lost $222,700. Let’s further assume the more likely scenario: the bank lost $222,700. Without going through a judicial foreclosure, it will be difficult for the bank to collect this money even though it is a recourse loan. How is this not theft? Do you see the moral hazard here? If we inflate another housing bubble, won’t you be maxing out your HELOC every few months until the bubble bursts? Why take any market risk when you can be paid the maximum appraised value by a bank?
I hate to say it, but some of the most memorable lessons of the bubble are the ones that are most financially advantageous and most morally repugnant.
Dude, check out this article on the “nastiness” in housing blogs from the WSJ:
http://online.wsj.com/article/SB122481699525965769.html?mod=rss_Buying_and_Selling
Housing Blogs Throw Stones
As Real-Estate Prices Plummet, Online Critics Get Nastier; Pricey House, Juicy Target
It’s hilarious reading. Man some people just can’t take a joke can they? And others think that they “deserved” that knife catcher who bought their home, rather than were lucky.
Thanks, I just emailed the reporter. Maybe she will do a follow up on us…
If she does, don’t forget to mention the sent out email invitations to the listing agent. Never got a response, but hey, hospitality rules here.
đ
Have you continued to send out the invitations?
I remember when you started, but haven’t read about you doing so recently.
I emailed her stating that it’s hard not to be bitter when you are living in someone’s nanny apartment, saving your stupid 20% down payment. Someone should have told me that down payments are so 1996. I could be struggling with my unfordable mortgage and not spending all my time being bitter on this blog.
“If we inflate another housing bubble…”
Some deflationists are beginning to say that inflation or hyperinflation could be coming in the not too distant future. This could slow down the deflating prices or even reflate house prices. Your take on this IR?
Price inflation without wage inflation will reduce our standard of living. Only wage inflation will make houses affordable and cause price to increase. Given our current economic environment, wage inflation seems very unlikely.
I am no economist, but from what I can figure out, the inflation being talked about will come from a weaker dollar pushing up commodity prices.
I am thinking this would hurt RE prices as higher oil, steel, etc. take a bigger chunk out of consumers wallets.
the economists I read, Roubini, http://www.regmonitor.com, predict deflation, not inflation as the global economy contracts. We are about to enter a world of stagdeflation… stagnation and deflation.
Yes, I see deflation as a real possibility.
But to complicate things, you also need to state the currency involved. Oil could deflate 20% against a basket of world currencies, but go up in dollars if the dollar tanks.
I see this as an even worse possibility. A slow global economy and higher gas prices in the US.
Either way, I do not see inflation helping RE in the foreseeable future.
This is still the same script as the one from the 70s. We’re currently in 1974. I think the main difference is that we’ll have much less of a middle class seeing any upside in this recovery.
What is incredible is that there are still people that really believe that their house/condo was really worth a 2006 price. This property’s zillow measured value QUADRUPLED between 1998 and 2006. How anybody could see this as valid or even sane is beyond me. I now realize that collective stupidity and irrational thought amongst the masses is not only possible, but has taken place with the participation of our peers. Can another Jonestown scenario or Nazi facist movement be very far away with our fellow Americans thinking and behaving so foolishly?
What gets me is how the collective seems to think that the bubble started in 2003 just because the acceleration in housing prices peaked in 2004.
The truth is that the prices have been in a bubble since the late 90’s and California has been leading the way.
http://www.crackthecode.us/images/HousePriceChange.jpg
Assuming that prices are going to bottom out at 2003 “just because” is nothing more than a very optimistic guess that I can find no real reason to accept when considering how much the cost of living has increased since the bubble began versus how much typical incomes have increased. I see the 2003 calls as nothing more than a new wave of market speculation whereas before everyone speculated that the prices would go forever, we now speculate that they will bottom in 2003 and rebound from there.
We are talking about living in a house price fantasy world for the last 10 years for which most of us were asleep during the first half of that period.
I think that we like the “2003” number because that is around the time that a lot of people started observing real-estate price increases as the short term gains started to become more dramatic as the tech bubble chasers moved to real-estate.
It’s hard to even know what today’s featured house is even worth because it was constructed while prices were increases were at their highest rate leading to inflated builder costs/prices.
My crystal ball says that today’s house will eventually drop to the 400K to 450K range. In the meantime lenders will try to establish ladders of knife catchers bringing in 100K down payments as the prices deflate back down to reality.
This place will sell for more than that today, but the way the game works nowadays is different.
Lenders are targeting people with significant down payments because they know that these knife catchers are going to lose it all. If the knife catchers default after they go under water then the lender will foreclose and flip the house to another knife catcher with another 100K down payment to blow. Rinse lather repeat.
The down payments are key. If you buy in the current market then you better start getting used to the fact that the money you bring to closing will be gone in another couple years and you should make sure that the premium you are paying is truly worth it.
Very astute observation. In pondering the chart you posted, I couldn’t help but think that the years could be fast forwarded 20 (start with 2011 instead of 1991, and it would resemble the future — if we build another bubble.
First post from a long time reader, California refugee.
Great site, in my favorites, look forward to the book.
As a very small builder, certain public policy impacts my ability to build, which restricts new supply, which creates upward pressure on the prices of existing housing, irrespective of the insane sub-prime bubble created by Carter/Clinton/Fannie/Freddie.
In King County, Washington (Seattle and the eastside basically), several years ago the County Council adopted the Critical Areas Ordinance in order “preserve” rural King County, where none of the council live. It has effectively halted development outside of established communities. You want to short platt 30 Acres just outside of town where the ecomics if sewer, water, gas and elctric make sense? Sorry. Not allowed.
There goes affordable housing. So, we scrape 50’s and 60’s houses off of their foundations and call it a remodel to, A:get a permit at all, and B:avoid 80-100k in “new construction mitigation fees”.
Families want single family detached. It’s like it’s genetic or something. The downtown condo is a waystation between young, hip and married and “Honey, I’m still at the vet, can you get the kids from day care?” And people will work, and work, and work for that SFD. The recent problem is that the insane effort left the equation.
That said, and speaking as a builder/investor, total rental parity just ain’t gonna happen. The desire to own is both emotional and practical.(Fenced backyard for the dog. Heck, dog allowed!).
The best rental properties I’ve been involved with absolutely would not have sold to an average buyer. 10-20k fix and a great rental, I’m a contractor, most are not.
It’s Karl Rove, not Carl. Sorry, I can’t stop myself.
and its not fair to take pop shots at Karl by the way…
Karl Rove deserves to be an object of derision. He has earned it.
If you want some insight into Rove’s finely tuned political mind then I recommend that you go back and read his weekly column in the wsj over the last several months. Of all the political writing out there I found his analysis of everything that the Obama campaign was doing right as well as his insight into all that the McCain campaign was doing wrong to be best in class. Several times he correctly predicted the Obama campaign’s next steps. At the same time he identified the shortcomings in the McCain campaign and made several suggestions which the McCain strategists ignored. In my view the big difference between the two campaigns was the talent of the campaign strategists where for the first time in awhile the Dems has a huge advantage.
Yes, but having the disastrous Bush presidency glued to McCain helped out a whole lot!
I remember my friend told me a few years back how “unlucky” she was because her lottery number was not picked after she lined up overnight for a house on Bamboo in this Northwood 2 neighborhood.I bet she doesn’t feel that way now!
I am surprised the few houses on Secret Garden are not in foreclosures. I drove by when the asking price was still $1m+. There’s not much privacy for these million dollar homes.
“…Even if people’s payments didn’t increase, their burdensome debt-to-income ratios would push them to sell…”
This will be the true test, won’t it? What’s going to happen to those borrowers who have fixed rate mortgages that are on the edge of affordability? We know most option ARM borrowers were reaching and/or speculating and cannot be âsaved,â but what about the borrowers who can afford their fixed-rate payments (barring serious income disruption)?
Over the next few years their mettle will be tested. The borrowers with mortgages greater than 40% of their gross incomes on houses underwater 30%+ will have many factors to weigh in deciding how to proceed with their lives.
This really will be the difference that makes the difference. It is certainly in their financial best interest to walk, it is only their sense of morality that keeps them in debt servitude. If it becomes widely socially acceptable to walk away from these obligations, which it already has in many markets, the local market will enter a death spiral. If you look at all the local real estate markets across the state, you may see a pattern where those markets where prices were pushed below this tipping point crash very hard, and those where prices do not cross this threshold sustain somewhat higher values. It will all depend on those who are financially capable of making payments either choosing to walk or choosing to tough it out.
This is exactly the situation most of my close friends are in. They bought in the past 2-4 years and are now all underwater. But they financed smartly, and they’re young professionals with increasing salaries, and they *can* pay these mortgages, only with significant financial strain.
And it looks like they all will pay, because of their sense of morals and in defense of their stellar credit. Unfortunately many are going to grow out of their homes, with expanding families, before this thing looks to rebound.
How do you get a loan for a bigger house when you’re underwater on the one you own? Paying their current mortgage AND saving for a separate 20% down?
If their housing costs are less than 30% of their gross incomes, then they should have enough flexibility in their finances to prepare for a possible move. They’ll have to delay new car purchases (and maybe even additional children) while saving and paying extra to their mortgages.
“If their housing costs are less than 30% of their gross incomes” EQUALS “financed smartly” – I think.
So far so good…making the payments they signed up for…and now they want more??? Lets add a kid or two. They can’t share the game room? Need a bigger car? Not!
“Growing” out of homes is a choice. You make choices based on logic and finances, not wants and chance.
This house looks like a slightly improved version of the “house with a shed propped against it” of a couple of months ago. But I am certainly willing to accept that others have different tastes than I. Looking up and down the street, the neighboring houses are not much better.
And I am trying to think of these places as classic, attached row houses with a couple of feet of air insulation between them. It doesn’t make the lack of any kind of yard or privacy for that price palatable, but thinnking of them as detached dwellings just does not make sense.
I’m glad someone else wants to live there.
Isn’t your home less private if your neighbors’ 2nd floor windows are 10 feet away from yours, than if you simply shared a wall. At least with the shared wall you don’t see each other; and I’m guessing you may hear each other about the same.
Its not IR that came up with that nickname for Rove, it is W that did.
My Google Ad today:
Free Rich Dad Training
Learn to Be Rich Training: Nov 22-24 in Seattle Ltd Seating!
They know us all too well up here in the great NW, don’t they.
We are about to enter a world of stagdeflation⌠stagnation and deflation.
Whoopee! That has always been the time I’ve done the best, oddly enough.
Maybe the incessant development, the imperative to drain and pave over every square foot of wetland or forest in Warshington State, will slow somewhat, or even cease for a time. Maybe things will even get “seedy” again, like it was when I came here. That was wonderful times. Guy I knew bought a house an property near the water for $1000 down. My sister bought the house and lot next door to her for $10,000. Good times.
I would like to thank the quasi-anonymous emailer who is sending messages to the listing agents each day. I always appreciate people who increase our blog traffic and broaden the discussion.
In my view the big difference between the two campaigns was the talent of the campaign strategists where for the first time in awhile the Dems has a huge advantage.
I know what you mean, Woodbury. After eight years of complete political, economic, and diplomatic success by the Republicans, only the machinations of “campaign strategists” could have won the election for the Dems! That and vote fraud, don’t forget the vote fraud!
Did it ever occur to you, Woodbury, my old renter pal, that the candidate is the premier “campaign strategist” of a Presidential campaign?
It’s just pathetic when people chase a market down. Why not list at $549K, be happy when an offer comes in at $530, and end the bleeding? This is why I fear we’re condemned to have a Japan-style 15-year RE bear.
, it is only their sense of morality that keeps them in debt servitude.
That raises a number of very interesting issues. How does one “shoot the moon” in the age of computers? Is it possible to just move to another state, and start over? I doubt it. And believe me, the debt collection industry will grow to meet the need. There is nothing like a guy with his nostrils just above the mulligatawny to harass and collect, if the commission or mwwting his collection quota means he can eat, or pay his bills.
I wonder if there will be an underground sub-culture of “debt-dodgers” which will resemble in some respects (other than its being much, much smaller) the sub-culture of “draft-dodgers” we had years ago?
And gosh, the number of things it won’t be possible to talk about with people anymore.
Marshalsea’s anyone? Oooh! How about “communes” of debtors, communities of “recovering” debtors, like an in-patient drug treatment?
Well, that’s more than enough astuteness from me.
We are witnessing the complete disintegration of the economy we’ve had for the past 60 years, and, hopefully, its replacement with one based on making real goods, delivering real services, much less debt, and much less fuel use.
The transition is not going to feel good. I’m embracing it because I’ve seen it coming, but switching fields, and picking the right one to switch to, is difficult in middle age.
But those of us, like me, who work in the FIRE economy had darn well better find something else to do no matter how old we are, because finance will have to shrink by about 50% at least. This sector has swollen to ludicrous size due to the ten-year flood of fake money that created our current mess.
Many jobs and industries that have paid major $$$ till now will be obsolete. Housing will not only drop in line with historic norms, but “overshoot” on the downside due to shrinking incomes.
Life will be a lot different.
I am looking forward to it too. What else can I do, really? Live in dread? Choose my parents differently? I just hope that things work out better in this redistribution cycle.
Our most famous turd blossom is Karl Rove?
Stay classy, California.
(It must hurt to know that the Chosen One is now taking ownership of one shiny new recession. Get used to hearing about “Obamanomics.” After all, turnabout is fair play, geniuses.)
Will do! Take care.
This is about 2nd phaseâs price, which I believe the first 2 phases were not sold to public at all. The time was year 2004, and each phase price goes up $25K, only the insider and IAC top executiveâs relative/friend can get into first 2 phases.