We’ve Only Just Begun — The Carpenters
{book}
The truth about real estate is that most people will buy and sell due to life’s circumstances. If a family wants to own a home for stability and security because they have small children or if a baby is on the way, they are not concerned with whether or not they are properly timing the real estate cycle. Unfortunately, the real estate cycle moves independantly of our life cycle.
We’ve only just begun to live,
White lace and promises
A kiss for luck and we’re on our way.
The innocent people who got caught up in the housing bubble — and there are many buyers who were not motivated by greed — are paying an hefty price for their own bad timing. Look at what a difference a few years makes.
Let’s say you graduated college in 1994. You were probably a bit bummed because the California economy was not doing that well, but if you found a job, you could begin your life. People in that circumstance might have been ready for marriage shortly thereafter, and they probably bought a house between 1997 and 2000. These people, assuming they did not abuse their HELOCs, are not going to lose their homes in foreclosure.
Now look at the circumstances of someone who graduated in 2001. They should not have been ready to buy until perhaps 2008, but with innovations in home mortgage finance, they were able to enter the real estate market early. They were “pulled forward” into 2004, 2005 or 2006. These are not real estate experts (although some probably thought they were), they are just 20-somethings who were given an opportunity to own a home with little sacrifice or saving on their part. Why would they have turned this opportunity down?
Well, the people who were graduating in 1994 are doing OK whereas those who graduated in 2001 or later are totally screwed.
Is this right? Should the real estate cycle really be allowed to have such a capricious impact on people’s lives? Does anyone think this system works?
The housing bubble is having an enormous impact on the health of individuals, families and entire
communities. As
with any mass delusion, it is difficult to see beyond the comforting
fallacies to understand the deeper truth; however, it is essential to
do so because the cost in emotional and financial terms of getting
caught up in the mania is very high. Foreclosure and bankruptcy are bad
for individuals, bad for families, and bad for society.
So much of life ahead
We’ll find a place where there’s room to grow,
When I saw the listing photos for today’s featured property, I couldn’t help but feel compassion for the innocent. (Do you think this means I have emptied my Reservoir of Schadenfreude?) When you see the first photo, your eye cannot help but be draw to the wedding photo on the wall over the fireplace (followed by the bottle on the counter…) Then when you see the kitchen photo, you see all the pictures on the refrigerator. There is another photo with a picture of the happy couple near the TV. (This is horrible staging, BTW).
This couple, this family, is watching their future get destroyed by the housing bubble.
Now before we break out the violins, this was a 100% financing deal, and they owners are not losing any of their money, but their dreams of climbing the property ladder are gone, their credit score will plummet, and they will be shut out of the housing market for the foreseeable future. All because their life cycle lead them to buy at the worst possible time in the housing cycle.
Asking Price: $274,999
Income Requirement: $68,750
Downpayment Needed: $55,000
Monthly Equity Burn: $2,291
Purchase Price: $389,000
Purchase Date: 6/21/2006
Address: 2206 Apricot Dr #206, Irvine, CA 92618
| Beds: | 2 |
| Baths: | 2 |
| Sq. Ft.: | 910 |
| $/Sq. Ft.: | $302 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Contemporary/Modern |
| Year Built: | 1979 |
| Stories: | 1 |
| Floor: | 1 |
| View: | Mountain, Pool |
| Area: | Orangetree |
| County: | Orange |
| MLS#: | S559747 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
|
|
Bath condo with Patio/Balcony out Master and Dining Area. Open floor
plan. Fireplace in Living area. Close to shopping and Freeway. Secured
building. Elevator and intercom. Handicap access. HOA provides water,
gas, trash, maintenance, pool spa, lit tennis courts, basketball court
and tot lot.
This property was purchased on 6/21/2006, right at the peak of the bubble. The owner used a $311,200 first mortgage, a $77,800 second mortgage, and a $0 downpayment. If this property sells for its asking price, the lender stands to lose $130,500 after a 6% commission. BTW, most of this loss was a second mortgage insured by the GSEs. In other words, you and I will be paying for this loss with tax dollars.
So how do you feel about this now? Are these people predatory borrowers betting on appreciation? Were they innocent victims just trying to live their lives? Are they something in between?
{book}
We’ve only just begun to live,
White lace and promises
A kiss for luck and we’re on our way.
And yes, We’ve just begun.
Before the rising sun we fly,
So many roads to choose
We start our walking and learn to run.
And yes, We’ve just begun.
Sharing horizons that are new to us,
Watching the signs along the way,
Talking it over just the two of us,
Working together day to day
Together.
And when the evening comes we smile,
So much of life ahead
We’ll find a place where there’s room to grow,
And yes, We’ve just begun.
We’ve Only Just Begun — The Carpenter
Always enjoy your blog.
I was just noticing on the “income requirement” heading – in this case it is a little less than a 5X ration. I thought as a general rule the house price should be about 3X (of 4X tops) your gross income. Is the %X what the bank is saying or the real estate agent?
No, that is the second time this week I messed up those numbers. I had the income requirement and downpayment backward. The income requirement I compute is at 4 times income. If interest rates were higher, this number would be closer to 3 times income.
I suspect that a mortgage broker arranged the financing and reassured the “buyer” that all would be well as the home appreciated. They could always refi or resell. These folks typify what is wrong with America now. They were CONSUMERS. Look at all the crap scattered around the condo. Don’t have the money for a house, a wall mounted flat panel, new dining room furniture etc – no worries. Charge it up, pay the minimum. Listen to the news, the talking heads on CNBC or anywhere. There aren’t any Americans left here, only consumers. You’ll know the bottom is in when consumers are replaced by Americans again.
I think of these situations this way. Say this young couple learned the lesson the hard way and started planning their future better – say they started reading the IHB. In 3 yrs they save up a 10 to 15 per cent down payment, do OK on their jobs and prices fall enough so the can buy a decent starter home with a 28 % DTI. But they have the ding from this foreclosure/short sale. Do we want that person to be penalized even if other metrics are OK? If we want them penalized, which is understandable, then we are going to have a massive number of homeowners sitting on sidelines and we may overshoot prices to downside. Personally I think if you have shown you will be prudent with down payment and borrow what you can pay I’m willing to give them a second chance. Will everyone learn their lesson probably not but a sizeable minority will.
This is exactly why I believe we will see the resurgence of subprime lending. It will not be the stupid subprime lending of the bubble, but the more prudent subprime lending where people with capacity (income) and collateral (savings) are given a bridge loan while their credit score improves.
One of the most important findings of the subprime debacle is that the single most important predictor of default rates is not credit score but down payment.
In the end, it’s the down payment that keeps people in homes. It’s a sunk cost kind of thing. Good or bad, that’s the findings.
Basically, down payment will determine who gets a loan; while your credit score will determine the payment/interest rate.
Chuck
Yes, That is what I see going forward as well. Subprime could work if the downpayments are higher and the income is verified. I predict the re-emergence of subprime will be the big story of 2011.
this is also one of the reasons I’m against loan mods.
Lets say a couple making 100k bought a 600k home on an IO loan they cant afford with 0 down.
Then the principal loan mod is done to 32/36% DTI, effectively giving them a 300k loan on a home that was a recorded sale (aka comp) of 600k – STILL with nothing into the house, and no equity!
My numbers are likely off, but the concept is the same: loan mods (of all kinds) for borrowers with nothing down mean they got a GREAT deal and still have nothing down.
On the other hand, I’m going to have to put 20% down to get the SAME loan amount. That sucks. Let them go into FC and I dont mind paying the 20% down.
Not to mention it doesn’t get recorded as a sale so it keeps the property value’s in the area artificially high.
exactly. I’d be fine with mods if they get recorded as a legit sale. If that 600k home is marked to market at 300k, that means my loan is 240k after my 20% down. I just save more monthly at that point!
Sadly, that would actually push prices right back up (since the median around them could afford a 300k LOAN with 20% down), and they would then have equity and then even be ahead in the game!
Whomever did that ’06 flip made out like bandits! But how the hell did this property actually go DOWN from 2000 to 2006?
Good point, perhaps it’s a family transfer or possibly fraud.
According to Irvine Renter, the vast majority of people who sold in 2005 & 2006 just bought another place and now are screwed.
He could be right, but from my personal experience, out of people whom I know there is a 50 / 50 split between people who sold in 2005 or 2006 and now are sitting on huge piles of cash… versus the people who are screwed. Maybe someone has data to show how many people benefited and are sitting on cash.
I would have to agree that there is a 50/50 spilt. If one party sold a house in 2005 / 2006 and made money, then the party that bought that same house likely lost money. That may be the source of the perception that half of the people you know made money and the other half lost.
Depreciation?
I have never seen a property go down in value in those years…
I guess some of it is the location,depreciation, and compared properties.
Roie Shapira
http://www.NestSeekers.com
The timing applies to people in the stock market also. Say you were planning on retiring now – you put a lot of money into the market from 1998-today with possibly a net negative return or very small positive. Compare that to the person retiring in 1998, where 1988-1998 saw 15%/yr returns. Each person could be passively investing in index funds, saving the same % of each paycheck, but one will have much more retirement savings than the other, with nothing other than being 10 years older going for them.
I think this explains differences in views on stocks & on real estate, what part of the curves, up or down, have you ridden.
Welcome to America. If you miss the equity expansion periods due to age, or do not participate, you will always be playing catch up…. as the rich get richer…. and the poor get poorer or get money from their parents who did participate in the equity expansion.
I’d say it’s a matter of running with the herd long enough to benefit, but not too long to get slaughtered with them.
I’d recommend the book “Devil take the hindmost”
Chuck
That’s a really good way of thinking about it.
One could go one step more extreme and ask, who should pay back the GSE, the person who sold them this condo in 2006 at the inflated price, or these buyers themselves, in effect garnishing away their prospects for saving up any downpayment in the 3-7 years during which they will be ineligible for a mortgage?
I think requiring an additional 5-10% downpayment in order to be considered prime would be more appropriate than paying the bank points to lower your rate to a prime-like rate. And making these people ineligible for anything more than 80% CLTV financing for 15 years. That would be good. That’s not punishment, that’s just verifying that this couple is amongst those who have learned how to be more responsible, although it in no way protects them from future bubbles.
IR makes Great Points, and offers Excellent Questions in this posting. Over the last 2-3 years, I’ve asked myself similar questions. How fair has this ponzi scheme been to people that were born in the wrong decade. 🙁
It’s pretty sad that a young family is now saddled with a massive albatross around their financial future. What a way to start your life.
As the smoke clears, I’m of the belief that the gov’t is gonna change a lot … probably too much.
Having known as assortment of people with credit problems, it is amazing how fast careful people with good advice can get their credit rating back.
I had a friend whose wife charged up massive amounts on credit cards he didn’t know about. Late payments all over the place, I think some chargeoffs too. Then, after the divorce, she somehow managed to get more cards in both of their names and do the same. He was able to get the post-divorce items removed. After that, his credit score was in the high 600s in less than a year, and in the 700s the following year.
For people where the mortgage was their only substantial problem, they can do pretty well within three years. However, they should be very careful with their other credit.
Sadly to say, this unit is worth $224k to an owner/occupant, and $168k to an investor. (assuming $1400 monthly rent)
Yes, that is where I would value it. Since this isn’t really an owner-occupant kind of place, I suspect this will not bottom at $224K.
Did you forget about the $310 HOA fee?
I’m thinking more like $110k/$175k
And that is assuming that rents don’t drop way out there in “Hot Irvine” for a smallish 2br with only one parking space (no roomates sharing this unit).
It’s too bad this young couple is losing their house; however, they are getting off relatively easy. They did not put 1 cent into the deal and will likely suffer a few year’s bad credit. I think the stigma of bad credit will be viewed differently during this “once in a century” event.
They need to rent an apartment (nothing wrong with that) and save some money for a down payment for their next purchase in a few years. They will probably be better off than the homeowners who decide to stick it out for the next five or so years in their houses. Those current homeowners will likely be underwater in a big way and be paying on an asset that is worth much less than what is owed.
Let me ask you are anyone else this:
With the high cost of living in Irvine due to high house prices and high rents, when was the last time you heard of someone actually saving up enough money to put a down payment on a house… that is without mommy and daddy’s help?
Seriously.
It must be at least 10 years since I met someone like that in SoCal. It seems down payments are something of a myth created by others to give hope.
Just askin’.
Chuck Ponzi
Chuck Ponzi,
You are correct, that’s just wishful thinking on my part. Most people (I would guess 80 to 90%) don’t have the financial discipline or the means to save anything…not to mention a huge sum of money used for a down payment.
Very few people in this area will go the route of rice and beans, beater car, no new gadgets, puttting off vacations to save for the magical down payment. That takes immense financial discipline.
My wife and I are saving. We currently live off of 50% of our net. Every month we’re still employed we have another month of emergency savings (which can be used as a down payment once the savings is >9mo)
I started saving for a down payment years ago, but now that I have accumulated around $300,000, I am no longer interested in Irvine. I’d rather move somewhere cheaper and pay cash for a house. It’s funny how the process of scrimping for years has turned me off to living in a community of competitive consumers.
I also suspect that in a few years, all the hyperinflation from all the bailouts will erode my nest egg….so I have to buy soon. That’s what I call government-induced consumption.
How do I suppose to feel bad for this people? That looks like my house, but me and my wife have been living in a one bedroom apartment because we knew we could not afford a $500,000 condo. Everone knew what they were getting into. There are no innocent victims in this housing bubble. It is easy to play the victim now.
I agree with Lemonlou… these fools simply overpaid for an apartment, probably just for the “prestige” of being referred to in their social circles as “homeowners”. I see the pathology everywhere in my generation (21-35 year olds) these days… being a “renter” signifies you’re not good enough. I’m recently married, just like these example fools, yet my wife and I suck it up and rent a 1-bed apartment, because that’s truly all we can afford if we actually want to save money, give a bit away to less fortunate, and even contribute to retirement and life insurance premiums, etc. and not go into debt service. Rent alone on a 1-bed apt for us is still 25% of our gross income. Ridiculous!
I totally agree with Lemonlou. I am also a recently newly wed and graduated in 2004. Although we have good paying jobs, my spouse and I knew that a home costing over $500K was just ridiculous and would consume a large % of our income. We also decided to just rent a small apartment while saving a large amount of our paycheck for our 20% downpayment. I can’t feel too bad for these people because they werent responsible enough to calculate some figures and do research. Like Lemonlou said, its easy to play the victim now.
These people “bought” a crappy condo for almost $400k of other people’s money. I wouldn’t be surprised if all their furniture and electronics were financed with “no payments for 12 months.” I bet they’re leasing luxury SUVs. Do I feel an ounce of pity for them? No.
I don’t feel sorry for this couple. They probably looked down on their renter friends with contempt. What goes around comes around….so why soften the blow for them when it finally comes around?
I think that they were led
into a bad decision, now they have a lead
weight around their neck.
Sure I can sympathize with this couple. But at the same time, I am sick and tired of feeling bad for SHEEPLE. If you are ignorant financially, and can be persuaded into bad situations, well then you get what you deserve.
It’s Darwinism.
Now will someone tell me why our schools don’t teach finance? It’s not physics.
The best thing we can do for people like these (and even those who may have been greedy) is to stop being the “Jones” with whom they were trying to compete while they are taking their financial “medicine”.
Instead of meeting our friends and family at the local eatery on Friday night at a cost of $50 a head. We can have them over to our house for some casual eats and board games. Meatballs in the crock pot, cheese and crackers, veggie tray. Heck even throw in a few $10 bottles of wine and a $20 bottle of Ketel One for those who want to loosen up a bit and you cut the weekend entertainment bill by 2/3.
Birthdays? How about a party at the park with a homemade cake and a football/frisbee instead of Chuck E Cheese for $25 a head?
If we “Jones” show up and make it “ok”, it will make all the difference in world to our friends who are experiencing challenges. It might be a bit uncomfortable for everyone at first, but in the long run, we will all be better friends.
Who knows, tomorrow, we may be the one’s who need the support.
Another way we “Jones” can help is by not maximizing the amount we can spend on a car. This “buy a new car every 3 or 4 years” mentality ruins household balance sheets just as well as buying overpriced homes with exotic credit.
We all know the metrics for buying a home: spend less than 2.5x your income and less than 28% of your gross on total housing costs; but what’s the metric for buying a car?
I’d advise, you can’t even consider a new car if you have credit card debt and don’t have 6 months’ expenses saved. Also, the price you pay shouldn’t exceed 25% of your household annual income unless you really have a lot saved relative to your income.
Stick to these limits, and you’ll make it easier on the people trying to keep up with you (and this is circular).
This “buy a new car every 3 or 4 years” mentality ruins household balance sheets…
I couldn’t agree more. The last new car I bought was in 1984, and I kept it for 20 years, and the last 6-7 years it was an extra car as it wasn’t worth much as a sale/trade-in. Since then, I buy a 1-2 year old car (low miles, still with new car warranty), use a big down payment (20-30%), finance it for 3-4 years and pay it off early. As a result, I have not had a car payment for more than 3.5 years, and then driven the car another 6-8 years without any payments. During the 10 years that I was married, we had always had two cars, but one of them was always owned free and clear.
Yes, I agree with Perspective. I had briefly lived in Switzerland where there are large amounts of rich people who are careful not to show it. It’s a culture where if you’ve got it, you certainly don’t flaunt it. Nor do you openly mock people who (you assume) make less money than you.
Well said, Jeff H.
Does anyone else think that Obama will wipe the slate clean for people like this, and let them buy homes with FHA loans in short order?
I think this is unfair and creates huge moral hazard, but I have a feeling it will be part of the “solution”.
Moral Hazard seems to be part and parcle to our version of capitalism.
mav, let’s see by next yr we will have a foreclosure on our record, however our income is 150k a yr w/ stable income w/ no debts and 80k in the bank. The only ding on our credit is the foreclosure. There will be millions of people just like us next yr. Does anyone think the greedy people in real estate will just let these potential buyers sit on the sidelines forever. Not like I plan on buying another house anytime soon (the previous experience has left a really bad taste in my mouth), I really feel like renting for the rest of my life.
I agree with you Mav… I think certainly Obama will do this for people who foolishly bought too much home, with promises of government-backed loans to make them homedebtors again. That’s why he was elected in the first place! Promise everyone everything, and make them slaves when they receive it. As a whole, our ignorant culture/country acts and thinks that owning a home is a “right” bestowed upon everyone in the Constitution!
That awful Obama is going to bail out home debtors.
Meanwhile my mortgage lender needs help.
“The government is near a deal to give Bank of America a $20 billion capital injection and potentially absorb about $100 billion in losses on toxic assets, people involved in the transaction said Thursday.”
Morality is so – you know – old school.
True….only a sucker plays by the rules.
IR brings up a great point that nobody ever really discusses. My wife and I are one of those young couples that got caught up in the great housing bubble (graduated college 2002). We were supposed to follow the path of the generation before us, graduate from college-get a job-get married-buy a house and raise a family-save for retirement. In a normal real estate market we would have done that however the “buy a house” part has tripped us up. We now have a foreclosure on our record and are now renting and trying to recover w/ our lives. It just ticks me off that w/ our income we could have afforded the house we had Pre-bubble price.
mark,
I’m as ticked off as well… had I actually had just a few more assets to my name and a few thousand $$$ more in the bank, I might have made the jump to buy RE in 2003 or 2004 as a young professional. The smooth talkers were everywhere– “Buy now or be priced out forever!” And had I listened, my wife and I would then likely be in your position now too, with a foreclosure on my record. I long for the day prices return to their fundamental values so I can own something!
Not to bust your bubble, but I graduated in 2003, and I have had to repeatedly stiff-arm (to the point of bitter argument) my partner because he was led to believe by the media all the real-estate slogans and pitches people were making about, “buy now or be priced out forever/now is the best time to buy, etc.” I got married too but despite how much I wanted a house, I knew we couldn’t afford it, no matter what kind of great introductory financing deal it was. What bothered me most about the financing was that the houses were outrageously priced way more than I felt they were worth and I knew the purchase price was astronomically outside of my income at the time. Hell, 3 years later, I know they are still outside of my income, but only slightly now. So, I’ll continue to wait, and learn (and read this blog).
I do feel sorry for you regarding your situation, but purchasing any house is a privilege, not a right. Though the way you’d see media now, playing up that all homeowners who bought during the peak are victims, they make it seem like it’s the latter.
IR, I am a perfect illustration of your dilemma/example today, I’m an architect that graduated college in 2001. Thanks to this blog and your knowledgeable insights, now I can explain clearly and give solid economic/monetary reasons for the fiscally conservative outlook I have, at least with regard to real estate and their markets. I had “friends” and co-workers and other colleagues practically screaming in my ear in the 2002-2003 years, “BUY! BUY! BUY!” when my earning power was very low as a recent graduate with little professional experience at the time. I was watched clients of my employer, the big homebuilders and developers who were rolling in their wads of cash, flaunting how smart they were as they built out every corner of Southern California they could get their hands on, and upgraded their second home McMansions on Lake Havasu or in Laughlin. I knew then deep down that something was very very wrong with our local and regional real estate market, that I, a licensed professional white collar worker, couldn’t even dream or plan for purchasing a home within 5-6 years of graduating since the prices were simply outrageous. I resisted the temptations of the fools who told me I should buy a home and get in now, even though I’d have needed 100% financing to do it at that time. My parents raised me with a conservative fiscal outlook, and while in many cases it can be a bit burdensome to be so methodical, in this case it helped me stick to my guns to say NO, not until I can afford 20% down and the monthly payment on a fixed-rate 30-year loan. Of course, that day still has not come, since prices continued to rise far higher than any of my salary and saving advances could ever have. I’m earning almost double my entry-level salary now, and I’m still priced out of the market, even after the past 24 months or so of decline. But at least I’m not in the same sinking boat as the homedebtors profiled here today!
The sad part is, some of my contemporaries, especially friends who graduated college a couple years later, in 2003, 2004 or 2005 and shortly thereafter got married, began entering the RE market in 2006 & 2007. Most refused to listen to my belief that real estate would eventually come back down to reasonable prices. But more than a few of them refused to resist the lure and bought horribly inflated homes, and kept chanting every ridiculous realtor and broker lie in the book they’d swallowed. And the only way they could even make their initial payments were to have both spouses working full time. What happens when they want kids?? Or worse yet, when they have kids, and their ARM resets to a higher payment! Needless to say, I know at least 2 of my friends and their families are literally trapped underwater in their homes, er condos, er renovated apartments. And they have no hope of getting out or moving up when their babies start growing and demanding more space. And folks, these are college graduates in these dilemmas, not unintelligent people. I’m beginning to see the distress as even worse than I even anticipated. Where are the “first-time” buyers going to come from in the next 4-5 years to support the bottom of the market? There aren’t many of us!
Thank you for sharing your experience. I am like you in that I refused to buy anything I couldn’t do without a 20% down and 30 year fixed. I did buy in 2003 on those parameters and sold last spring, making out with a decent profit. But my best friend graduated from USC in 2006 with her MBA, and egged on by her father who is a highly educated man – went out of state to buy a home in April of that year. Her plan was to own for 2-3 years then move back here to southern California. I do not know what kind of financing she got, but I do know the value of her home as dropped significantly and her life will now take a different path than the one she had in mind. Again, this is an educated person who made this choice, mentored by another well-educated person. Astounding.
I’m in a similar situation. I graduated 1997 and we are still saving up for the first house. We weren’t sure that we were going to settle in socal until about 2004, and by then prices were crazy. Since then, we have been outside looking in waiting for prices to become reasonable, as they’re still nowhere near pre-bubble. At this point, I’m sure we could qualify for a house, but it makes no sense from a financial standpoint because everything is still wtf priced. A simple rent vs. own calculation shows that we’d have to pay 2k-3k more to own anything that might appreciate in the future (i.e. I don’t particularly want a condo, and renting a 2BR is more than enough space for us) My big concern right now is that if a kid shows up before 2011, we’d like to buy in order to have more stability, and the numbers aren’t there yet for us to do that safely.
PS – I noticed there’s another mark in this thread. It’s not me. 🙂
Don’t worry about that whole “stability” thing when the kid comes along. We had our first kid mid-07 and almost made the epic mistake of buying a home about 6 months ago based on the stability argument. That argument is garbage. When they’re that little they couldn’t care less about where they live so long as Mommy and Daddy are there and they get their milk. If by “stable” you mean being a prisoner in your own home, then by all means…
As long as you’re not moving every six months you’ll be fine. By the time she’s old enough to notice, to have groups of friends, to have sleep-overs, hopefully the market will have bottomed out and you’ll be in a perfect position to buy.
I am glad to see you and the others in your circumstances posting today. I was hoping to read your perspective. I think your generation has been really hurt by all of this.
You all end up breaking down into two groups: 1. Those that participated in the bubble and are now screwed. 2. Those who didn’t but have to play the waiting game for prices to drop and have to endure the feelings of groundlessness renting can entail.
I am also in group 2, and I am thankful I am not in group 1, but nobody should have to choose between those alternatives. It just isn’t right.
I agree, IR, it’s sad to be forced to choose between these two categories. A friend in my graduating class of 2001, also an architect and whose wife has a Ph.D. in Physical Therapy, moved out of OC in late 2005 to Colorado to simply be able to afford life. Two highly-educated professionals, working full time, but unlike most in our generation, they’re fiscally prudent. And they’re still renting today in 2009, because even in Colorado, simply buying a larger home in 2005 at a lower price, but in a less desirable market would have been just as foolish as paying Irvine/OC prices.
Being one of those in Group #2 hurts even further because the housing bubble fueled other specific industry bubbles and artificially pushed wages higher in all industries. Especially here in Irvine and the OC overall, the median income level is still currently higher than typical inflation or real world value for the necessary job skills would allow. And as IR has documented so thoroughly that rents are tied to income, all of us currently renting are still paying grossly inflated rents (even if it is “cheaper” than ownership cost for the same place). And that cuts deeply each month in to how much we can actually save for a down payment, or a new car, or the unexpected crises that always arise, etc. etc. etc…
And there are those of us in Group 3: participated in the bubble, got out in time, and are playing the waiting game.
I graduated in ’98 and was fortunate enough to purchase in ’01. Even in 2001, after we bought the place, our scumbag realtor mailed out flyers with our place pictured on the front, “RECORD PRICE PAID! BUY NOW!” Die.
Both in ’05 and ’07 we were on the hunt to upgrade to a bigger place with the expectation of kids on the way but both times I was shocked and depressed by the prices. I knew something wasn’t right because it didn’t make sense that everyone in OC was making that damned much money to afford these prices. By ’07 we knew a shitstorm was brewing and were preparing to sell and rent but with the birth of our daughter we just focused on her. In ’08 we had the parenting thing halfway under control and knew we needed to sell NOW. So here we are with a mountain of cash in the bank, renting a little 2-bdrm, just enjoying our lives waiting out the storm.
I’m no RE genius just, as IR has pointed out, life-circumstances-lucky with maybe just a dash of common sense. In fact, we almost became very unlucky with a purchase we tried to make this fall (it’s hard to argue long term finances with a hormonal nesting momma). Luckily we were out-bid and with the help of IR and this website I have been able to verbalize and confirm our situation with my wife. We both have friends stuck in Groups 1 and 2 and it really sucks for all of them. Thanksgiving really is my favorite holiday.
AVRenter,
You make a good point about a Group #3 category of people in this market. In 2004-05, once I understood RE markets better than in college and had more purchasing ability, I wished I’d graduated 3-4 years earlier than 2001 (like yourself) and would have been able to buy a home before the frenzy and sell it for huge gain. But that’s merely lucky timing, I guess. I know very few people in your situation who purchased a home at a fairly reasonable price, saw the rampant appreciation, thought later about “moving up”, then (either by force or luck) chose not to and were content to rent with a mountain of cash. Good for you.
IR’s analysis about how there is no such a thing as a “Move-Up Buyer” due solely to appreciation is very enlightening, especially with regard to a situation as yours. If your own property is appreciating rapidly, then very likely the bigger properties you wish to move up to are appreciating at an even more WTF rate!
I’m in what I would deem group 4: Just finished college and just starting out in the “real” world. I’m in more of a position to start looking at a home purchase in a couple of years but wanted to get the groups input on what to do in order to be ready for when (and maybe if) that moment arrives.
I finished grad school in 2001, but my husband had been working straight from undergrad. We were fortunate to have a downpayment of 20% from his parents and bought a small 2/2 in 2003. We had two children there. In a 1000 sq. ft. split level. Not ideal, but many people get by with less. We were convinced we should sell and rent in 2007 but we had a second baby on the way and decided not too. Looking back, we should have sacked up and did it. I agree with AV Renter, kids just want you around. They don’t care where they live when they are little. And Irvine has a park on just about every corner with plenty of room to play. Honestly, I think my husband and I would be more disappointed if we were waiting this long to get into that ideal SFR to have children. I am fortunate to be a SAHM, which I know isn’t the norm. I hear alot of women tell me, “I wish I could do it.” Meanwhile they are in large homes in nice neighborhoods and buying their kids everything they point at in Target. We had everyone and their mother telling us we needed to sell and move-up when the first baby arrived but my husband was leary. He was hunting around the internet one day, doing searches, and found this blog. We have been loyal readers ever since. And our friends and family were sad…almost like we had failed in some way…because we decided to move into a rental. In our family, we have a sort of pact to consider the ‘welfare’ of everyone in the house when making a decision. If a big home is that important, that you are willing to make your head spin with both parents working, dropping the kids off at fulltime daycare, and barely having time to fill the kitchen with groceries and do the laundry, then buy now…and bring your children into that environment. But if your goal is a happy home, rent something. A house is just a house, the people make it a home. Personally, I think that people need a lesson on living on/with less. Especially in OC. Instead of making you sad, you are actually happier. Our only debt is 15k in student loans, which we feel like we need to have some debt, so we are holding on to it. We contribute 15 percent to retirement each paycheck and 200 per child for college savings each month. I cook breakfast, lunch and dinner and we don’t eat out as much as when we were DINKs. I am just saying, it can be done responsibly.
I couldn’t agree more. We were very fearful of our downgrade to the small 2-bdrm rental and, to be honest, slightly embarrassed. I tell ya though, a week after getting settled in we both started to enjoy our cozy little place with no worry in the world other than writing out a check once a month. 75% of our crap is in storage and we have completely simplified our lives (although I sure miss that 50 plasma, dammit). Of course there are drawbacks but with a little girl running around it definitely allows us to give her 100% focus and attention. In the past few weeks/months I’ve become more proud to actually say I’m a renter (OK, OK, there’s a bit of smugness to it too).
I’m hopeful (but don’t think it’s very likely) that this massive market crash will enlighten people to a simpler less debt-burdened life and curb some of Cali’s Cultural Pathology. Doubtful but maybe, just maybe.
Well sometimes life lessons are forced on us. If this is Great Depression II, and people are going to be forced to come up with large down payments in the face of bad credit, I think people will be saving like we have never seen them save before.
I mean, if you have no credit, you can’t shop on plastic, lease luxury cars, and generally keep up the facade.
It’s very nice to see you show a little compassion where clearly compassion is due. Thank you. I’ve been a long-time reader and appreciate the time and effort it takes to put information like this together. We are all going to school in these times.
I’ve been reading this blog for quite some time – I love it. Keeps me up to date with the craziness with left behind in CA 4 years ago. We bought in 1996 in South OC, 4 years after college graduation. We had saved every penny we had, put a nice down payment on a house with a big yard (13,000 sq. ft), and still the bank required that we have an additional $5,000 in the bank to show that we could make mortgage payments. Oh, and we had to pay off both our cars. The debt we had – only some small student loans! What happened to the loan industry? But we bought a house we knew that we could afford on one income (because eventually I stayed home with children). Fast forward to 2004, when my $221,000 home was valued at $850,000. My husband and I simply said this was nuts, and promptly sold it. We looked around the country for a nice place to live that wasn’t landlocked, that had a good outlook, but not the insane rise in housing. We found it, and now we look at CA and thank ourselves that we listened to our gut instints. We never tried to live up to our neighbors, and where we live, we have potlucks, don’t feel the need to buy new cars every few years, and quite frankly, don’t miss CA. The weather is nice, but it doesn’t justify the housing costs. Thanks, IR, for keeping people informed.
This is exactly how the debt/housing bubble led to extreme inflation from 1998 – 2007. The story that is not really being told is the wealth disparity that was created. Each boom and bust cycle creates equity haves and have nots. We had many bubbles over the past 10 years: tech, asian equities, commodities, student loans (tuition bubble), car loans, commercial debt, a global housing bubble, global equities bubble, essentially all assets experienced a bubble. In each asset bubble some lost money, and others gained huge amounts of wealth. This is why I postulate that some more premium areas / neighborhoods might not see as big a pricing decline due to large cash downpayments that will be necessary to afford certain areas.
Victoria – please share where you moved to. You’ve got me curious. It sounds great. I am glad you all are happy.
IrvineRenter: Bought your book on Amazon and am about half way thru. Excellent! Thanks for taking the time to make all that info available at such a ridiculously low price.
Seems like many of the posters are in the 25-35 age group. I can understand their lamenting the timing of their opportunity to buy into the California dream. It’s easy to forget that even in relatively normal times California homes in coastal areas have always been relatively expensive. I remember talking to a 29 year old physician in the early 1970s who stated that a classmate of his who had grown up in Pasadena stated that he could not afford to buy the house he had grown up in!
A question: The mortgage “cram down” legislation discussed in Washington looks like it might be workable only between a home buyer and the bank who made the original loan, kept it and continues to service it. I’m unable to find any estimates of the percentage of mortgage loans made during the 2000-2007 period are still in the hands of the originating bank. Any idea?
I don’t see how we can absolve the younger generation from their decisions just because they were following an expected path – isn’t that what everyone was doing – following an expected path?? This blog seems to have no problem expecting the people ‘should have known better’. So it is ok that the 23 year old didn’t know better but not ok that an older person didn’t know better.
Well, I think there’s some measure of absolution.
Not everyone has read the IHB. Take a trip to Barnes & Noble and check out the real estate section. When I was thinking of buying last March, I did that. I had a strong sense that the market was overpriced, but didn’t know for sure. Well, you know what was on the shelves? Mostly rah-rah housing books.
My point is that a reasonable person who’s never bought a house before could have done some research, talked to the nice realtor and mortgage broker, talked to friends and parents, and STILL come away with the impression that it’s fine to buy. Life is generally too complex to figure everything out for one’s self; we all rely on advice from trusted sources to make numerous decisions. Only problem is that the herd was running off a cliff.
Life may be generally quite complex, but maybe, just maybe, people should try to figure out those complex things when they are life-changing monetary decisions.
Personal story: graduated in 2005 with a doctorate in engineering with commensurate salary. I looked at what houses cost, what financing would be required so that I could actually pay the loan (PITI + maintenance, really) off with no worries, and how much money I actually took home at the end of the day.
Less than 1 day of work for calculations and basic price research told me that a $500k-$1m purchase price did not make financial sense. Books and rah-rah do not take the place of common sense.
Sympathy for poor decision making, yes.
Absolution, definitely not.
Bail-out? Do I really have to subsidize people who make less and foolishly spend more than I?
I agree with both of you.
I think that sometimes on this blog there doesn’t seem to be any empathy for the fact that the information was not available to everyone in order to avoid making a bad mistake – not everyone can use a computer, not everyone even has the time to investigate every economic decision as in depth as was required to learn the truth over the past housing bubble – NOR should they have to – otherwise we would just have a country full of economists or accountants.
I think as a country we need to start realizing that we were ALL victimized and instead of focusing on whether so and so deserved to be victimized or not start working together and calling our govt. to shape up or ship out.
There are many people who deserve sympathy in this mess, spanning all ages, incomes, situations, etc… (hmm – sympathy for Bernie Madoff investors – hard for me to muster but I guess a little)…..
Left unresolved at this point is what level of fiduciary duty a real estate agent has for his/her client.
Why would you hire one if you didn’t think they’d represent you and your interests?
Act as “YOUR AGENT”???
Didn’t Arnold just ensure last year that r.e. agents are NOT to be held to fiduciary standards?
This current situation is not tenable. And it’s responsible for a LOT of our current crisis.
You should have read “Mortgages for Dummies” – You would not have had to do the calculations. They are done for you. They say don’t buy these homes, don’t take these ridiculous mortgages. But the stupid people did and now they tell me I have to pay for it while I’m holed up in a tiny apartment where my rent gets raised every year.
“Mortgages for Dummies” – they were even willing to look at a “dumbed down” book for the largest finanacial transaction they would ever make. NOT MY PROBLEM. CA, SENATE, OBAMA – STAY OUT OF THE MORTGAGE ISSUE. Prices will correct themselves. Why do they want to keep the prices of houses artificially inflated?
I used that very book, Mortgage for Dummies, when we decided to buy a home in 2001.
I don’t want artificial home prices propped up but I do what a slow deflation of prices instead of a massive bust. That would reduce defaults & foreclosures and save us money.
We’re paying for those fore3closures by bailing out the lenders. Better to restructure payments and keep owners in their home and paying some fraction of what they owe.
All or nothing means we bail out the entire loss at the bank. It’s killing us.
Is there a difference between sympathy and empathy? I think most of us empathize with many people caught up in this mess i.e. we can understand it and identify with it. However sympathy seems to imply that we share their feelings or have an inclination to feel alike. I most certainly do not. Obviously borrowers aren’t the only ones to take the blame for all of this but I won’t absolve anyone for not taking some simple steps to ensure they can afford what they’re signing up to buy.
Get the fok outta my house.
I agree – no absolving anyone from their part of responsibility – more than anything in this country we need to start expecting people to take responsibility for their decisions.
BUT – calling them stupid, idiots, deserving of what they got, etc., etc…. like some of the posters here…
Why in the world would anyone want to admit they made a mistake when other people are likely to call them names like that and treat them like dirt.
I think experience matters a lot, especially in matters of finance.
Also, as others have mentioned above, the peer pressure and the parental pressure to BUY NOW would lead many reasonable people to think they are making a sound decision.
The parents of these 25-35’ers are probably in their 50’s and have ridden the wave of a long bull market and the great housing bubble. IF they shifted investments into wealth preservation mode, and down-sized the empty nest, then they are sitting on tons of cash.
They aren’t the best example for recent graduates to emulate, just because they got lucky with their generational timing.
All this to say, not everyone is a finance wiz, and even people with common sense can be talked into bad decisions from the people they trust the most.
I have to agree you buy any asset and it can go up or down–do I get my money back when one of my stocks drop do I get a do over. When you first buy a home you expect to live in it, fix it up and stay a few years–it’s an investment not a quick flip or if the price goes down you can walk away–it’s your home. Prices always go up and down and I feel they should honor their contract unless some kid of fraud and that case get in line with the FBI.
You all bought thinking it has to go up and you were wrong same as a stock.
Fix up your home and try and sell it walking away only hurts everyone else. And the government stepping in teaches us no moral lesson here as the more people walk away the more the prices all over come down. Is this fair to people who have owned their homes for years? Taking everyone else down with you.
I have owned three homes the first two were losses and the third was a gain this is the normal process in owning a home. You learn from your mistakes and you learn that houses go up and down in value.
A home is an investment taking this out of the equation will cause stagnation for many years to come. Why would anyone buy now?
and you young people should have stormed City hall and demanded fair housing!!!!!!!! WE did back in the early 80’s when interest rates were 20% instead of walking away—
IR,
you would be suprised how many flippers are still working in this market on bank owned properties. In my neigborhood near claremont, there was only one area where new houses were built and a lot of them are in foreclosure now (no surprise there). However, in the last few months, many bank owned homes were sold for much lower prices (in the range 400- 475k) and almost all of them came back on mkt within couple of months with 40-80k more. the part that surprises me is that they all got sold. so, some people are still making money in this mkt, not as much as 2006, but still. My realtor friend said that he has been seeing as much as 50% as downpayment when it is a bank owned home.
Hey Sam I’m in beautiful La Verne… howya doin’???
Pricey flat screen, high cable T.V. bill, … I don’t feel too bad that these people that got to live in a 400K home while I’ve been locked in a tiny apartment where my rent gets raised every year. Simply because I’ve been locked out of the housing market for the last 8 years because the prices of homes have been overvalued. Nobody saw this coming? How come I did. I didn’t buy. However, I bought stock in GM and GE. Who is going to help me out. NO ONE! Who is going to replace my Retirement Annuity that a banker talked me into. NO ONE. And, I don’t expect anyone to. I take responsibility for my actions. I say we take up arms and storm all Government buildings if Obama and crew spend a single sent on helping one of these morons keep their homes. The proces of homes are overvalued. This is what got us in trouble to begin with. Why does the Government want to keep the prices artificially inflated. I guess they have to pay all those Government workers that work less hours per day, less days per year, and less years in a career than the rest of us. Along with the fact that we don’t have pensions (never mind guaranteed ones), benefits for life, on and on and on … The prices of houses will take care of themselves. OBAMA stay out if you know what is good for you.
Oooooo-weeeee!!!!
Don’t stand next to concerned_citizen too long-
OBAMA-cat’s got claws!!!
I’m pissed at the morons who bought countryside and Meryl Lynch and now need MORE help.
“The government is near a deal to give Bank of America a $20 billion capital injection and potentially absorb about $100 billion in losses on toxic assets, people involved in the transaction said Thursday.”
The revolutionary war was fought over taxes….so how bad do things have to get before we start another one and overthrow the government?
As for Obama, he is planning to spend just as wastefully and frivolously as George W Bush. Yup, so much for change…
WORST staging ever…
I’d rather live in an apartment that that home.
If I’m not mistaken these have underground parking with elevators. They’re handicapped friendly condo units. The HOA fee of $300 is comparable to Laguna Hills (not Laguna Woods) condos.
It really is sad how the timing works out for some. My timing was aweful too, thankfully I found your blog and held off on purchasing.
Some of my co-workers weren’t so lucky. I think it’s an evil in our society that this has happened. I’m sure no one will agree, but I don’t think housing should be an investment vehicle. I wish they’d pass a law making it illegal to buy a house and rent it out. 🙂 I know, I’m stupid. 🙂
Just today I was noticing that there seem to be a lot of short sales in the $450-500k range SFMs in El Camino Real (Culver / Walnut). I even see some sub $500k houses that according to Red Fin are not short sales that are 1500 sq ft and on a 5000 sq ft lot. Not bad!! Now if only I could find one of these for $410k or so…
Bottom line, each of us has the obligation to be sure we can pay for what we want before we take it on.
Yes, CA is expensive. Always has been. You pay a premium here for the weather, the economic vibrancy, being around cool and diverse people, and the fact that So Cal real estate is more in demand than real estate in a lot of other places.
Yes, the bubble overinflated the market here. It will deflate. Very slowly if the Fed keeps throwing money at the banks (which allow them to put off recognizing losses). Then it will probably reinflate in another way. Etc. etc.
However, as an adult one has to take responsibility: that means save enough money to have some reserves and a reasonable down payment before buying. Also taking time to learn to be financially literate.
My story: grew up in Midwest (no clue about financial literacy), graduated in late 1980s, moved to CA, married, had some family setbacks that left spouse and me paying for/supporting our parents/other family members economically for several years. (Learned financial literacy because I had to.) Managed to have a kid.
Lived in rental housing (2 apartments, one house) for a total of 14 years while saving (and despite unstable jobs due to companies folding). No vacations other than to see family for 10 years. No cable TV til 4 years ago. (Now we have cable, and a flat screen — bought this fall with cash. Boy, do I like it! and appreciate it!)
Our child was 6 (and in private school) when we finally were able to buy a house in a decent neighborhood with good public schools, which she attends. The world did not end: she is well adjusted, a nice kid, and not spoiled.
Did I say we buy cars 2 years old, then hang on to them til they fall apart (usually around 190,000 – 200,000 miles)?
The clothing at outlet malls is not cutting edge fashionable, but it’s fine. Occasionally, it’s fun to find a great piece for way less than retail at a consignment or thrift shop. (As I write this I am wearing a terrific tweed jacket bought for $4 at a thrift shop.)
We had a great social life during all those years having friends over to eat, and going to their houses. (We learned to like to cook.) Now we go out to eat a bit more, but it’s still a treat.
For fun now: bought an ocean kayak used (twice by prior owner)on Craigslist. Great free hiking around So Cal with dog rescued from pound, who is eternally grateful. Great used books available at many used bookstores. Rescued cats double as space heaters. Also involved in some civic activities, which feed the soul.
Extravagances now: a week away in a rented house at Thanksgiving; occasional trips abroad; occasional spa days; hardback books; pets; and a gym membership.
My job, or my spouse’s, could go away any time. So we try to relish the good days, and sock away money for when we won’t be able to work, or when our companies hit bumps.
It’s hard to resist when everyone else seems to drive a BMW, or travel to Europe every year, or know the latest and best club. But I’ve never had anyone turn down an invitation to dinner because our house or apartment wasn’t fancy enough . . . and if someone did, I would not invite them back. You can pretty much make as much fun as you like without spending all the money you make.
So I am against the bailouts, for banks or homeowners, as I don’t want to have to pay for other folks’ mistakes. (Don’t mind paying for extending unemployment/retraining though, as a matter of social good.)
Thank you. I have a similar tale. My father was a laborer (6 days a week, 7 holidays, 51 weeks a year), my Mother worked on an assembly line, they had no pensions, my grandparents were not citizens of this country (guess what – they were denied by the Government – I’m not hispanic). This is the tale of most of us baby boomers. My parents paid off their house, all by themselves. No vacations, no fancy cars, no nothing – now their taxes are through the roof in order to pay for those that believe they and their children are entitled to everything. Guess what – YOU ARE NOT. I have an 800 credit score, been locked in a tiny 500 square foot apartment for 8 years because home prices are WAY TOO HIGH. I have a 100K for a downpayment – and yet I still cannot buy a home here because the values are still too high. And, for some reason, so many of you and the Government say we are all in this crisis together. The cheerleading isn’t working – it’s not my crisis yet the Government will steal my moeny to reward the immoral and the ignorant home owners. The Government is even now going to offer a $7500 tax credit to 1st time home owners. Some house in CA are overvalued by 100K or even more. How is that a deal? Why does the Government want to give a blessing to buying overvalued houses? This false security that it is OK to buy homes now is worse than what any Lender ever did to anyone. Obama is a walking lie, a true Left of a Socialist, and will say anthing to be elected which has already been proven even before he takes office, … and, then there is DODD. The most corrupt politician there is that has benefited from the mortgage crisis and now puts his nose in every decision to make it appear as if he is a hero in solving the crisis. It was his job to prevent this disaster to begin with. Not benefit from it. OFF WITH HIS HEAD!
Sorry, not much sympathy here — anyone foolish enough to pay $389K for a 900 square foot 1970’s apartment might ask themselves why the price was so ridiculously high at the time, why they were willing to take on a loan to pay it, and how on Earth they ever imagined someone else might actually pay MORE for it later on.
You can’t always see every bubble before it’s too late, but there were a lot of clues about this one.
“It’s hard to resist when everyone else seems to drive a BMW,”
What? You can get a bimmer for like $2-3000, easy.
Oh, you mean a *new* bimmer? F#ck that! 🙂