By 2004, the primary reason people bought homes was to make a profit. A home was a money maker that gave you shelter. What a deal.
Asking Price: $1,199,000
Address: 52 Winding Way Irvine, CA 92620
{book}
Shake your money maker
Like somebody boutta pay you
Don’t worry about them haters
Keep your nose up in the air
You know I got it
If you want it, come get it
Stand next to this money
Money Maker — Ludacris
Real estate is a money maker. Don’t listen to those haters at the IHB. BUY NOW!!!
In the past couple of weeks, we have had a couple of new posters
from beach communities remind us of how much kool aid is still in the
market. The Irvine bulls have been quiet for a while now, and although
the used house salesmen are calling the bottom, we all know prices have
not bottomed yet. As long as interest rates are artifically low,
unemployment is very high, and default rates continue to set new
records, there isn’t much chance of prices stabilizing.
The last bastions of kool aid denial are the beach communities.
Perhaps prices there will defy the downward pull of nearby communities.
Perhaps not. Personally, I think prices there are going to crash very, very hard. We will see.
There is a legitimate financial reason to buy a home: it saves you money versus renting. I have written often about rental parity and waiting to buy when it is cheaper to own than to rent. We are seeing this in neighborhoods all around Orange County, largely due to the artificial affordability in the form of 5% interest rates orchestrated by the Federal Reserve.
However, the primary financial reason people in California buy homes has nothing to do with rental parity or saving money; it is all about speculating on appreciation. Perhaps the collapse of real estate prices and the resulting foreclosures and bankruptcies will change people’s attitudes. With the strength of the kool aid in California, it will take a long and painful collapse to change people’s minds. (For anyone who needs a refresher on the difference between cashflow investment and speculation on appreciation, please read Speculation or Investment?)
Asking Price: $1,199,000
Income Requirement: $299,750
Downpayment Needed: $239,800
Purchase Price: $1,545,000
Purchase Date: 6/21/2006
Address: 52 Winding Way Irvine, CA 92620
| Beds: | 4 |
| Baths: | 5 |
| Sq. Ft.: | 3,477 |
| $/Sq. Ft.: | $345 |
| Lot Size: | 5,717
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Tuscan |
| Stories: | 2 |
| Floor: | 1 |
| View: | Park or Green Belt |
| Year Built: | 2006 |
| Community: | Woodbury |
| County: | Orange |
| MLS#: | S580793 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
STUNNINGLY BEAUTIFUL home: reflects a bit of Hawaiian Style with arelaxed elegance. Rich hardwood flooring, custom painting tastefully
done, a mixture of plantation shutters and vertical blinds, crown
molding throughout. LARGE GUEST SUITE ON FIRST FLOOR, suitable as a
second master bedroom. Every bedroom has its own full bath. SUMPTOUS
MASTER BEDROOM AND BATH. Double sink vanities with limestone counters ,
polished stone flooring, travertine shower stall with custom tile.
Media niche in master bedroom. UPSTAIRS MEDIA CENTER AND SECOND FAMILY
ROOM. Custom built-in cabinet center holds a large flat panel TV.
EXTRAORDINARY BACK YARD: AN OUTDOOR KITCHEN: large covered grill,
double burners, storage, icemaker, FRIG. supports two umbrellas, a bit
of BBQ Heaven. TWO KITCHENS: INSIDE AND OUTSIDE. Across from one of
Woodbury’s beautiful private parks with pools and a tot lot.
Stunning!!!
Intermittent CAPS LOCK
What? Two kitchens, and neither of them is gourmet?
These are the kind of owners I feel bad for. They purchased right at the peak on 6/21/2006 for $1,545,000. They used a $1,235,700 first mortgage and a $309,300 downpayment. They did not use conventional financing, and I imagine they cannot afford the payment on anything other than the ARM they used. Now that they cannot refinance and the market has gone south, they are being compelled to sell at a loss. If this property sells for its current asking price — 22% off — and if a 6% commission is paid, the total loss on the property will be $417,940. Their $309,300 downpayment is lost, and their credit will be trashed.
That sucks.
I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
Beach communities? How about a $7 Million markdown?
30553 Morning View Drive
Jul 13, 2009 Price Changed $16,995,000 —
Apr 02, 2008 Listed $23,750,000 —
30553 Morning View Dr
Malibu, CA 90265
Price: $16,995,000
BEDS: 10
BATHS: 12
SQ. FT.: 20,787
$/SQ. FT.: $818
LOT SIZE: 5.33 Acres
PROPERTY TYPE: Single Family Residence
STYLE: Colonial, Other
STORIES: 2
VIEW: Coastline, Courtyard, Hills, Mountain, Ocean, Orchard/Grove, Panoramic, Pool, Has View, White Water
YEAR BUILT: 1992
COMMUNITY: Malibu Park
COUNTY: Los Angeles
MLS#: F1761212
SOURCE: SoCalMLS
STATUS: Active
ON REDFIN: 469 days
“VERY SERIOUS SELLER! Discover timeless European elegance in the heart of Malibu! This palatial masterpiece on approx. 5.33 private ocean view acres includes manicured gardens, reflective pools, fountains, caretaker’s residence, horse stables with riding area, tennis court, large infinity edged pool guest/pool house, fruit orchard, large motor court & more. It is truly a ‘trophy’ property in every sense of the word. Endless views, magical location, grand scale & elegant style make this a worldclass compound for a deserved few. See agent remarks for square footage. Also available for Lease.”
Also for lease = vacant
http://media.cdn-redfin.com/photo/46/bigphoto/212/F1761212_1_2.jpg
http://media.cdn-redfin.com/photo/46/bigphoto/212/F1761212_7_2.jpg
A bit over-the-top for my tastes, but it is a unique property. With the $7,000,000 price reduction, the owner is giving it away… not.
There is no accounting for taste. This is in Malibu?
The property is valued at only 3 million for tax purposes. Ain’t prop 13 grand?
What … you’re not in favor of grandpa paying 1/3 the property tax you pay? Hells Bells, this has become the American Way … shift the burden to the next generation.
I keep asking myself, why has Prop 13 not made its way back to the supreme court on some equal protection argument. Could it be a bunch of old geezers on the lower courts, protection their interest?
You’re probably aware that prop 13 did make its way to the US Supreme Court in 1992. I believe the gist of the majority opinion, was that community stability and continuity were important and prop 13 enabled that. If an individual objected, they could buy somewhere else.
I’ve no idea how often the Supreme Court reviews the same situation under a different context.
Lee: sorry; misread your comment the first time. You are obviously aware.
These need a movie star in the picture.
I agree Sue…here ya go
Ha, Ha. That’s funny. However, I asked for a movie star, not an old TV “star”. 😆
Nice.
Your clear delineation between speculation and investment is something everyone who thinks they are investing should read. That is investing
in anything. Internet stocks were only good ‘investments’ when you looked at their rate of appreciation. Not only were they not good cash flow investments, most were cash-flow negative.
There are non-investment reasons to own vs. rent also. The one I thought of was people who like to do lots of gardening. With the small lots in soCal I dont’ think that’s what’s driving people to buy. People may also treat housing as more of a consumption than investment expense – again not happening a lot in soCal.
While I somewhat feel sorry for people who bought at the bubble with substantial dp’s, they probably stretched pretty far, and some of that dp may have been move-up appreciation money. When you stretch like that, you leave no room for problems which inevitably happen, and you contribute to the bubble. Just taking people from 25-33% dti can create a 32% increase in home prices – keeping all else constant.
One of the main reasons I want to own and not rent is that I’d like to buy/install furniture that requires mounting it into the studs. I have a lot of books, and a dog that likes to eat books; the solution is high book shelves. However, high book shelves will topple if they’re not screwed into the walls. Right now, my books are in boxes, and they’ll probably stay in boxes until this stupid bubble deflates.
(Ugh, patience is so hard; you can’t buy while the bubble is inflating and you can’t jump into the market until it’s finished deflating. All told, there will be, what, 10 years that this bubble has caused me to rent for?)
There is a relative of tobasco which I used to keep the dog from stealing our remote controls and hiding them. Very effective. Also works on books.
Is it messy? I had an aunt that used something called “sour apple” on some of her stuff.
Not at all messy, and you only need a few tiny drops. It you get it on your hands, wash thoroughly. Your hands won’t burn, but if you get it on your tongue or eyes it will hurt a bit.
Our dog liked bitter apple, was only slightly deterred by regular tabasco. I need to locate the capsaicin package we have for a brand label. Haven’t needed it in about a year.
Our dogs have eaten aluminum cages and drywall sections one stud-stud wide, about 3 feet high, and he liked the taste of the sour apple. We were concerned and have bought a 10x10x8 steel enclosure for the basement. Thunder is his trigger.
The enclosure could be for the dog or the books 🙂
Our dog eating building materials made us renters who could count on completely losing our security deposit.
Are you sure this is a dog and not a disposal with fur? 🙂
What breed? Does he get plenty of exercise? Does he have anything to watch or do when you are gone? What does he do if people are around when there is a storm?
There are an assortment of things which might help. One is an herbal ambien for dogs. Usually used when traveling, or for dogs who flake out at the vet.
Our dog used to gut stuffed animals, chew on things that weren’t his. He’s a pretty fun and trustworthy dog now as an adult. Never had any fear of thunder. We actually took him to fireworks for 4th of July. He thought it was great.
He’s a shepherd mix, looks like a 40lb jack russell. We have another dog – 80lb basenji mix. They had free run in the basement until he started eating it. The two sharing the giant cage seems to have helped.
Does Cesar read ihb? Sent an email with some pics of damage, but no recommendations from him.
Are you renting a place with impenetrable walls?
I rent and I have things screwed into the studs. I’m moving in 3 weeks, and I will do the same to the new place.
I’m sorry – you think you can’t earthquake strap your book cases or use the earthquake bolts as a renter? Why not? It has never been a problem for me. You just have to use the hole filler putty NOT TOOTHPASTE, to refill the holes when you move out. Best is if you can reserve touch up paint for when you move out at move in time. If you do this, your deposit won’t take much of a hit.
The place I’m in now made it sound like you’d lose your security deposit if you drilled into the walls. The place we’re moving into next week just gave us the green light to drill into the walls, though. I may have to do that.
If some apartments don’t let you drill into walls, then even if you’re current apartment allows it, you can’t count on being able to move that furniture with you on your next move. It’s already a bit difficult finding a place that allows big dogs.
Um, the solution is to get rid of the dogs. There’s no reason people should be living with filthy animals.
Re: the what to do with them from yesterday, what have we done with the guys from Lehman, AIG, Bear, etc. whose terrible bets inflated the bubble and enabled the types of malignant loans mentioned? Are Dick Fuld or Joe Cassano bearing any personal responsibility? Limited liability corporate law protects irresponsible employees. I’ve seen homes with listed owners being LLC’s, which I can only imagine is to shield the true owner from any downward price movement, while the owner was free to reap any benefit of appreciation.
We seem to be holding individuals to higher standards to people acting under corporate umbrellas.
I’m not 100% sure on CA law, but generally setting up some sham LLC doesn’t protect you from liability. You have to actually run the LLC like its a real company to get the limited liability. Separate accounts, records, no mixing funds etc… It’s a misconception that you can just set up an LLC and everything will be ok. Courts aren’t that dumb.
This only works if the LLC buys the property on its own, without a personal guaranty by the owners of the LLC. That rarely happens, except with very large organizations with lots of assets.
Calculated Risk on falling home prices:
Housing: Sticky Prices
“There are clues in the DataQuick report that prices are still too high. The volume of sales is still below normal, foreclosure resales are 37.3 percent of the resale market (a very high percentage) – and foreclosure activity “remains near record levels”. And the foreclosure resale statistic don’t include short sales, and the recent data from Sacramento suggest short sale activity is fairly strong.
There are other reasons to believe prices will fall further, but I just want to point out that the small pickup in demand doesn’t suggest a price bottom.”
DataQuick is cheerleading again:
Bay Area home sales and median price rise
“-Home sales in the Bay Area jumped to their highest level in almost three years, the result of improved mortgage availability and a perception among potential buyers that prices have bottomed out. The median price paid for a home increased month-to-month for the third month in a row, a real estate information service reported.”
The general public is easily fooled.
The pick-up in demand will slow the rate of decline (maybe), but it is the months of inventory statistic that will indicate when things will bottom. I think the rule of thumb is that more than 6 months of inventory implies downward pressure on prices.
The supply/demand curve argument that CalculatedRisk presents in that post is useful to keep in mind. An increase in volume does not mean an end to depreciation; it’s just simply the natural result of depreciation.
A realtor was kind enough to send me some info on real estate sales in Thousand Oaks.
In June, the median sales price was $680k with 450 homes on the market.
In February, the median sales price was $480k with 490 homes on the market.
oh yeah, and last June (2008) there were 700 homes on the market. The number of homes on the market has declined pretty steadily over the past year.
Is that a sign that shadow inventory is significant?
I don’t know that it says anything about shadow inventory.
The rising median is being caused by the shifting mix of sales now that we are clearing out the middle of the market. When sales were concentrated at the low end of the market, the median makes the drop in real prices look more severe than they really are. We are now entering a phase when the median can rise while house prices are still falling because more mid to high end properties are selling while low end sales drop off.
I was thinking that the drastic increase in median, coupled with the drastic DECREASE in inventory is a sign that the bottom end, subprime foreclosure-type stuff is being held off the market.
Question for irvinerenter:
When a bank “repurchases” a home on the courthouse steps on which it has the mortgage (assume only a 1st mtg is outstanding), is it legally considered “an arms length transaction”? If so, is it usable as a comp by independent appraisers? Tx.
It is my understanding that appraisers have discretion when choosing comparable properties, and they can choose to ignore auction properties and short sales if they believe those transactions to be outliers.
The appraiser’s job, as per customer request, is to determine what is the most likely resale price of a subject property. A lender wants to know the collateral they are loaning against will retain the value of the loan. They used to always ask for a 20% cushion just to protect themselves, and after losing a trillion dollars, they will likely be conservative for a while (we can only hope).
If the appraiser sees a cluster of sales around a given price level, he has a feel for where the market is currently transacting. When you see a data point that is outside of this cluster, you tend to view that as an aberration rather than being indicative of the current market. Appraisers need the ability to discount or ignore outliers in their deliberations to establish market value.
Thanks. When you say, ” They used to always ask for a 20% cushion just to protect themselves…” do you mean that, if the appraiser thinks the house is worth $100,000, the banks would instruct them to value it at $80,000?
I think he means if the appraiser thinks the house is worth $100,000, the banks will loan $80,000 on it.
“They used to always ask for a 20% cushion”
Now I see the confusion. Are they asking the appraiser to come in 20% below, or is the down payment the cushion?
Exactly. Your initial answer made immediate sense. Another of my senior moments. 🙂
I was referring to the downpayment. I was trying to be cute about how offering 100% financing took away their safety cushion. Sorry for the confusion.
It’s that banks will only loan 80% of the value; if the appraiser thinks its worth $100K, they’ll tell the bank that, but then the bank will turn around and loan only 80K to the buyer. The difference between the price and 80% of the appraised value is what the buyer has to provide as a down payment.
If someone has agreed to a $120K price tag on a home that’s appraised at $100K, then they have to put up a $40K down payment. That would be 33% down instead of 20%. If the buyers only had $24K ready for a down payment (20% of the price tag) then they have to come up with $16K extra cash or the sale falls through.
That’s why the NAR is complaining about strict appraisal standards; deals are falling through because the buyers can’t cover the gap. The NAR is blaming the appraisers for lost sales. If only the appraisals came in higher, then the banks would lend more, the sale would complete, and the realtors would get their cut.
Technically, if someone is willing to pay 120K for the house that appraised at 100K, isnt the appraisal wrong then? To me, I’d say the market price is whatever someone is willing to pay. in this case, the true value of the home is 120K.
Then why do appraisals at all?
The term is Fair Market Value. What the fair market would value the property at. Just cause someone got lucky enough to find a sucker willing to pay 20% above FMV for the home doesn’t mean its suddenly worth $120k.
From a lender’s perspective, they don’t want to know how much the greatest fool is willing to pay, they want to know how much the second greatest fool is willing to pay.
If they loan money to the greatest fool, and he defaults, the bank is going to have to take the property back and sell it to the second greatest fool. That is the number banks want to know, and it is why they want objective appraisals about where the “action” is.
True, and if that somebody has all cash, that could be the new comp for that neighborhood and type of property. But until then, a bank will only loan 80% of what the existing comps value it at.
Now, if you have a standard loan and want to overpay the appraisal, you can always increase your down payment to match and the bank will be happy. That is, instead of putting $20k down for the $100k place, you put $40k down. The bank’s portion of the purchasing is $80k either way, so they shouldn’t care.
In the past, the bank would arrange the appraisal. The appraiser would look at the loan application to the downpayment and %DP. If that info were not available, they call the buyer. Surprise, Surprise. With the comparables the house comes at the right price for a DP of 20% +/-2%. I always questioned the fairness of the process.
Deals are falling through because the house is overpriced.
then market is wrong
if you are planning to buy, it the Realtors who push the comps. They decide the price..period. Whenever i have attempted to negotiate a purchase with detailed comps, the realtors say the following:
a) that was a short sale, we cannot use it as a comp.
b) REO are not comps.
c) but this house is unique, the area is great, school is amazing.
d) if you dont buy now the house will be gone by next week.
and other loads of trash to show that the listed house is unique and correctly priced, besides there is always a sucker waiting on the sidelines with cash to buy it.
No one does a detailed comparision, they pick up the highest priced house and come up with a selling price. I like to do a line item comparsion between houses..(compare rooms, yards, kitchen, area, appliances independently and I always come up with a good estimate). Unfortunately, realtors blow a different kind of some up the sellers backside and they think their homes are highly prized and competitively priced.
Prices are not going anywhere as long as we have salivating buyers in who believe that owning a house in Irvine is a slice of heaven.
Interesting observation:- This week we went to a day old listing on lewis, there were 8 families waiting to see the house. They were literally pushing each other to see the rooms. The house is just a regular house, nothing great, was priced at 650k which could have triggered the frenzy. Looking at the people one would thing that it was the last house in Irvine. We just glanced around and walked away.
When a Realtor does a Comparative Market Analysis (CMA) or a Broker’s Opinion of Value (BPO), they are not held to a higher standard like appraisers are. Unscrupulous realtors will cherry pick the comps to make the case for whatever price they are trying to justify (buyer’s brokers do the same, just in the other direction). This is a problem.
If you look back at last weekend’s open thread, you see an example of the CMAs we are planning to use. We would show this same report to both buyers and sellers so everyone has the same information. It eliminates some of the bickering about comps (not all the bickering as some will still play the cherry picking game).
Scheduling multiple showings at the same time is a great way to create a sense of scarcity and to get people to compete for a property. You are wise to recognize it for what it is and not participate in the frenzy.
My original question concerning “arms length transaction” was simply an attempt to understand whether there was actually any legal change in the banks position re: maintenance of minimum capitalization ratios when no buyer shows up at the courthouse auction. Sounds like there isn’t – the bank just adds another document stating property is now REO but there is no change in how much the bank values the loan for capitalization purposes. That change only occurs after the property is sold and the sale price recorded by the bank on its books.
It isn’t supposed to work that way, but that is what they are doing now.
Lenders are supposed to revalue their loans based on the likelihood of continued payment and the anticipated loss recovery. It is a complicated calculation that anticipates default rates and collateral value. Ordinarily, banks have very little real exposure, but now, default rates are very high, and recovery rates are very low. If they were to go through their books and apply GAAP, they would be revealed as insolvent or bankrupt, so they don’t.
Our banking regulators are allowing our banks time to make enough money with the fat interest rate spreads they have right now, and if they can make it back quickly enough, we can go back to GAAP and the banks will not be insolvent. That is why they have suspended mark-to-market accounting rules for a year, and they may extend it even further if the banks are not ready for the truth.
Remarkable how effective the low interest rates and the marketing from REIC were. Panic buying. What happens when foreclosures and short sales continue on and on. I hope that these panic buyers have the resources to stay in the homes they bought at inflated levels or we going to go through this process for years and years, mabye a decade.
I think Google killed the Real Estate Star…
Seeing the aerials of these expensive houses with Google map provides too much information. They are all crammed together and not attractive at all. No amount of perfect angle pictures can hide that there is minimum back yard and the house is just another cookie cutted in a sea of cookies. And to top it off the 5 and 405 usually within two clicks of zoom out, something I rather not be that close to if paying that amount.
Thanks again. Maybe it’s house envy but this website has replaced perez hilton as my morning wake up show. And yes I do intend to buy a house but only when this website’s astuters deem so. Anyways a $800 rent is hard to beat so I’ll be happy going on my vacation trips on a semi annual basis.
I’m guessing I’m one of the readers you’re talking about in Newport, although I didn’t say anything at all about beach pricing. All I said was one of your analysis pieces was wrong, a very important one about investment value of real estate, if you recall. I guess you didn’t like that. Your militancy is getting boring. You’ve been telling the same story day after day after day, but you don’t see that the drops you’ve been showing haven’t changed much for at least a year and a half. This piece today is the nail in the coffin of your credibility. Oh, those evil people who expect housing to go up over time! Yes, for 100 years people have considered appreciation in home buying math. Bastards! You see, even a little bit of appreciation makes owning cheaper than renting most of the time. Always has and always will. Good luck with persuading people to your “new way” of thinking. You’re going to need it.
“Your militancy is getting boring.”
You are right. We did not start off well.
“All I said was one of your analysis pieces was wrong”
I should have reacted better than I did. I apologize.
I don’t wish to push you away. I like differing viewpoints and a data-driven discussion.
You may be correct in your views; it really might be different this time — it would have to be. I am merely reviewing history and basing all my predictions on the proposition that history repeats itself. If history repeats itself, prices are going to crash very hard at the high end; that is a fact. For the crash not to occur, the fundamental valuations must be “different” this time.
I have no idea what is going to happen next. I have an active imagination, and I can visualize what I believe is going to happen next, and I write about it often, but that doesn’t make it so. I don’t want to discount the possibility that you may be correct.
I’m sorry, let’s start over. For the record, the beach is crashing hard right now and has been for awhile. Have you seen the carnage in the Port Streets? Lots of custom homes with $2.8m price tags and $1.8m comps. Not good.
Thank you, and welcome to the board.
I am amazed at the quantity of inventory in Newport Beach right now. I don’t know the exact numbers, but Irvine’s inventory as compared to the total housing stock is quite low right now; Newport Beach looks like a much higher percentage of the housing stock is for sale. When I go to Redfin, I have to zoom in extra tight to avoid the “over 500 properties” error.
That much looming inventory looks like real market fear. When you get a few comps like the one you are describing, and people start to take notice, fear can become self-fulfilling leading to capitulatory selling.
Just so you know, your comments have promted me to think about quality, scarcity, uniqueness, and other properties of homes that may give them reservoir value above and beyond pure cashflow value. There is a subjective, emotional value that is difficult to quantify, but it does exist. I will be writing on these subjects soon.
Some other things that add value beyond pure cashflow are the flexibility of ownership, the security against moving, and the quality of the housing stock.
Flexibility gets understated here by folks who talk about “painting the kitchen blue” or whatever, but there is a real advantage to being able to have a pet and to put in bolt-on furniture. Gardening probably fits here, too.
Security against moving is protected by rent control and occupancy control in some areas, but there is a real cost to moving. Compared to a single college grad, a family has a higher cost (with more people and stuff, plus any school district changes).
The quality of the housing stock available for rent is another variable. Finding a single family home to rent is non-trivial, especially with the bubble inducing the landlords to sell out, reducing this kind of rental stock. How well maintained the properties are is another aspect.
I like the cashflow comparison, but it doesn’t capture these differences (not that they’re worth doubling the value of a house!)
I haven’t seen any indication that good, affordable rental housing is scarce. Quite the opposite in fact.
Frank,
The “security against moving” is real. I don’t know if there is objective data being collected about how often renters are forced to move compared to foreclosures, but owning does put the security within your control. As long as you make payments, your banking Overlord is not going to make you move. As a renter, a capricious landlord can force you to move on a whim (within the terms of the lease).
The Flexibility you are describing is certainly a perception of some. You could probably do what you wanted with a rental as long as you put it back to the way you found it. I have installed shelves and stuff like that in rentals and moved them from place to place. As a renter you are far less likely to do many improvements because it is a waste of money (other than the joy of use while you live there).
How would you quantify the dollar value of these things?
That is the real question….
Frank / IR,
I think you’re both absolutely correct with regards to security against moving. My family and I are currently in that boat – the landlord stopped paying the mortgage with our rent quite some time ago (probably about 1 year by my estimations). We caught it this past March, and I called the owner asking him about it. He must have been shocked that we knew – immediately said that, yes, they weren’t paying and couldn’t get a mod, so we could just live there for free until it gets foreclosed upon. The trustee sale was supposed to be on June 10th, but has been pushed back 2 times now to August 11th. I’m guessing it might be pushed again due to the moratorium.
There’s a constant feeling of uneasiness because we have no real idea when we’ll need to be gone, yet it makes very little sense to move from a financial standpoint because we’re not paying rent. Life in limbo. We’ve been looking at places to buy in North OC with little success. It’s pretty amazing how quickly places moved when priced fairly low (upper 300s – mid 400s). Even places that are very, very marginal sell within a few days, much of the time for over the asking price.
Just makes you realize that there can be, for many people, other factors at play when purchasing a house.
Yup, it’s the dollar-value worth that needs calculating, but it’s not straightforward. It is there though. What fudge factor though? Is it a percentage? Is it different for everyone?
Another benefit is the “forced savings” aspect of a mortgage. Many people have a hard time saving, and a mortgage “forces” them to (unless the go off the HELOC deep end, of course). This forced savings can be a personal benefit as well as a societal one.
But again, what’s it worth?
Why do you keep coming back here? Hmmm?
100 years of appreciation in home prices?
Might want to recheck you data there my friend before you add another nail to your own coffin.
Professor Shiller talks about this in his book, “Irrational Exuberance”. He was able to obtain data going back to the end of the 19th century, and here’s what he learned. Some markets have outperformed other markets, but when you include inflation, and then add all the markets together, home prices have remained relatively flat in the USA … of course it was that way until Ponzi scheme financing was introduced, but that was the basis of his book.
Lee in Irvine, your analysis leaves a lot to be desired. First, read this and decide whether Shiller is even right:
http://online.wsj.com/article/SB124051414611649135.html
Then go back and address my post about appreciation being part of home buying math. Even appreciation at the rate of inflation is appreciation, and should be (and is) part of home buying math.
NS-
I didn’t give an analysis … all I did was tell the board what Professor Schiller wrote.
:smirk:
But you dismissed my premise that people have always assumed that homes go up over the very long term and that homes, in fact, go up over the very long term. Ignoring that is nonsensical and makes you seem irrational.
What exactly is that smiley emoting? Never seen that one before.
Outlook for Home Prices Clouded by Spat Over Historical Trends
This article appears to be a thinly veiled “hit piece” on Shiller written by someone who opposes his policies:
“If they rely too heavily on house-price gauges, politicians may get a distorted view of the severity of the slump and support overly drastic measures, says Kenneth Rosen, a housing economist at the University of California, Berkeley.”
They guy is clearly worried about the policy implications of Shiller’s work. I am speculating that Mr. Rosen is being paid by lobbyists for lenders to discredit Shiller.
While updating his book “Irrational Exuberance” in 2004, Mr. Shiller says he was surprised to find little data on long-term house-price trends. So he spliced together his own chart from various price indexes and studies. He conceded that the chart was “imperfect,” but added that “it appears to be the best that can be found for this long time period.”
I remember reading this in his book. He clearly stated it was his best effort to assemble data from different sources.
Whose work to assemble a long-term price history would you find more reliable? The tenured professor who explained irrational exuberance just in time to witness the stock bubble and the housing bubble? Or this guy?
“Mr. Lawler, a former Fannie Mae economist who now is an independent consultant in Leesburg, Va.”
I read that as an economist who lead the GSEs into government conservatorship and is now unemployed.
I have read the article, and I conclude that Robert Shiller was right, and he continues to be right about where prices are headed.
I haven’t been in the mood to debate you people. Why? Because the debate is over … you’ve lost.
However, I do find it ironic and somewhat amusing that you come in here (after being wrong), and insult IR … calling his writing “boring “. IR is doing a very good job, explaining this Ponzi scheme to this community, and distinguishing & analyzing individual cases, so we can see how this is impacting us locally in real time.
You say ~ “But you dismissed my premise that people have always assumed that homes go up over the very long term and that homes, in fact, go up over the very long term.”
Actually, I was adding to Dan in Fl statement. The only time I directed anything to you was when I asked why are you still here. You’ve insulted IR, you’ve referred to this venue as boring … why are you still here?
On a final not … it’s a smirk, not a smile.
Of course it’s a smirk. I’d think nothing less from you. You don’t want to “debate” because you were wrong on the fundamental issue. Quit obfuscating! On Irvine Renter, I apologized. I felt attacked originally. The part that is getting old is the inability to partake in conversation without being attacked by an angry mob and you sir, are a mob leader. If people want to believe that prices don’t rise in the long term, they are completely hopeless.
“You don’t want to “debate” because you were wrong on the fundamental issue”
No, I’m not wrong. Prof Shiller clearly uses data going back to 1890, making the case that real estate values, adjusted for inflation are relatively flat! Quit saying I’m wrong … I’m just communicating his message.
“The part that is getting old is the inability to partake in conversation without being attacked by an angry mob and you sir, are a mob leader”
Let me see … you come in here, start insulting the writer of this blog, and then you say I’m leading an angry mob because I ask you a simple question (why do you keep coming back here?). Come on. You’re just mad because you’re wrong, and now you’re looking for a target … and that would be anyone who’s been right. Right?
“If people want to believe that prices don’t rise in the long term, they are completely hopeless”
Your argument is with the Professor … here’s his email address:
robert.shiller AT yale.edu
Not only was he an economist at Fannie, but VP for ‘risk policy’!!
“The key part of a bubble is that people buy an asset solely because they think it is going to go up in the short term,” said Thomas Lawler, senior vice president for risk policy at Fannie Mae. There was no evidence of that in housing until a year ago, he said.
To go after Shiller in 06 was to be expected. Things were rolling and everyone had funny money to spend. But he’s been so eerily prescient that it is laughable to call his analysis ‘bogus’.
Boy, are you dense? Appreciation at the rate of inflation is still appreciation, and favors homebuying under normal circumstances. What part of this is so difficult?
Lee, step back and take a breath. You are seriously off the mark. Shiller says homes rise at inflation + .7%. That is still a healthy rise. I don’t get what you don’t get. You can’t throw away the premise of appreciation. That is extremely foolish of you.
The problem is any initial drop from purchasing now.
IR has a post in the analysis section on the timing of buying, and the bulk of the problem is the amount of time it takes for “normal” appreciation to make up the immediate loss.
But yes, housing as an inflation hedge is what you’re refering to, and most of us here would like it to go back to that.
I’m looking at buying a TH that will be considerably cheaper than renting and provide more space, such that even if it drops another 10% to cash-flow positive (such that I expect landlords to provide the price floor), I’ll still come out ahead over renting. But I’m in Virginia, such conditions don’t hold in Irvine yet. So you need to either allow yourself to pay a price for ownership, or you need the discount over renting (with rents eventually going up) to compensate you for any capital losses on the sale in case you have to sell sooner rather than later under some unforeseen circumstance.
No will be no appreciation in mid/high end for many, many years baring money falling from the sky and/or sudden wealth creation (i.e. every baby boomering dying in the next year and passing all that money down to their children).
The best you can expect is prices will just stop falling but inflation (if present) will eat any appreciation over the short term. The alternative of deflation would actually be a worse scenario.
Boy, are you dense?
Now you’re insulting me. But since you said that I’ll take the gloves off a moment.
You actually believe that I don’t understand what your trying to say? … I do, I just choose to overlook it (until you insulted me), because I think it’s stupid. No, No, No … it’s not stupid, it’s dumb, futile, idiotic, simple-minded, stupefied, pointless, and everything else in between.
I, and everyone else in America, uses REAL DOLLARS, and the goods and services we buy with them, are constantly adjusting. If I buy 1 share of asset ‘A’, and it increases 5% per year, yet the cost of goods and services increase by 7% per year, I’m losing 2% in real terms every year. You call this appreciation, I call it losing money, you buffoon.
No, you insulted me first. And your example is ludicrous. The alternative is not keeping up with inflation, i.e., not hedging against inflation that would leave you behind a full 7% in your example. Any way you slice it, 4%, 5%, 6% appreciation is appreciation. You sound moronic arguing something else.
Oh really? Are homes selling for $1,000? You might want to recheck your math.
And how do you figure these people have a problem arm that’s 3 years old considering where rates are? That sounds ridiculous, but I guess you have to have a story to sell.
I don’t understand your question. Do you mean they should refinance while underwater more than $300,000?
There is no need to refinance when your rate is 4%.
“And how do you figure these people have a problem arm that’s 3 years old considering where rates are?”
Because I have access to the property records, I know that the mortgage on this property is an interest-only ARM (10 years) with a yearly adjustment based on LIBOR.
Is that a good one?
Then their loan is not the problem. Libor is in the toilet. Their loan can’t be any higher than 4% something and the interest only option is still around for at least 7 years.
doesn’t that mean they renting for 10 years? I’d call that gambling actually because at the end of that 10 years you could have interest rate way higher (we hope since that would mean that the stimulus worked) and unless incomes shoot way up, you’d have a home that is worth less than you paid. Way less.
one other thing, why use a 10 year I/O, shouldn’t homes of the highest caliber be paid all cash?
Either they couldn’t refinance their way out of the ARM because they’re underwater, or they’re hitting, or soon will hit, the phase of the loan where one must begin to repay the principal.
Current low interest rates won’t save them. They’ll need a return to 15% annual home-price appreciation, or a long period of low interest rates, as in Japan. This second condition will mean continued house price drops, which is likely to drain their capacity to pay via macroeconomic effects on their earnings.
They have a choice between further negative equity or being forced out by their payments.
This is a problem ARM.
The arm is not the problem here.
The arm may be a problem.
– libor can change quickly and dramatically. It is added to the margin to determine the new rate. We don’t know how big the margin is or how often the rate can change – some can change monthly after an initial, usually short, period.
– we are assuming that there is no provision for a recast after 2 or 3 years. If there is, and the loan is underwater, the recast could dramatically increase the mo pyt.
As always, the devil is in the details – and we don’t know enough about them to say the arm is, or is not, a problem.
An interest rate reset is not a problem in the near future. A recast might be. As for now, if they get close to the asking price, it appears to me that they might be able to walk away with no hit to their credit, but they will lose all of their down payment and may have to contribute some cash on the deal. This doesn’t appear to be listed as a short sale (yet), so they expect to walk away with their credit intact, contrary to what IR is saying.
Of course, that’s all assuming they get their asking price or damned close to it.
“The arm is not the problem here.”
I believe The ARM Problem is very real.
Try reading that post. Keep in mind, it is not the interest rate reset that is the problem, it is the amortization recast that is the core of the ARM problem.
Lax underwriting standards have also put people into mortgages they cannot afford which makes the ARM problem worse.
The 15% appreciation scenario is an overstatement. I’m not saying 5% appreciation is coming anytime soon, but 5% restores their equity in 6-7 years.
$1,199,000
$1,258,950
$1,321,898
$1,387,992
$1,457,392
$1,530,262
$1,606,775
That should read 5-6 years.
A snarky person would point out that it takes 77 years to recooperate the lost purchasing power of the purchase, payments and taxes when adjusted for the appreciation rate of 0.7% above inflation you reference for Shiller above.
That is with an interest only loan at 4.5% for the first ten years and an original loan balance of $1.235M and a likely recast and payoff rate at 6% and an appreciation going forward of 5% (hence 4.3% inflation)
I admit I’m not on par with mortgage terms, but please help me.
So, for your examples, you’re counting on 5% appreciation for the next 5-6 years? And that’s just to get the home up to the value of the original note?
Is this extremely optimistic? What happens if it goes the other direction and loses 5% for the next 5-6 years?
You’re reading too much into it. All I’m giving is the math of 5% appreciation.
Assuming rates of capital appreciation and extrapolating back for a justification for a current price is not solid analysis. From the list price, I would bet that neither the current occupant will not stay another 5 years, and most banks cannot hold a foreclosed property for 5 years for prices to ‘rebound’. There is a carrying cost for the loan that needs to be serviced.
LIBOR went insane at the beginning of the credit crisis, which pushed a lot of people past the “point of no return”.
I’m not saying that’s what happened to these people, but we don’t really know their entire situation. What we do know is that home prices are in the toilet and are still being flushed, interest rates are unsustainably low, and any figure of home appreciation starts with a minus sign.
This guy is just getting out before things get worse.
Quote of the day:
“Many of the industry’s former employees are living on bare-bones budgets and their absence from shopping malls will add strain to both local and state finances, [Orange County Supervisor]Moorlach said.
“Our social services offices have seen a lot of former mortgage brokers applying for food-stamps and welfare,”
http://www.reuters.com/article/ousiv/idUSTRE56G4FT20090717
what can they do now – become used car salesmen? stand by street corner with a sign that says “will process option ARMs for food”?
makes me wonder as this industry shrinks fast what skill sets their former players possess that can be quickly transferred to other sectors.
working IT in many of these small mortgage shops, I can attest to the fact that VERY few of them have any kind of skills or training beyond a 2 day lecture in the company conference room on mortgages.
I’d honestly say 60% of the loan officers I knew either came from bartending/bouncing or went back to it.
This quote does not surprise me one bit.
Dan,
We just had a sales meeting discussing FHA loans. Starting OCT. FHA will no longer insure finacing for CONDOS. Are you all familiar with this??
I don’t have all the details but this will then require condo buyers to put down real $$$$.. Conventional…
Since most here in Jax DON’T have $$$$ to put down, the Toilet keeps flushing… further depressing prices… OUCH !!!!
I’d like to think you are right, but I don’t think it will happen because Barnie Franks is already beating up on them over the 70% requirement.
… the one about there being lots of owners rather than renters and most of the HOA payers being up to date. In San Diego there is already hell over this one – and its making it harder for sales to go through in a complex I’m very interested in.
I don’t think people should be allowed to buy with a mere 3% down – and I certainly don’t think the seller should be able to get the 3% to the buyer for the downpayment via some bogus charity and then hoik the price to get that 3% back. It will be a disaster for prices if you are right… but that is in a way good because the sooner they correct, the sooner we’ll have this mess behind us
That’s an entirely new one for me. Did they have any confirmation on that? Anything in writing?
I briefly checked out their website and didn’t see any announcement on that. Shoot me an email at dan@mckilloplawfirm.com if you have any paperwork.
From HUD ~ mortgagee letter
“In accordance with the passage of the Housing and Economic Recovery Act (HERA) of 2008, the Federal Housing Administration (FHA) is implementing a new approval process for Condominium Projects to insure mortgages on individual units under Section 203(b) of the National Housing Act. FHA will now allow lenders to determine project eligibility, review project documentation, and certify to compliance of Section 203(b) of the NHA and 24 CFR 203 of HUD’s regulations. HUD will continue to maintain a list of Approved Condominium Projects. The requirements of this Mortgagee Letter are effective for all case numbers assigned on or after October 1, 2009 except as noted.”
Go on this link, then click on letter 9-19 to read more.
Could somebody translate that into English? Geez.
On first blush, this means thtat HUD is no longer taking the time to determine whether Condos are eligible for FHA insurance…that determination will be left up to the banks. So, if I’m reading that correctly, the banks certify to HUD that the condo is compliant with section 203(b), and that’s good enough for HUD.
It’s a pesky business, trying to make sure that your own regulations are complied with. Much easier to let the criminals decide whether they are compliant or not.
This is a beautiful home inside, but one look at the purchase price makes me wonder if that’s all that drove the owners to buy it.
The temptation of treating house as money maker was too high. If you believe that there is a stock out there that can never go down in value, and you can purchase the shares with leverage of 5 times (20% down) to infinity (100% financing), would you not buy? When people got wiped out by margin calls back in dotcom bubble era, the leverage was not even close to housing “investment”. Once the reality sinks in that house prices do not always go up, people will go back to cash flow model (as opposed to making money thru price appreciation w/ high lever).
The temptation is still high.
No half-filled trash cans and cleaning bottles on the kitchen counter. Exterior photo not taken on garbage day.
At least it is smartly presented–everything clean and orderly, tasteful furnishings that photograph well. Perhaps furnishings and the outdoor kitchen is where a lot of the $ went that should have been going to the mortgage. But over 1 mil for a less than 6k sq ft lot?!?
But the wide-angle lens is set so stretched out that the breakfast area contains the world’s widest microwave.
I didn’t catch that. Thanks.
I like to think that home ownership also helps to put you in a much better place at retirement age – if you have significant equity in a home, or even if a home is paid off.
It sure would be a lot easy to retire if I didn’t have to worry about making a mortgage payment.
Do you not think this is a legitimate financial reason to buy a home?
This is definitely overlooked. It be a pain in the a$$, but I’d love to see calculations done that take into account that eventually, you stop paying a mortgage when the principal due hits zero.
You never stop paying rent.
Owning a home without debt at retirement is a good position to be in, but you have to consider the price paid to get there. Say by the time you’re ready to retire it will have cost $2,000,000 (principal, interest, taxes, maintenance, etc.) to own your house free and clear. If renting for all of that time will only cost you $1,000,000, if you actually saved the reduced housing cost, you’d have an extra $1,000,000 to pay the rent during your retirement. Depending on rent rates, how long you live, etc., you could come out ahead renting your entire life if the price of owning a home is too much higher than renting.
Obviously, there could be compelling nonfinancial reasons to not want to rent after retirement, and a lot of people would find the “forced savings” of mortgage payments and home equity to be easier than saving and investing in other assets. But from a purely financial perspective, it doesn’t seem to work as a reason to buy instead of renting.
N4, it looks like your numbers assume that the monthly cost of renting is significantly lower than the cost of purchase. I would agree that in that case the wise long-term financial decision is to rent.
But if we are closer to rental parity, you won’t pay double the amount of mortgage payment over 30 years.
I ran some rough numbers for rental vs. purchase of a $350,000 house. At 6.5% interest, 0% down payment, and factoring in property taxes and interest deductions, I get roughly $900,000 in total cash outflow on the mortgage over 30 years.
If that same property rents for $2000/month today and figuring 3% annual increase in rent, the total rent paid over 30 years is about $1.16 million.
Doesn’t IR argue that over the long term, rents will typically be pretty close to monthly cost of mortgage?
Same with your example. For $900,000 you get the home at the end. For $1.16m you get nothing.
You ignore the fact that you now own an asset probably worth the $2m in your example. So you paid $2m and lived in it and ended up with $2m instead of paying $1m and having zero to show for it.
NewportSkipper: I guess math is hard for you.
The homemortgager ends up with a $2 million home – but that’s $2 million after inflation.
The renter in the case above ends up with $1 million plus interest.
Could be a wash.
That is not correct. All of our calculations are done in today’s dollars. That home could be worth $4m in tomorrow’s dollars. Irvine Renter, your audience does not understand mortgage finance and the time value of money. Maybe you should do an analysis piece on that.
Excuse me, I see N4’s example includes financing, so it includes interest. We would need to know the base purchase price to determine possible future value. Anytime you use leverage the computations become more complex. The easiest way to look at it is as a cash purchase. Then you are merely comparing returns and it takes inflation out of the equation because it affects all investments the same way. When using leverage, everything becomes more complex, but is also amplifies your returns.
San Jose Renter,
Here is something to chew on:
$300,000 Purchase price / cash purchase
Total paid-in = $300,000
FV in 30 years at 4.5% = $1,123,595
FV – paid = +$823,595
$300,000 Purchase price / 80% financing @ 5.5%
Total paid-in = $550,568
FV in 30 years at 4.5% = $1,123,595
FV – paid = +$573,027
$300,000 rental home @ 4.5% annual increase
Rent year 1 = $1,800
Rent year 30 = $6,741
Total paid-in = $1,317,753
FV – paid = 0 – $1,317,753 = -$1,317,753
If you assume a 4.5% return on the 20% down a renter doesn’t pay, you can offset $224,719 of the $1,317,753 loss. But then to be fair, you should also add-in the tax savings an owner would be receiving.
Who the #%@^$# raises rent 4.5% every year? That’s total BS, plus the fact, as I pointed out before is that we’re not at rental parity, which is the problem. so in order to reflect current market conditions you need to reflect the FACT that the current cost basis for renting is lower.
Besides the fact that as your income increases you can more easily adjust your lifestyle without paying a 6% premium on every transaction. (Or as you need to move, or whatever)
But thanks for running real numbers, shows some seriousness.
This calculation is overly simplified. Assumes no cost of maintaining a house or that it doesn’t require substantial updating in 30 years. Here is a much more complete model including annual renovation costs, annual maintenance cost etc. These costs will inflate substantially over 30 years.
Can I get a show of hands for who believes that homes are going to appreciate 4.5% every year for the next 30 years ? If that’s a general inflation assumption, you’re not building any purchasing power.
I think NewportSkipper is just trying to keep the example simple. I can speak from experience renting for the last 15 years that once I got out of the apartment scene and into private rentals, I rarely had rent increases while I was in the property.
Unfortunately, the world keeps moving, and rents continue to go up even while mine stays put. The result is a rude awakening every time I move to a new rental.
So I think we can cut him some slack for using 4.5% appreciation on the home and a 4.5% increase on the cost of rent.
I also think it is fair to say that the majority of readers understand the benefits of home ownership. I believe most are simply waiting to pay a fair price. IR has made that point as well: “When owning is cheaper than renting, it makes sense to buy.”
anotherirvinerenter,
I just saw your post after posting myself.
As for 4.5% appreciation for the next 30 years, I’ll raise my hand.
I hope you won’t mind if I answer in questions. I don’t mean to sound incredulous or offensive, I just think this is a better way to make my point.
Once housing prices bottom, do you think home prices will continue to depreciate? How can the bottom be the bottom if they do?
Meanwhile, we currently have low interest rates and almost zero inflation. Do you expect that to stay the same over the next 30 years?
If the government permits double-digit inflation (as it did in the 1970s), can you see where such inflation would affect the price of housing?
Savings are thwarted by inflation, but not debt, so consider someone who bought a $300,000 home with a 30-year fixed (15-year fixed if your name is Nancy).
While the prices of goods are going up, the monthly payment on the debt stays the same. After 30 years (15 if Nancy) your home now has a higher price, even though the cost to you remained the same all along.
I would suggest that inflation is the friend of the home debtor, but I’m open to any convincing counter-arguments.
So to answer your original question, with significant inflation, 4.5% appreciation over 30-years is in the bag.
Before people light up the torches and gather the pitchforks, let me qualify this though. There certainly will NOT be the ridiculous 30% annual appreciation we have seen with some sales here in Orange County during the bubble.
Let’s assume you have the type of job where you have great job security and a stable paycheck. You will be in that job until you retire. In this situation, buying a house at age 35 is great, because when you retire at 65, you will have no housing costs (other than maintenance/repairs, taxes, and the like).
Capt. Kirk… “Stunning”… I get it!
The ARM was just one of the tools to create a housing bubble.
The underlying problem is that the price of the house is too high. Prices were inflated using creative finance, creative credit ratings for the CMO, regulators who looked the other way, bankers and MB who took the money and sold near worthless CMO to investors. Many of the cards are falling but the govt and industry are still tring to rebuild the pyrimid or find out who the greatest fool was, second to the greatest, third to the greatest, fourth…. while collecting 7-8%% from each round of transactions.