Eliminating equity requirements and encouraging cash-out refinancing shifted all financial risk from borrowers to lenders. For borrowers it became a wise method of risk mitigation — much to the dismay or our bankrupt banks.
Asking Price: $419,999
Address: 12 MISTY SHADOW #1 IRVINE, CA 92603
We’ve been here for too long, please let me out
You’ve caused me so much trouble and you’ve really let me down,
You’ve broken all your promises,
all that’s left are broken feelings, I’m still healing
I can’t believe that you deceived me for so long
I fought for us but I can’t trust you anymore
It won’t be easy to make up for what you’ve done
I see a chance in all of this, but do I dare to take the risk?
The Risk — Lovehatehero
Do I dare take the risk? It was easy during the late stages of the housing bubble because all you were risking was a credit score; the lenders assumed the real risk. They didn’t know that, of course, but they also believed they had no risk because real estate prices always go up.
The way our residential real estate finance system worked during the Great Housing Bubble, it was financially prudent for borrowers to max out their borrowing and transfer their market risk to a lender. Nothing has changed.
I am starting to have my doubts that the Government is going to do anything on the regulatory front to make sure we never inflate another damaging housing and credit bubble. If left to it’s own devices, the free market will inflate another bubble once the institutional memory of the losses from our recent credit bubble fades. Monopolies and Ponzi Schemes are the seedy underside of unfettered capitalism.
I studied the S&L disaster during the aftermath while living in College Station, Texas. The commercial overbuilding in Texas during the 1980s was truly astonishing; it was so bad the expression “see through building” came from the overbuilt glass office buildings in Houston. Glass skyscrapers were the Pergraniteel of the age.
The biggest similarity between the Great Housing Bubble and the S&L Crisis is the shifting of risk and the subsequent underpricing of it that lead to lowering of equity requirements to the point where you could cash-out refinance with nothing but a proforma. In the Great Housing Bubble, the cash-out refinancing caused a shifting of risk away from the borrower onto a lender. As lenders and investors encouraged more and more cash-out refinances, they created a system that encouraged predatory borrowing. Financially, it was more prudent to borrow and shift risk than it was to be conservative and manage cashflow.
IMO, this is bad. If these incentives do not change, we certainly will inflate another housing bubble; we just need to wait for lenders and investors to get stupid again. I give it 20 years.
Asking Price: $419,999
Income Requirement: $105,000
Downpayment Needed: $84,000
Purchase Price: $535,000
Purchase Date: 12/15/2004
Address: 12 MISTY SHADOW #1 IRVINE, CA 92603
| Beds: | 2 |
| Baths: | 2 |
| Sq. Ft.: | 1,090 |
| $/Sq. Ft.: | $385 |
| Lot Size: | – |
| Property Type: | Condo/Co-op |
| Community: | IRVINE |
| County: | Orange |
| MLS#: | 09-389765 |
| Source: | TheMLS |
| Status: | Active |
| On Redfin: | 1 day |
features a large kitchen with granite counter tops, spacious living
room with fireplace, two large bedrooms. Direct access from the garage
and a small patio. Unit is nice and bright.
mantainedc?
This property was purchased for $535,000 on 12/15/2004. The owner used a $428,000 first mortgage, a $107,000 second mortgage, and a $0 downpayment. On 11/1/2006 he refinanced with a $549,000 first mortgage, took out all his equity plus $14,000, and shifted all the risk to the lender.
It isn’t a paragon of personal ethics, but this behavior makes complete sense financially.
If this house sells for its current asking price, and if a 6% commission is paid, the lender stands to lose $140,201. The borrower took no financial risk, and he has already made off with $14,000. Given the system, is this behavior surprising?
What has changed that will prevent this behavior from recurring? Other than the lenders current state of fear, I see nothing stopping this from happening again. Do you?
Lender state of fear?
They’re not afraid. They’re partying on their yachts.
Viva slavery!
Economists’ mantra is incentives matter, and you hit it with your last paragraph. I feel LTV & DTI levels should matter more than credit score when evaluating what rate to give. I found an article written by a financial ‘engineer’ at Fannie Mae on pricing asset-backed securities. They did not account for default risk because they assumed MI. The real risk they thought about was prepayment.
The assumption that prices would not fall and a borrower could either sell or refi out of a problem loan is a main pillar the crisis was built on.
How much would the I-banks have lost had they held onto all the mortgages they originated? The role of FNM & FRE as mortgage lender of first resort needs to be reduced. The mortgage securitization process needs reform, as does the credit rating process. None of those structural reforms are happening.
I also think that the way banks accounted for assets & pre-booked gains allowed for massively inflated bubble earnings and massive losses as the bubble burst. The accounting losses would not have been as large, had the gains not initially been propped up. FASB needs to look at this.
Zombie Subdivisions and “Pig In The Python” Shadow Inventory
The Realtor’s chief economist, Lawrence Yun, called it a “business decision” by the banks:
“I believe that many banks including Fannie and Freddie, who are also holding onto some properties, are releasing foreclosed properties in a measured way so as to not to flood the market which they perceive then perhaps could lead them to even more drastic price cuts. So they are releasing properties on a measured pace as a business decision to minimize losses.”
The Lenders Are the Market
so how long can the banks actually do this?
Also, isnt this sort of illegal? The banks have stockholders. Those stock holders invest into the bank (in theory) after looking at the financials of the company and determining that the books look sound. If the banks are not foreclosing on non performing loans, doesnt that alter the books and therefore are deceiving investors?
that changed in March of this year. The banks can still claim they are going to get the full value of the loan. See easy.
Under normal circumstances, when a bank takes possession of a property, it impacts their reserves, and increases the cost of doing business. Banks do not like to own property for this reason. However, these are not normal circumstances … the SEC, FDIC, FED and The US Treasury, are backstopping the big banks, and the shareholders are just along for the ride.
A bank’s lending power is contingent on meeting a minimum reserve requirement, Can you explain how taking back a property changes the reserve balance? tx.
If they keep the loan on their books at full value, they do not have to recognize a loss. Once they recognize the loss, their capital is reduced, and the amount they can loan out declines. This isn’t a big deal with a few loans, but when it becomes the bulk of your portfolio, you suddenly have no money to lend.
A performing mortgage is an asset. A non-performing mortgage is a liability, therefore an REO is a liability. The more REO’s on a banks books, the more reserves they must keep in place, and the less they can lend.
It’s worse. Banks are both lenders and borrowers. The loans (and later the foreclosed homes) are collateral. If the loans are paid off at much less than face value, or the foreclosure proceeds are much less than face value, the bank has to keep getting cash from somewhere else to pay off the money the bank borrowed (either from bond markets, depositors, or the Fed).
If the process happens slowly, ongoing profits from credit cards, other lending, or other financial services might take care of the cash burn. If it happens quickly, the hole can be filled by more borrowing, or FDIC takeover.
Many current policies are designed to slow down the bleeding (or the appearance of bleeding), and to keep banks margins high (they tend to borrow short and lend long). It may indeed save some banks. However, it tends to leave a lot of assets in limbo for a long time.
“However, it tends to leave a lot of assets in limbo for a long time.”
Is that one of the reasons Japan has experienced such a long and slow deflation?
Yes. You end up with nonperforming assets which aren’t being put into the hands of people who can actually afford them or make money on them.
Indirectly, it keeps the prices of those assets artificially high.
It also keeps “too much” investment capital in real estate and mortgages.
If we followed exactly the same strategy as Japan, we would not end up with 20 years and still the same problem of slowly declining prices. Population growth would eventually fix it in most parts of the US. Maybe not Detroit. California might need an extended beating before it’s State government finally decides an expanding population is not the Manifest Destiny of CA, and that it should actually try to attract businesses and jobs.
This is part of the reason why I am making a big deal about the difference between houses in pre-foreclosure and those that are bank-owned but not for sale. An empty bank owned property is just sitting there, doing nothing for the greater good of the nation or whatever-but most houses in pre-foreclosure are occupied, either by the home debtor or tenants. They are assets being used as opposed to assets not being used.
There is no significant shadow inventory. People keep saying there is, but they are just throwing numbers around without actually looking at individual properties. Since sales of properties are public record, including when a bank forecloses, making an actual list of bank-owned properties that aren’t listed for sale should be easy.
I know of only one person who has actually attempted to do this: Jim the Realtor. You know what he found? Almost no shadow inventory whatsoever. The banks are still turning around most properties quickly.
Now, there is a significant pre-shadow inventory. That is, properties on which the owners have missed one or more payments but have not yet been foreclosed upon. The time between somebody not paying and the property being taken back by the bank is over a year in some cases. But, until the bank actually takes possession, there’s always a chance that the owner can become current with payments, arrange a loan mod, or arrange a short sale-not every house that the owner falls behind on payments gets foreclosed upon.
There is no doubt what is to come for the OC. We have thousands of Alt-A mortgages coming down the pipe, and a lot of these people can’t re-fi because they don’t fit in the Obama plan. They’re upside-down, and the clock is ticking.
Per Matt’s blog~
” Seriously delinquent loans have risen steadily since early 2007, with the 90-day delinquency rate on all outstanding first mortgages in Orange County approaching 7%.”
OMG … Read that again, and understand it! Those aren’t people who are mearly behind on their payments, they are in DEFAULT.
There are steps in the process:
1. A homeowner stops paying.
2. They get a Notice of Default.
3. They get a Notice of Trustee Sale.
4. The trustee auction actually occurs.
5. The bank takes the properties not sold at the trustee auction back (some will be sold at the auction and not become REOs).
6. The bank lists the properties as an REO.
7. The bank sells the property.
My argument is that there are very, very, VERY few properties in between stages 5 and 6. I’m also saying there are lots of properties that have not yet had stage 4 occur. But, until stage 4 actually occurs, there is a chance that the homeowner will become current with their payments, arrange a short sale, or arrage a loan mod, and the property will never actually be foreclosed upon. Just because they are in default (past step 2) doesn’t mean they will get to step 4.
Really? You don’t think there are a ton of properties that the banks have foreclosed on but haven’t put on the market. I challenge you to take a drive with me through van nuys as I point out obviously abandoned homes with no for sale sign in the front yard, just a notice saying trespassing is illegal. I take it you haven’t done any driving around lately….
If this was a game, and steps 6 & 7 were the bottleneck (due to staffing or whatever reason) … then the logical way to play would be to delay step 4 so as to avoid paying taxes on the property and get assessed fees for maintenance, having to deal with squatters who abuse the properties, etc …
Jim the Realtor provides one small data point, and perhaps it is true in the neighborhood he investigated. It is not true in the rest of the market.
I have spoken with brokers and asset managers that are preparing to dispose of thousands upon thousands of properties. Perhaps most of these are currently being held in a non-REO state of limbo, but they do exist, and they must be washed through the system before prices stabilize.
How else can we get news reports that 1 in 10 loans are in default yet only a few hundred REO are in the system? The numbers do not add up, and the difference is shadow inventory.
A loan in default has not been foreclosed upon yet-they may get a loan mod or arrange a short sale or become current on their payments. I agree with you that there are lots of loans in default that the bank has not been foreclosed upon-I said that very thing in the last paragraph of my post. However, there are very few propeties where the bank has actually taken back them and not yet listed them for sale.
This is a pipe dream. The banks:
1. Don’t own the loans. They are slaves to other masters, usually MBS investors. The investors get more from insurance payments if the property forecloses.
2. ARE holding back. There are many many abandoned properties out there that the banks refuse to complete the foreclosure on. The banks absolutely don’t want to hold any more properties, so they get as far as they need to in the foreclosure process, then hold it there till that home’s number is up. “Now serving foreclosure number 12.”
3. Use dummy corps. The shadow inventory is very hard to track. The right to bid on the properties is often assigned to a dummy corp. I’ve tried tracking the sales lately, and it isn’t easy to find.
The shadow inventory is real, and it’s huge. If you want to label “shadow inventory” as just one stage of the foreclosure, then you can make the numbers seem smaller; but you’re only fooling yourself. The unlisted inventory is enormous, and if it hits this fall, prepare for Dow 4,500.
If a lot of these properties really are already vacant (ignoring the stage of default/foreclosure they are in), and they are all put up for sale, I would expect the stock market, overall, to do little. Homebuilders would be hit, but places like Home Depot would be helped as first time home buyers fix up their new places.
It would be nice to see the foreclosure beast digest these properties-there are a lot of first-time home buyers out there that can’t find a house due to the lack of inventory.
“The numbers do not add up, and the difference is shadow inventory.”
They say that the “numbers” are being mitigated due to pressure from the govt on loan servicers to modify this toxic crap. They also say that they’re turning these REOs quickly, therefore reducing the percentage of distressed inventory.
They = The REIC
I think They are full of shit.
Even ignoring the government pressure, there are simple economic reasons for a bank to modify some loans. If a property owner owes $200k, but the house is only worth $100k, it is in the bank’s best interest to at least attempt to keep the current “home owner” in the house via a loan mod, say by extending the length of the loan or lowering the interest rate, because they will lose less money than if they foreclose, especially if you factor in all the costs of preparing a house for sale and actually selling it.
I understand the banks interest in potentially modifying mortgage, or allowing a short sale. However, few mortgages are actually qualifying for a modification, and the banks are concerned with moral hazard. They modify your neighbors mortgage, and the word spreads … then you just “stop paying to get their attention” so you can also qualify for a loan-mod.
There is a valid reason why banks are not foreclosing and they’re holding lots of shadow inventory. They are concerned with the comps in these neighborhoods (in particular places like Orange County). They know that the primary reason for default is negative equity, and if they release too much bank owned housing at one time, they’ll kill the market … kinda like what happened in Vegas.
Moral hazard is all over the place here. For example, the fact that trustee auctions are not happening in a timely manner alone is a moral hazard-who doesn’t want a year of free rent?
But, again, they are not “holding” lots of shadow inventory, unless you count properties that are in default but haven’t been foreclosed on as “holding”.
“unless you count properties that are in default but haven’t been foreclosed”
That’s shadow inventory.
Jim the Realtor documents the deadbeats in one of his video tours. I think the same thing … scratch that … I KNOW the same thing is happening right here in Orange County.
The banks can’t, and don’t, do loan mods that way. The number of loan mods happening with actual modifications to principal is almost zero.
I have an attorney friend who does loan-mods for a large OC firm, and he told me that less than 1 in 10 successful modifications result in a reduction in the outstanding loan balance.
Exactly. Most lower the interest rate, or extend the time period the loan is due, or both. The net result is the monthly payment goes down, but the amount of principal stays the same.
It’s probably better from an accounting stand point to not lower the amount owed. It also reduces the moral hazard a bit.
If I was a bank, when somebody came in for a loan mod, I would turn it into a 40, 50, or 99-year loan with the same interest rate that they are currently paying. It would lower their payments, and I would actually get more money (over a longer period of time, of course) with minimal moral hazard. Win/win.
But your idea of extending the loan terms will also result in more speculation and even higher real estate values. As soon as the market recognizes slack in one’s ability to pay lower payments, it quickly seizes on the opportunity and prices adjust.
Sorry Geotpf, extending the term doesn’t do much. Let’s take a look:
Principal balance = $100,000
Interest Rate = 6.0%
Monthly payment @ 30 years = $599.55
Monthly payment @ 40 years = $550.21 (8.2% less)
Monthly payment @ 50 years = $526.40 (12.2% less)
Monthly payment @ 99 years = $501.34 (16.4% less)
That’s why most traditional amortizing loans are 30 years. Once you get beyond that term, the decrease in payment is minimal.
Padilla’s article says the number countywide for OC is 7%, or 1 in 14. The number in Irvine is closer to 1 in 50, maybe 1 in 70-80.
Even in Dallas, realtors frequently talk to us about homes which are not listed. The high end here has far more homes available than listed. A decent chunk of them are vacant, but not listed.
But are they bank-owned? I think some private home owners are keeping their houses off the market until prices recover (although why they wouldn’t rent them out in the mean time I don’t know). That’s not “shadow inventory” in my mind-it’s just deluded homeowners. Prices aren’t going up any time soon (even though they have bottomed in some areas-but not going down is different than going up).
“There are steps in the process:
1. A homeowner stops paying.
2. They get a Notice of Default.
3. They get a Notice of Trustee Sale.
4. The trustee auction actually occurs.
5. The bank takes the properties not sold at the trustee auction back (some will be sold at the auction and not become REOs).
6. The bank lists the properties as an REO.
7. The bank sells the property.”
You are correct to point out that the process has “backed up” due to moratoriums, loan mods, and legal hoops such that the existing REO “shadow inventory” has actually been absorbed.
The wave that has continued to build and that many refer to as the existing “shadow inventory” would be better described as “pre-shadow inventory” (as you said).
At the same time, the banks certainly know who they have “extending and pretending” so I’m sure they are working out arrangements for disposing of all these properties once the loan mods fail. So it is possible for people in the know to be discussing a “shadow” inventory that is not currently the official number.
In any case, while some may squabble over what is and what isn’t “shadow” inventory, I think we all agree the future inventory of distressed properties will be bountiful.
But the fly in the ointment is where. I would argue that the 800-1,000 Irvine properties currently in jeopardy represent the bulk of what will ever be defaulting. If people are not currently 90 days late, there is no incentive to become so after two years with no further declines. In fact, there is a big incentive to hold on tighter than ever.
NewportSkipper I dissagree with your statement. As unemployment continues to rise and real interest rates increase and the significant numbers of resets kick in then more people will default on their loans. Indeed, I’ve read that resets won’t peak until 2011!
And as the IHB points out there is no good reason to think that house price declines have stopped. We’re just seeing a seasonal uptick before the decline continues. We are still nowhere near back to rental parity, even without an undershoot.
I think step 2 is already shadow inventory.
Frankly, the banks need to start foreclosing soon on these guys. Word is out that you can get a year’s free rent if you game the system enough. Some of the delays are caused not by the banks, but by the homeowner successfully gaming the system-declaring bankruptcy, agreeing to a loan mod and then not paying anyways, etc.
I guess I like to point out the difference between the shadow inventory and the pre-shadow inventory because people hear “shadow inventory” and they think there are seas of empty houses that the bank is simply refusing to sell, when the reality is much more complicated.
“…when the reality is much more complicated.”
I see now the differences between us are more of semantics than substance. I think we all agree there are a huge number of homes where owners are in default on their mortgage. I think many would agree that most of these properties will go through foreclosure, and these foreclosures will need to be sold in the open market.
I agree that it is unfair to present the issue as the evil banks who are manipulating the market by purposefully withholding inventory. The issue is too complex for such a limiting description.
The 64 thousand dollar question is, in the end, how many of the “pre-foreclosure” folks will get loan mods (or short sales). Right now, I think part of the lack of success in most loan mods (and delays throughout the process) is a lack of trained personnel on the bank’s end. But that’s changing.
I think, in the end, a fair number of these folks will get loan mods. In a lot of cases, it just makes financial sense for the bank to do so. But is the number 20% or 80% or somewhere in between? I have no idea. And how many of the folks who get loan mods redefault? Again, I have no clue.
Some numbers from a NYTimes report:
http://www.nytimes.com/2009/07/30/business/30services.html?_r=1&pagewanted=all
“From June 2008 to June 2009, the number of American mortgages that were 90 days or more delinquent soared from 1.8 million to nearly 3 million, according to the realty research company First American Core Logic. During that period, the number of loans that resulted in the bank taking ownership of the home declined to 245,000, from 333,000.”
That statistic lacks common sense. The first number is cumulative, so the second should be too. You can’t have fewer foreclosures against a cumulative number, that would be like turning back time.
Common sense or not I think the numbers are clear. The lenders are foreclosing less homes from a larger pool of delinquent mortgages. Exactly what we would expect with foreclosure moratoria over the past year.
I don’t think so.
1,800,000 / 333,000 = 18.5%
1,200,000 / 245,000 = 20.4%
Or
3,000,000 / 578,000 = 19.3%
That’s what I mean, the statistic is meaningless.
June 08: $1.8M people are 90 days or more late
June 09: $3M people are currently 90 days or more late
If the bank forecloses on you, you’re no longer in that pool. So the pool of delinquencies almost doubled, yet the banks are completing less foreclosures. I see this every day…the banks hold off on taking over more homes all the time. Not because they want to help people out, but because they don’t want to own that property…yet.
Here you’re assuming the number of delinquent mortgages went from 0 to 1.8 million in the year before June 2008, which is clearly incorrect.
The above post is a response to NewportSkipper’s calculation of:
1,800,000 / 333,000 = 18.5%
1,200,000 / 245,000 = 20.4%
Not really, the 333,000 was not a part of the 1.8m. Regardless, the numbers aren’t very different and the premise of the story is still misleading. This kind of sloppiness really annoys me.
I’ll agree with that point.
By using 1,200,000 / 245,000 you’re calculating the increase in delinquent mortgages from June 08-June 09 over the number of foreclosures in the same period.
Therefore 1,800,000 / 333,000 is saying the increase in delinquent mortgages from June 07 – June 08 is 1.8 million, assuming zero delinquent mortgages in June 2007. A little sloppy with the numbers perhaps?
My agreement with you got misplaced. You are correct about 2007. However, what I am saying is much closer to reality than the NYTimes article which was written without understanding the nubmers.
Perfect example of banks not moving properties right awawy is my Mothers story. She was renting from someone who stopped paying the mortgage. The bank foreclosed on the mortgage holders back in October 2008. Only last month (July 2009), did they even contact my Mother that there was even a foreclosure and she needed to move so they can sell the property.
They call it a business cycle. It happens everytime and will continue to happen for two reasons: denial and greed.
If Americans are truly getting dumber, I doubt it will take 20 years to repeat.
I disagree with the whole “greed” argument. It was simply banks responding to the market distortions caused by the Federal Reserve and by implication the Federal Govt. The Fed deliberately priced money below a risk free rate, thereby signaling banks that they should grab these cheap dollars and spread them around. The banks did the only rational, economic thing that they were incented to do: redistribute the cheap dollars. If the freaking govt would get out of the price fixing business, this would not have happened as the banks would have had to correctly price their dollars by charging the appropriate interest rate.
Of,
I think there will not be another housing bubble due to higher interest rates in the future.
IR,
Yea, one year ago there was intellectual energy and momentum for mortgage reform/regulation of some kind, but now no one is interested. Too bad- I’m a libertarian at heart but if the choice is between requiring 20% down or bailing out banks then I’ll take the downpayment requirement.
Bill
I doubt rates will go up. We are turning Japanese. But won’t lose one decade. We will have 2 lost decades.
“Other than the lenders current state of fear, I see nothing stopping this from happening again. Do you?”
From personal conversations with qualified individuals trying to purchase a home, the banks current state of fear is indeed a major factor – as it should be. The banks abandonment of reasonable borrower qualifications – significant down payment, demonstrated stable income indicating ability to repay the loan for more than a year or two, etc., – appear to be making a comeback. I interpret those requirements as recognition that only responsible individuals need apply. Isn’t that the way it should be?
“I interpret those requirements as recognition that only responsible individuals need apply. Isn’t that the way it should be?”
That is the way it should be. Unfortunately, they will lose their fear and inflate another bubble again in the future. If banks would stay conservative, these problems would be far less frequent and destructive.
“I am starting to have my doubts that the Government is going to do anything on the regulatory front to make sure we never inflate another damaging housing and credit bubble.”
I’m gonna rant a bit!
I think they’re trying to re-inflate this bubble. It’s they’re only option to prevent another depression.
Most everything in our economy is now dependent on the re-inflation of this Ponzi scheme. We’ve been living in an economy that was propped up by this bubble. Most business has turned the expansion of consumer debt to big profits.
Example … Disneyland had tremendous pricing power during the bubble years, raising prices from $43 in 2001, to $72 today. My gosh, that’s a 70% increase in 8 years (our incomes didn’t increase 70% in 8 years). Even though incomes are now going down, Disneyland doesn’t want to give back those increases … even if the economic conditions warrant it. The run-up in park pricing was based on a lie, an economic mirage. The same thing can be said on just about everything regarding entertainment … movies, restaurants, concerts, the fair, parking at the beach, etc, etc, etc … an ice tea at the Claim Jumper will now cost you about $3 bucks (WTF).
This is just one example. In order to avoid The Great Depression ReDux, the government is prepared to throw everything at this problem, and reforming regulations is not on the map.
As I said before, show me a president or fed governor who really wants to tell americans the truth about spending beyond their means, and I’ll show you a 1-term failure.
Either way, this just piles more debt on the next generation of tax payers, and kicks the can down the road.
One more point. When I say the govt is trying to reestablish this bubble, I’m referring mainly to the availability of credit. Not necessarily jumbo mortgages. The only way they can restart the high-end, Alt-A, pick-a-payment, Ponzi scheme again, is to erase the memories of all the investors.
Most of us are aware that Orange County’s problems are unique. Most of our prices are simply priced beyond the reach of the governments assistance line. We cannot pass enough inventory above $500,000 to avoid a calamity. It’s that simple.
“…As I said before, show me a president or fed governor who really wants to tell americans the truth about spending beyond their means, and I’ll show you a 1-term failure…”
There’s little room for truth in politics. There’s less room for brutal honesty.
Dear fellow American: Regardless of the many reasons why your family of four only earns $50k, your spending must be limited to your means. Yes, this means you and your spouse will drive 10+ year old cars. It means you may have to rent depending on the city in which you live. It means you cannot afford most of the fancy things you see on TV.
In the same vein my fellow American, regardless of the many reasons why you are currently overweight, your eating must be limited to what your body naturally burns off plus any additional exercise. Yes, this means you may have to prepare many of your meals yourself. It means eating won’t provide as much pleasure. It means your body cannot afford to eat most of the tasty treats you see on TV.
I know this sucks to hear, but we have to face the facts.
Lee, You have to be one of the smartest people here. This is sooo true. I keep telling me wife how amazing I find this. Salaries have not increased that much since the year 2000, yet, I can also cite hundreds of examples about prices doubling or tripling since then. People are now paying $250 dollars for a pair of Jeans (e.g. True Religion) but I guess you can find them on sale in outlets “for only $175”. I used to complain about paying $70 just a few years ago.
What people are paying for things is just ridiculous. The funny thing is that it seems the more businesses charged for something the more successful they became.
Now, nobody wants to go back to even “normal” levels. The Fed and the government have indeed inflated to try to keep us at this high level.
It is not salaries that have made all this possible. It was asset inflation. Once this attempt to re-inflate by the Fed/Government runs it course, the depression will continue.
Let me give you another example.
About 2 months ago, I took my wife to Napa Valley to visit the wineries. We hadn’t been there since 2002. The first change we noticed was ALL the great vineyards now charge a fee to taste their wine, and a fee to tour the facility with a guide. In the past, you were considered a guest, and the cost (investment) to the winery of offering free tours and tastings was considered a business expense. They operated this way for decades. But because they had strong demand due to the number of visitors, and the additional purchasing power due to the availability of consumer debt, the fees were initiated.
The same thing has happened in Las Vegas … the comps are now feeble, and the cost to eat a steak dinner is off the charts.
All this pricing power comes from this massive credit/housing bubble.
I paid 6.00 for a pair of Diesel Jeans at the thrift store. That being said, Lee is right. Prices are crazy high for most things. Kids sports prgrams aren’t too bad (Pony Baseball) but now with the addition of travel clubs it is insane. Honestly, parents are paying thousands of dollars to have their kids play in travel sports clubs ie soccer, baseball, ice hockey. You name it. Folks listen up, your kids are not going to be professionals. Put that money into a college fund!
Newbie question:
So are we already starting on the path to next housing bubble since people are starting to jump in?
Housing bubbles, to a first approximation, are created by several things:
1. Easy credit, especially with high loan to value ratios.
2. A supply constraint. At least in the short term, there cannot be huge numbers of homes hitting the market. This might be true for a few months, but it is certainly not true even on a 1-2 year time horizon. Either the shadow inventory will come up for sale, or people who need to move will sell, or homes and condos for rent will go back into the “for sale” column.
3. Optimism that prices must go up. You don’t need this to be terribly widespread. It just has to be the belief of a large number of purchasers. When it becomes the belief of the great majority of people in the system, it gets vastly more dangerous.
1. Easy credit, especially with high loan to value ratios.
Check. 3.5% FHA loans to newby buyers.
2. A supply constraint. At least in the short term, there cannot be huge numbers of homes hitting the market. This might be true for a few months, but it is certainly not true even on a 1-2 year time horizon. Either the shadow inventory will come up for sale, or people who need to move will sell, or homes and condos for rent will go back into the “for sale” column.
Check. It’s clear to the banks that keep homes off the market is actually in their and their investors best interest. Keep supply low. Thanks FASB and tax payers.
3. Optimism that prices must go up. You don’t need this to be terribly widespread. It just has to be the belief of a large number of purchasers. When it becomes the belief of the great majority of people in the system, it gets vastly more dangerous.
Check. Cash buyers and flippers are actually back in the market due to the two items above. Cash buyers are buying and renting out (maybe not for cash flow but..) and flippers know that they aren’t having to compete with the banks due to the low supply.
It’s a win, win, win! Except when rents fall, unemployment is still sky high, rates climb due to lack of Tbill demand, the stock market turns south due lack of fundamentals and when the MSM decides that a darkening mood is better for ratings.
There is an interesting thing about cashflow investing. There is a fairly broad range of price to rent ratios where you make money even if prices keep going down. If your rent collections are sufficiently above mortgage payments and other expenses, prices can just keep declining.
It’s a bit like having a stock of rental cars. If you make enough renting them out, it’s ok if they keep losing resale value the longer you own them.
I would have to pull my spreadsheets back out, but it’s something like at a price to rent ratio of 70, you make money even if prices go to zero over 10 years.
That’s a really low GRM, though. 100 is a great number in the real world. Irvine is above 200 (and has higher costs than older areas with HOAs and Mello Roos).
It would be interesting to know what desireable places to live and educate children currently have price/rent ratios of 70. Where can you buy a dwelling for $70k that you can rent for $1000?
Palm Springs, CA
I’ve lived in the Coachella Valley for 17 years. Where exactly in Palm Springs are you talking about?
tazman:
still waiting for those exact location(s) in Palm Springs where a $70,000 home or condo can be rented for $1000.
All of those refis had some unintended effects.
1. Raising the average loan to value ratio, because so many of them were cash out refis.
2. Raising the interest rate for many buyers. “What?” you say? It was very common for someone to go from a $300k loan at 6% to a $450k loan at 6.5% or 7%.
3. Lowering the average quality of outstanding mortgage backed securities. Because there were so many refis, older more responsible loans were replaced with newer, larger, irresponsible loans. Those newer loans were secured by the same collateral. They were less likely to receive the full loan value if the owner was in distress.
4. Lowering the average quality of retained loans on banks portfolios. The banks who had written responsible loans 2002 and earlier watched as their portfolios shrank. Well, unless they had similar policies to their nutty competition.
5. Turning many borrowers from prime borrowers with a $250k loan to subprime or Alt A borrowers with a $500k loan on the same house. To get the bigger loan, they had to use programs with more relaxed standards.
Just curious, do you have the right address? Refin says 12 Misty shadow sold in 2008 and 1 Morning Mist is currently listed at $419k
This one looks like an REO but it doesn’t mention it in the description…looks like it’s off the market.
The tightness of the inventory is reflected in the frequent drop offs I have been getting lately. I don’t know if they are all selling, but it is becoming quite common for houses to appear and disappear within a couple of days.
“it is becoming quite common for houses to appear and disappear within a couple of days”
That sounds like an excellent use for an invisibility cloak. Even in dense neighborhoods, everyone could have a broad view.
An acquaintance of mine was thinking of selling is home in Irvine. The home was purchased in the early 80’s and is fully paid off. He wanted to list it at around 700+, unofficial offers were coming in at around 670’s. According to him he would have had to pay 5% or 33k to sell the house, he would get around 635k (btw he had purchased the house for less than 215k). This guy hated the fact that buyers were low balling the home he lived in for 20+yrs and he took it off the market if the owner was upside-down or did not have sufficient equity in the house then the RA’s commission would certainly require him to pay money out of his pocket at closing.
Most owners list the house on the market and get a shock at the offers and the costs of the transactions. The ones who are underwater prefer to stay on till foreclosure or the very end instead of bringing 50-60k at closing. Some of the owners in houses listed for short sale are keep the houses so bad that the you don’t even want to make an offer. They can stay on free and the banks are in no hurry to evict them.
If a property goes off the market quickly, it usually means they have gotten an offer at asking or above. Folks like your acquaintance usually take months to finally take the listing down, usually thinking they will eventually get their WTF asking price.
I guess TLC should start a new show in Irvine, Real Estate Intervention for sellers. The host and the Real Estate Agent can take renters like me around Irvine to educate us on how to compete with FCB’s for an SFR.
They can add a Japanese game show twist. The agent will hold a stop watch and a gong and us look at a house and make and offer in 10 mins. if we dont the list price is increased by 1% and is sold to the next in line.
We renters need a splash of cold water to realize that this is still a sellers market 🙂
If left to it’s own devices, the free market will inflate another bubble once the institutional memory of the losses from our recent credit bubble fades. Monopolies and Ponzi Schemes are the seedy underside of unfettered capitalism.
If left to its own devices, the free market wouldn’t have created such an enormous and dangerous housing bubble to begin with. It wasn’t the free market pumping “liquidity” into the system by manipulating interest rates, or generating a ready secondary market for stupid loans with implicit (and then explicit) guarantees of bad debt for government-sponsored entities like Fannie and Freddie.
And now the government is guaranteeing that there will be another bubble someday, by bailing out the institutions that took the biggest risks and made and bought the stupidest loans, rather than letting them fail and their executives end up homeless, something that really would have set those “institutional memories” in somewhat firmer cement.
“If left to its own devices, the free market wouldn’t have created such an enormous and dangerous housing bubble to begin with.”
I wonder if this is so. I agree with the rest of your rant about the constant manipulation of markets by government and the FED, but our institutions and laws came about for a reason. The Tulip mania in Holland happened in an era of completely unregulated markets as did the South Seas bubble. The manipulations of the market we currently employ have their problems, but unregulated markets do create Ponzi Schemes similar to the Great Housing Bubble.
Well, the free market is driven by greed, the government only alters the parameters and drives the greed in different directions. You just get different bubbles. In this case, the market created all those clever financial instruments to pass the buck, the government let them innovate…
But, the tulip mania also very quickly unraveled because the courts refused to intervene in modifying contracts. The people who took the risk took the hit… that doesn’t happen when the govt elites start mucking about with contracts and printing money out of thin air. Hold on to your hats, the only possible outcome is rampant inflation for the trillions of dollars the govt has ‘created’ out of thin air.
12 MISTY SHADOW #1 IRVINE, CA 92603
Hehe…lots of misty shadow inventory out there.
Me too has some clients who have been refused o intervene in modifying contracts by the courts. Its a too big risk to take so I also advise not to take it.
great post ! it shows the lending risk by the banks and financial institutions because with the borrowers losses and bankruptcy possibilities .