The housing bubble was another California gold rush, but it was all fool’s gold…. or was it?
Asking Price: $362,800
Address: 53 Smokestone #42 Irvine, CA 92614
{book}
Im standing alone
Im watching you all
Im seeing you sinking
Im standing alone
Youre weighing the gold
Im watching you sinking
Fools gold
Fools Gold — Stone Roses
When I started writing for the IHB, many bulls used to come to the blog and tell me I was wrong. Many of these people became knife catchers because they thought prices were at the bottom and there is a fortune to be made in California real estate. I am standing alone, and I see them sinking, weighed down by their fool’s gold.
There are many ways to look at the behavior we saw during the Great Housing Bubble. On Tuesday, I wrote about HELOCs as Risk Mitigation, and I wrote from the perspective that predatory borrowing is a rational choice given the circumstances.
The MEW spending frenzy we witnessed made homes very desirable. The general public has not forgotten the fun of the HELOC party. Many of today’s buyers are hoping for their own consumer orgy — chasing their own fool’s gold.
What if they are right? What if prices go up? What if we fuel another massive wave of debt creation and unsustainable spending?
There are people buying today because they believe prices have bottomed, just as they have for the last three years. Can the fantasy of kool aid intoxication be self-fulfilling? Will those chasing today’s fool’s gold be proven correct by their own actions?
The more some people pay for housing, the more others can borrow to spend and stimulate the economy. The Ponzi Scheme is great while it grows larger. Can we continually create one Ponzi Scheme after another?
I doubt it.
Asking Price: $362,800
Income Requirement: $90,700
Downpayment Needed: $72,560
Purchase Price: $315,000
Purchase Date: 8/27/2003
Address: 53 Smokestone #42 Irvine, CA 92614
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,164 |
| $/Sq. Ft.: | $312 |
| Lot Size: | – |
| Property Type: | Attached, Condominium |
| Stories: | Ground Level |
| View: | Park Or Green Belt |
| Year Built: | 1980 |
| Community: | Woodbridge |
| County: | Orange |
| MLS#: | C09085046 |
| Source: | MRMLS |
| Status: | Active |
| On Redfin: | 1 day |
ALL WOODBRIDGE AMENITIES INCLUDING TENNIS, BIKE PATHS, SPORTS COURTS,
POOL AND SPA, AND MORE. GROUND LEVEL UNIT. GOOD SIZE LIVING ROOM,
3BEDS, 2 BATHS. PERFECT FOR FIRST TIME BUYER. YOU MUST TO SEE IT!!
YOU MUST TO SEE IT!! [shakes head] You must be kidding?
- This property was purchased on 8/27/2003 for $315,000. The owner used a $252,000 first mortgage, a $63,000 second mortgage, and a $0 downpayment.
- On 7/21/2005 he refinanced with a $360,000 first mortgage and pulled out $45,000 on his $0 investment.
- On 10/26/2006 he refinanced again with a $432,000 first mortgage.
- Total initial investment is $0.
- Total property debt is $432,000.
- Total mortgage equity withdrawal is $117,000.
Who was the fool here? This guy’s credit is trashed, but he got to spend $117,000. Was he the fool, or were we the fools for not doing the same?
I’ve never done a cash-out refi, but do banks ever ask ‘why are you refinancing?’ Actually they gave you all the reasons in the commercials they made – banking made easy by WaMu.
This type of refi frenzy was concentrated in areas where you could get a bubble appraisal to cash out. Little/no appreciation, little/no heloc abuse. The heloc abuse can feed the price appreciation when you get people using heloc money to buy more real estate.
I would like to see any refi appraisal have to be reported for tax purposes and the increase in value reflected for property taxes. When you cash-out refi, you are getting a financial benefit, and taking on larger payments – those things are contradictory to the long-time owner being forced out because of onerous property taxes motivations for limiting valuation increases. I doubt this would have stopped much, but at least the areas that are being crushed now with budget crises would have raked in a little more prop tax.
I still don’t get the amount of risk borrowers and banks were taking, and the audacity they had pretending there was no risk.
It reminds me of that cocaine PSA during the 80’s where the guy is walking around in circles saying…
“I do coke…so I can work more…so I can do more coke…so I can work more…so I can do more coke…”
“I HELOC…so I can buy more houses…so I can HELOC more…so I can buy more houses…so I can HELOC more…”
And just like the jingle at the end of the commercial…
“Always chasing rainbows”
Loans are not taxable income, even HELOCs, nor should they be under our current tax system.
There is already a tax mechanism set up to tax these people on their illgotten gains. If you borrow money, and then you don’t pay it back, you are taxed on the debt forgiveness portion.
The only loophole is that, temporarily, you don’t have to pay taxes on the debt forgiveness if it is on your primary residence.
I meant property taxes. If you want to only pay property taxes on $200k worth of home, don’t refi and agree to an appraisal of $400k.
That’s a huge loophole.
It used to be that if you arranged a short sale or were foreclosed on, the bank issued you a 1099 for the difference in the amount the house sold for and what you owed on it. You then had to report that as income. So, say, if you make fifty grand a year and took a loss of a hundred grand on your house after a foreclosure or short sale, you would owe more in income taxes that year than your entire annual salary.
Very early on in the current crash, the law was changed, for obvious reasons.
I think your property tax reset is a great idea. I bet it would have cooled things down quite a bit. In CA, have it reset your prop 13 basis to the new amount of debt on the property.
I had not thought of this. It is something that would be easy to roll out, and no one would lose their prop 13 basis with out making this decision of their own free will.
You don’t even need to limit it to the debt – use the appraisal that the property owner agrees to, and is financially benefitting from.
Man, that’s a lot of rooms for fewer than 1200 square feet. I just can’t imagine buying a place with rooms that small. Though if you have a family you may not have a choice, I guess.
I’ve seen plenty of houses in Riverside that are this size (some even smaller) with three beds and one to two baths. It’s not too bad. I would be more worried about the size of the common area (living room, etc.) than the bedrooms, frankly.
Of course, that’s a house vs a condo with a neighbor above. That’s got to be one of the worst things in condo/apartment living of this sort, being able to hear your upstairs neighbor stomp around. Plus, you get a yard and a garage with a house.
I do suspect this is an apartment conversion-you have an upstairs neighbor and no apparent garage. A purpose built condo should have a garage and be a two story unit without an upstairs neighbor.
Yeah, the “stomping around upstairs” is such a wild variable that I’d never consider getting a condo under someone (having lived in one). It’s really variable…sometimes it’s dead silent, other times, you hear every little stomp. Drives you nuts, I kept tennis balls at the ready to throw at the ceiling.
My “minimum” would be a condo w/ no upstairs neighbor, or a townhome w/ one common wall on the side.
This would make an excellent apartment. How in the world did these places become condos?
The owner waves a magic wand and goes “Poof! It’s a condo.”
Well, when a greedy property owner and a seedy property love each other very much, the owner decides “You know, I’d make a lot more money by breaking up these apartments into condos and selling them one chunk at a time than in rent. Not only will I get suckers who figure that they can flip the properties for a lot more than they’re ever going to be worth, but I can get them to pay even more in HOA fees for basic maintenance. With an apartment, I’d actually have to take that out of rent. Everybody wins.”
Sorry: I live right across the street from a bad conversion from apartment complex to condo complex. The condos are still the same hellpits they were, but the owners pretend that they’re property owners now. Even better, when you get electrical fires, such as the one that nearly burned down the complex earlier this year (the wiring for the air conditioning system hadn’t been repaired or updated since 1983), there’s no property owner to be liable when everyone discovered that someone removed the firewalls between condos when updating the roof in 1990.
The fool’s gold is disappearing fast:
American CoreLogic: More than 15.2 Million Mortgage Holders Underwater
* More than 15.2 million U.S. mortgages or 32.2 percent of all mortgaged properties were in negative equity position as of June 30, 2009 according to newly released data from First American CoreLogic. June’s negative equity share was slightly lower than the 32.5 percent as of the end of March 2009 and it reflects the recent flattening of monthly home price changes. As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity and negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide.
* The aggregate property value for loans in a negative equity position was $3.4 trillion, which represents the total property value at risk of default. In California, the aggregate value of homes that are in negative equity was $969 billion, followed by Florida ($432 billion), New Jersey ($146 billion), Illinois ($146 billion) and Arizona ($140 billion). Los Angeles had over $310 billion in aggregate property value in a negative equity position, followed by New York ($183 billion), Miami ($152 billion), Washington DC ($149 billion) and Chicago ($134 billion).
* Nevada (66 percent) had the highest percentage with nearly two?thirds of mortgage borrowers in a negative equity position. In Arizona (51 percent) and Florida (49 percent), half of all mortgage borrowers were in a negative equity position. Michigan (48 percent) and California (42 percent) round out the top five states.
LA can claim a full percentage of the property value in a negative-equity position!
Hmm,
Looking at these numbers, 28.5% of the aggregate value of underwater home loans is right here in California!
Glub Glub!
Suppose average prices decline another 10% to bottom. What will that mean for total negative equity, another $1.5t, something like that? How much of the negative equity at that point will translate into bank loan losses?
Not to be a broken record, but record foreclosure activity and a low-supply market reflect a disconnect; shadow inventory.
Report: Record Foreclosure Activity in July
RealtyTrac … today released its July 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 360,149 U.S. properties during the month, an increase of nearly 7 percent from the previous month and an increase of 32 percent from July 2008. The report also shows that one in every 355 U.S. housing units received a foreclosure filing in July.
“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”
That news need to be on front pages of every newspaper and site.
Obama is too busy selling us “The Private Health Insurance Companies Get Rich Act” of 2009. AKA, “health insurance for all”…. with private health plans paid from…huh?
Pobamalosi can not afford to let the news go out that the economy is about to take another DUMP.
I think people get the joke nowdays that real estate is not moving up. Most people I talk to are actually turning afraid of real estate. Compare that to last year when all I heard from peers was “WOW, its a great time to buy”.
Where are the contrarians at? Its time to giddy-up.
Are you kidding. It’s about 2-4 years before time to giddy-up.
At the very least I would suggest waiting for the foreclosure wave to crest before wading in…
I don’t know who you’re hearing your ‘peers’ are, but the only place that I do NOT hear “it’s a great time to buy” is on this blog.
-Darth
EXCELLENT LOCATION CLOSE AWAY FROM SOUTH LAKE
I’m confused…is it close to the lake or far away from the lake…or both? Two locations for the price of one!
When I left Texas in 1997 you could not borrow against the equity of your home EXCEPT to improve the property. Period. Before getting the loan you had to show the contracts for the improvement, etc., and many times the banks actually cut the checks, so the property owner actually never had his hands on the actual money.
This was actually a state constutitional provision since many of the Texas founders themselves – as heroic as they were – were running from one debt or another. They wanted a stop-gap in place to protect people from themselves and supposedly to protect wives and children from their husbands debts (remember this was 150 years ago and women didn’t have careers).
In 1998 Texas voters overturned this constitutional provision by 51%-49%. They could now borrow for any reason at all. I was gone but I knew this would cause great trouble a it did.
I think something like that needs to go in place nation wide.
It was no small wonder that our private consumption driven economy had grown at a fast pace for decades without substantial improvement in real wages. In hindsight it seems that it was achieved by a gov’t/Wall Street collusion to turn debt into the ultimate fuel for consumer spending. First was credit cards and other consumer loans, once the expansion of consumer lending stalled in late 90’s they discovered the gold mine of home equity and entered into the second stage of credit bubble thru home affordability products and HELOC. Now we are probably at the point where financial sector can no longer make insane amount of profits by beating the same dead horse known as private consumption based on easy credit. People inclined to spending finally maxed out on their credit cards and squandered home equities, and now are having a difficult time servicing their existing debt.
Thus we entered into the final chapter of this credit expansion/bust cycle. The new game in the town should probably be called “squeeze the savers”. And the goal of the game is for financial institutions to offload as much non-performing assets such as residential RE to unwitting domestic savers and foreign investors as possible. IMHO we seem to have all the ingredients in place:
1. Obama administration has instituted the policies to allow large banks turn themselves into zombies via mark to myth accounting rules and backstop support by Fed. Insolvent US financial firms can now keep non-performing assets on their books, and really take their time to “earn” their way back to life thru insane spread thanks to Fed’s zero rate policy, while slowly write down via tightly controlled release of housing inventory.
2. endless refi/loan mod programs to prevent the ultimate debt destruction in the form of foreclosure and bankruptcy. Schemes designed to slow down the market correction and drag out the asset deflation process. Want to buy a house at a reasonable price? Just come back in 10 years.
3. incessant siren calls of market bottom and green shoots by mainstream media – if you don’t buy today you are going to miss the golden opportunity….
4. inflation scare – while you are earning 1% on your bank CDs, the imminent hyperinflation is going to wipe out the value of your precious savings. So you’d better hedge the inflation risk by locking your money in some fixed asset. Yeah, that’s what I am talking about. Mainstream media has largely ruled out any possibility of a deflation, despite strong evidence indicating otherwise – worst annual CPI drop since 50’s, weak retail sales, falling wages, high unemployment rate, lowest capacity utilization ratios in the industrialized world (US: 69%, Japan: 65%, Germany: 70%…). And consider this – if deflation is no longer a real threat why did Fed again decide to keep the rates at 0%? But if we admit deflationary pressure is real and Fed liquidity injection only increased money supply, but did little to improve the velocity of the money, how can we get savers to catch the knife?
So the game plan is to “smoke” out savers. Our gov’t and Wall Street have collectively created an environment to coerce domestic savers (and entice foreign buyers) to take devaluing assets off banks’ balance sheet. Irvine housing market seems to indicate this plan has worked out very well so far.
great post, the markets are about to tank 30-50%….. and this time it’s going to be nasty with circuit breakers going off.
Smokestone, indeed.
Good post, IR. That’s the kind of speculation/discussion that I was looking for when I asked for a “what-if-we’re-wrong” post the other day. Might it be a coincidence that your featured property is only steps (literally!) from my front door? With IR’s penchant for meticulous research, I suspect that it might not be coincidence. 😉
I also found it interesting that rental parity appears to have arrived inside the loop in Woodbridge! I didn’t expect that for another year or more. If my calculations are correct, this unit at its current asking price is at tax-adjusted rental parity for an owner-occupier (not yet for a cashflow investor). However, that’s with one very important caveat: a 20% down payment.
Another of these 3/2’s rented out a couple weeks ago for $1,850, so I’m using that as my comp rent. Also interesting to note, this is 1 of only 2 downstairs, 3BR end units in this complex. That’s important, because the other 3/2’s face each other, so you and your neighbors get to stare in each other’s windows. On the downside, absolutely no upgrades that I can see.
Hmmm, now I just need to figure out how to get the rest of the $$$ for the downpayment AND not get outbid by someone with “investment” cash from China (or wherever).
Since we’ve still got a lot of froth and knifecatchers out there, I’m guessing that this unit will be bid up above this list price. Ahh well…
-Darth