It was a big week here at the Irvine Housing Blog. The post on Shadow Inventory in Orange County received a great deal of attention.
Asking Price: $345,000
Address: 40 BRIARWOOD #81 Irvine, CA 92604
That’s what you get for pretending the danger’s not real.
Meek and obedient you follow the leader
Down well trodden corridors into the valley of steel.
What a surprise!
A look of terminal shock in your eyes.
Now things are really what they seem.
No, this is not a bad dream.
Sheep — Pink Floyd
{book3}
Asking Price: $345,000
Income Requirement: $86,250
Downpayment Needed: $69,000
Purchase Price: $282,500
Purchase Date: 4/16/2003
Address: 40 BRIARWOOD #81 Irvine, CA 92604
Beds: 2
Baths: 2
Sq. Ft.: 1,125
$/Sq. Ft.: $307
Lot Size: –
Property Type: Condominium
Style: Other
Stories: 2
Floor: 1
Year Built: 1978
Community: Woodbridge
County: Orange
MLS#: S587624
Source: SoCalMLS
Status: Active
On Redfin: 4 days
2BD, 1.5 TOWNHOUSE IN WOODBRIDGE. INSIDE THE LOOP LOCATION. FIREPLACE IN NICE SIZE LIVING ROOM. KITCHEN INCLUDES WOOD FLOORS, INSIDE LAUNDRY ROOM. TWO LARGE BEDROOMS, ONE WITH A WALK IN CLOSET AND THE OTHER WITH MIRRORED DOORS. GREAT PATIO FOR ENTERTAINING. TWO CARPORTS DIRECTLY BEHIND UNIT. WALKING TRAIL TO NORTH LAKE. CLOSE TO EASTSHORE ELEMENTARY SCHOOL AND FIRWOOD PARK AND POOL.
{Adsense-ir}
I wonder how the Emperor is doing?
Good morning, The Worm, Your Honour,
The Crown will plainly show,
The prisoner who now stands before you,
Was caught red-handed showing feelings.
Showing feelings of an almost human nature.
This will not do.
Call the schoolmaster!
I always said he’d come to no good,
In the end, Your Honour.
If they’d let me have my way,
I could have flayed him into shape.
But my hands were tied.The bleeding hearts and artists,
Let him get away with murder.
Let me hammer him today.
Crazy.
The Trial — Pink Floyd
Breathe In The Air
Breathe, breathe in the air.
Don’t be afraid to care.
Leave but don’t
leave me.
Look around and choose your own ground.
Long you live and
high you fly
And smiles you’ll give and tears you’ll cry
And all you
touch and all you see
Is all your life will ever be.
Breathe In The Air — Pink Floyd
I didn’t get to the Shadow Inventory post until this morning, but once again, you have done ground breaking work.
I’ve been looking at the effects of the housing bubble collapse as it filters through to government budgets. Closing the spigot on mortgage equity withdrawal has had a huge impact on sales tax revenue, which has been compounded by the economic collapse.
Income tax collections have fallen substantially as unemployment has dropped, with incredible rates of job loss in construction, finance, real estate and a host of affiliated fields.
Now we’ll slowly face a slow yet steady decline in tax revenue from property taxes, as every property that has changed hands since 2001 is sequentially reappraised downwards every year, and most capitulation sales reduce the property tax base.
Yet almost every elected official at a local level is assuming that revenues are in a normal recessionary cycle that will start recovering any day now, and they are just as clueless about the coming drop in property tax revenues as they were about the drop in sales tax revenue, because they don’t understand the true implications of the collapse of the housing bubble.
Good point.
I think the best way to address this is we’re living in an economy that’s reverted back 9-10 years, yet budgets, and attitudes have struggled with that idea.
The public school system in this state has hired about 75% more ranking administrators since y2k, yet the number of students has remained about the same. I think this would have been acceptable if student performance had increased, but it didn’t.
Manufacturing new layers of management and fattening up the existing ones is the rage in both the public and private sectors.
Every technology-type firm I have ever worked for does this: more vice presidents, directors, and senior something-or-others each passing year. And educational institutions are particularly prone to this, because superintendents and deans feel silly without other layers of management reporting to them. You’re just not important if your direct contacts are faculty department chairs. In one community college district, the superintendent created an entire layer between the deans and the faculty – calling them “division directors” – but it was difficult for them to find anything to do. So they created additional policies and procedures for the faculty chairs to implement, including an entire new class of meetings and reports to take up their time, as well as that of other employees.
I have read that the collective increase in tuition at MIT between 1970 and 2000 is equal to the sum of the salaries of the 600 additional administrative positions created during those 30 years. The university went from 300 to 900 administrators, and they students footed the bill.
As I’ve been saying since last year,
2009=2002
2010=1996
i’d say it looks more like:
2010 = 2002
2011 = 2001
2012 = 2001
2013 = 2000
2014 = 2000
2015 = 2000
let’s just call it “the lost 2 decades”
In 2010, we go from tons of defaulted mortgages sitting on the books of banks and in MBS pools, to extreme pressure on all of the guarantors.
For all of their faults, Fannie and Freddie weren’t as stupid as the lenders who did subprime and alt a. Still, they will lose large amounts of money.
The FHA has had rapidly expanding questionable underwriting in the last year. It will lose a larger portion of its portfolio, and faster, than Fannie and Freddie.
While there will probably be even more guarantees and aid to the three of them, I suspect that underwriting guidelines will keep getting tighter. When the Fed stops buying agency paper, that will also raise interest rates.
There will also be some additional severe credit scares. Here are some prime candidates: a default by a central bank (e.g., Portugal, Argentina, Iceland, Ireland, UK); Citi finally going under; a corporate collapse amid a kind of accounting scandal which wasn’t anticipated; one of the bond guarantors being going from poor rating to actual default; and the FDIC tapping its credit line with the Treasury in a major way.
To me, the difference between MalibuRenter and mav’s predictions is the behavior of FHA.
If FHA changes their max back to 417k, or they put in some other restriction (max yearly income they’ll lend to?), we’ll see MR’s predictions.
If FHA continues to do what its doing (lending $700k+ to high income earners w/ no down), we wont see a large drop – but FHA will continue to see higher default rates.
So the question is: at what default rate (and when) does it cause FHA to tighten their standards?
The way I see it…. in an epic bubble collapse, neither the sellers nor the buyers do well post bubble. You have a long drawn out bottoming process….. I think we have a dandy of a bubble right here, clearly one for the history books. You have zero momentum on the bank side to liquidate as the banks would all be insolvent if they did…… instead you have balance sheet shenanigans…and zombie banks dragging down the economy for the next 10-20 years….. buyers in 2010-2012 will likely be stuck in their properties for a long time the same way buyers in 2004 – 2009 will be stuck….. only way out being foreclosure, short sale, or bringing money to the table….
Yes. This is an astute observation.
The FHA would really worry me, if it was a standalone insurer. However, it probably wouldn’t be able to operate in its current fashion if it was standalone.
The FHA has a delinquency rate of about 15%, and if it’s like other lenders, its loss given foreclosure is going to be over 30%. If most defaulted loans will make it to foreclosure, that means it would need to be collecting guarantee fees of
30% * 8% = 2.4% if foreclosure rates and losses given foreclosure are on the low end.
40% * 10% = 4.0% if foreclosure rates and losses given foreclosure are more like what I currently expect.
45% * 15% = 6.75% if things go fairly badly. Note that this assumes that default rates keep going up, and not many of the loans are cured.
50% * 25% = 12.5% if things go really badly. Oddly, one of the causes of things going really badly might be the FHA changing its underwriting criteria? Why? Because for a large number of borrowers FHA loans have been there only way to get into a house. If new borrowers can’t get into a defaulted FHA financed home, the prices will have to drop until someone is willing and able to buy it. Unfortunately, even the low end assumption for pressures on the FHA budget are likely to drive tighter underwriting standards.
To make this all even worse, the FHA has some characteristics which scare the hell out of insurance regulators. If the FHA was a state regulated insurer, watching it expand by a factor of 10 in one year would really worry the insurance department. Even worse, in many of the markets it serves, it’s the only insurer. And, we are talking about markets where other mortgage insurers are backing away or going insolvent.
Luckily, I expect the FHA will get Federal aid. The big fight won’t be over whether the FHA guarantee is actually good. The big fight will be about how much the FHA can change its program.
as much as i like 2010 = 2002, thats hard to believe. in 2002 the home prices were in the range of 250-280K. currently similar homes are in the range 450-475K. it wont drop straight 50% in one yr. but, as i said , thats the correct price for thses homes and it would match rental parity and affordability.
I have seen this happen already in Las Vegas, but I didn’t have a full appreciation for your predictions here in OC until I ran the numbers for the Shadow Inventory post. A bad economy and high unemployment has a way of sucking all the air out of a real estate bubble.
it’s more than just the real estate bubble at that point….. 2010 = 1996 has a way of sucking the air out of every day life for the majority of people…. I don’t think this depression is going to be shaped like that, but I could be wrong…
an easier way of saying 2010 = 1996 is:
USA = Detroit
You forgot greenback printing.
We haven’t got there yet. The end of US is when they actually **print** instead of creating it electronically.
No need to worry about shadow inventory cuz the gubbermint is actively colluding with the fat cats to prevent the market from seeing them through:
1. Mark to Fantasy
2. Foreclosure Moratorium (hell, let’s have a permanent law on foreclosure moratorium. Renters be damned.)
On #2, imagine that you’re renting a house in which the landlord fails to pay the mortgage for 12+ months:
1. Landlord is busy supporting what’s left of this economy with, you guessed it, your moola.
2. The fat cats are too busy with NOD or NOT notices.
3. You, as a stupid renter, continues to pay for the landlord’s luxury.
And you THINK you’re gonna get that NOD or NOT notice….hahahaha….think again.
Why the hell do you think the market is still up?
Forgot to add this:
2. The fat cats are too busy with NOD or NOT notices.
Even if they do have the time, they don’t need to do it because of Mark to Fantasy GAAP reporting.
Thank you renters for helping with what’s left of this crapola economy.
Funny and brilliant Chris !!! Mark to Fantacy !!!
gubbermint !!!!
I would like to add my Anecdotal evidence..
Look around at the people you know, a large percentage are spending either savings or HELOCs
in order to keep up their standard of living. Their actual income (no more bonuses or O.T.) is much less than the bubble years. This is what is sustaining the market currently. However, this can’t last too much longer. With no new REAl production any time soon, the end of the road is fast approaching.. another major leg down is about to occur..
Could Irvine = Detroit
Higher unemployment, check.
Collapse of a major local employment sector (mortgages in Irvine, cars in Detroit), check.
Continued state budget problems, check.
Migration to other states, especially among high earners, check.
Crazy politicians running Irvine and some going to jail. Fortunately not.
Long term population decline. Fortunately not.
I think Irvine will encounter large scale price drops. However, I don’t think it will encounter much abandonment of habitable structures. Some abandonment in Irvine might happen on construction projects and defaults of condo projects which are not all sold.
I agree with you, it could happen, but it means this depression would be a great one… that was my point, not that it was impossible.
“Migration to other states, especially among high earners, check.”
That’s your assumption. AFAI can tell, high earners (or high net worth indies) are still residing in Irvine and not leaving in droves. Otherwise, why aren’t we seeing better located Irvine SFHs on fire sale?
Check my comments above on collusion between govt and the fat cats. Irvine will not become another Detroit.
Wishful thinking on your part.
“Yet almost every elected official at a local level is assuming that revenues are in a normal recessionary cycle that will start recovering any day now, and they are just as clueless about the coming drop in property tax revenues as they were about the drop in sales tax revenue, because they don’t understand the true implications of the collapse of the housing bubble.”
As with the general population, very few people in government have a good background in economics and finance. And, much of what people learn in finance and econ classes isn’t very useful for running a state or local government.
“As with the general population, very few people in government have a good background in economics and finance.”
Yeah but many of them know how to fool voters.
I’ll take the latter if I’m a politician, thank you very much.
Don’t kid yourself. The voters never vote for somebody who says what needs to happen. They vote for people who spin lies like “we can cut taxes and improve services by cutting out waste in government” – never for the guy who says “your taxes are too low relative to the services you want provided, and the constitutional requirements we must meet in providing them (I’m referring mostly to prisions). Do you want less services or more taxes?”
Re: schools
You know how much crap we’ve strapped on the backs of schools in the past 30 years? From teaching protection techniques courtesy of “Megans Law” (eats two class days) to changes in the curriculum to handle “No Child Left Behind” testing requirements? They are teaching kids to pass tests and to defend themselves, but what are they really learning?
“As with the general population, very few people in government have a good background in economics and finance.”
I would say that many people in our gov’t do have some working knowledge of economics and finance. But the real problem is that much of the modern economic and financial theories are built on shaky ground to begin with. I happened to take a few economics courses back in college days (early 90’s, that is) and I remember the concept of “liquidity trap” was treated (by textbooks as well as my professors) as if it were a pure academic curiosity/speculation that had no real meaning or implications in real life. Of course after Japan and now US/EU, one can no longer say that liquidity trap is nothing but a figment of skeptics vivid bearish imagination. Oh, there is also the infamous “efficient market hypothesis” – and we all know how the ardent believers of this hogwash fare in today’s environment. Well – it appears all of our “classic” models in economics and finance are built around a smooth, flawless bell-shaped normalcy in which information is perfect and flows/distributes efficiently, and people are rational and make their everyday decisions based on the transparency the “efficient market” brings.
But the collapse of bubble economy finally exposed the inadequate nature of the “theories” that our policy makers (Fed, Treasury, gov’t officials at all levels….) so dependent upon. We are in the outlier of the model. And the truth is there are no known effective solutions for this kind of mess. Why are our gov’t and Fed still trying desperately pushing square peg thru a round hole – because that’s all they got in their playbook (based on dubious theories of course), printing more money, zero interest rate, deficit spending, yada yada….
Just read IR’s post on OC shadow inventory this morning. Great stuff as usual. Once again reminded me just what an agonizingly lengthy, slow burn housing deflation we are going to experience for the next decade.
Yeah, dang, the stock mrket is rallying, and I was almost ready to jump on the Green Shoots bandwagon, until I read this. It seems California will be last to recover, as so often happenes after a recession.
“Yet almost every elected official at a local level is assuming that revenues are in a normal recessionary cycle that will start recovering any day now, and they are just as clueless about the coming drop in property tax revenues as they were about the drop in sales tax revenue, because they don’t understand the true implications of the collapse of the housing bubble. ”
Local spending just might have to change, even in California. Of course they’ll lay off police, firefighters, clerks at the DMV and release prisoners to get people really frightened, before administrators face any cuts. Actually, we’ll need more administrators to better oversee and direct the more limited resources. 😉
I guess this does not happen only in the Bay Area:
New database shows six-figure government salaries abound in Bay Area
A public health care district in southern Alameda County paid its chief executive $876,831 in 2008 — more than twice as much as any other local government employee in the East Bay, San Francisco,San Mateo County and San Joaquin County, an extensive survey of salary data by the Bay Area News Group found. …
http://www.mercurynews.com/breakingnews/ci_13234993
Well, I agree that we ARE in a “normal recessionary cycle” actually. One would expect housing and post-prop 13 tax revenues, as well as income and sales tax revenues, to decline in a period like this, as they have in past recessions. The problem is that the governments at all levels may not have understood, and perhaps still don’t understand, to what extent the the pre-recession revenues were just ‘bubble froth’ due to easy credit and the resulting asset bubble and HELOC abuse. In other words, when we finally get back to “normal”, it isn’t going to be 2006, either.
Sorry to go out on a tangent, but with a handle like “OC Progressive” you probably would prefer to err on the side of funding government services. I sympathize, but have to also ask myself how we are going to reprioritize state spending to get back to a sustainable level. The question becomes, how much State can we afford?
Yes, that ‘s a good question. And can we get only the State we can afford if we keep the ballot proposition system? Or the 2/3 requirement for the state Assembly to pass a budget?
If we had to start again from scratch, what would we ask for? Law & Order (but does that include updating prisons?); good transport; clean public areas; good education. Oops, forgot fire protection, libraries, help for the disabled, health insurance for poor children, aid to poor families, “business-friendly” tax models, you name it.
Any support out there for a state Constitutional Convention?
Actually the constitutional convention idea hopefully has some legs now, and here’s hoping the intrenched interests don’t strangle it. Whether one is on the Left, Right, or Center, we need a legislature that isn’t gerrymandered into meaninglessness and hampered by ridiculous 2/3 rules.
I have exactly the same concern. Either it will get bogged down in social issues (abortion, domestic partners, gun control), or it will be hijacked by special interests wanting to guarantee a perpetual money pipeline to themselves.
I hate to say it, but I think a well-conceived ballot measure with some serious backing is the right way to go.
Serious backing is easy. Well conceived? HAHAHAHAHAHAHA!
Forget RE for a second
Dark Side of the Moon… I got into it when we moved from sunny Oahu (Loggings and Messina, Cecilio and Kapono, Elton John) to crappy Puget Sound (Pink Floyd, Yes, Tangerine Dream).
Yes… spacy music well suited when the weather outside is grim and the fog horn go on all night (I kid you not).
Now, take Cecilio and Kapono, sunny Hawai’ian Country music. Music for good time, bruddah… relax, take a toke (ooops) and ride it nice.
Pink Floyd? Oh no. Serious trips men. Won’t tell ya what to drop, but you get the meaning. Grim place.
Used to have a set of ADS L500s with a Dual table, Stanton 681EEE and Marantz receiver. Played all that music great.
Now I got tubes, Class D amps, english minimonitors, Magnepans, etc… I think I’ll play Pink Floyd in the living rooms system and later I’ll detox with some Frank Zappa.
Aloha from TR, folks.
Still have a pair of ADS L810s in the back room with a bigger Marantz receiver… 😉
I have Vandersteen Model 2’s. 2 channel rocks!
Thanks to you guys, I fired up iTunes (I have 3000 cd’s ripped into Apple Lossless) loaded DSOTM and The Wall into the playlist, and fired up the home theater (I love my airport Express!)
Is there a link from Audiogon to IHB? 🙂
+1 for two channel audio and Vandersteens!
Now…if only the price of Rowland gear would crash. :-/
According to Bill Gross, a “New Normal” exists.
“… if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.
As for housing …
Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households … Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households. Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.”
(Quote from the OC Register/Lansner)
In the longer time, I am actually quite optimistic. More people will do things which are actually useful. In many former bubble areas, regular families will move in, be able to afford having kids, and generally live more like prebubble days.
Savings rates will be higher. Real estate won’t appreciate much. New homes will be smaller. People will have less of a tendency to buy crap they don’t need just because the neighbors or doing it and they have a credit line.
Bless you for your optimism, MalibuRenter! If we could add to this a tendency for the Wave Of the Future to watch a lot less TV and participate in civic life, it would be heaven on earth. Or at least a version of American life that future generations could actually feel nostalgic for.
” … participate in civic life … ”
Watched or been to any of the Town Hall type meetings about health care lately? Do we need more forums for nut-cases to “debate”? They make the internet seem sane.
You are watching the death rattle of the old GOP. They are flat out of issues and all they have left is raising the noise and hopefully crowding out the signal.
I agree with you Malibu Renter — I’m not one of those folks who claim to believe that intervention wasn’t necessary last October, and I also believe that the fiscal hangover will be with us for a long time. However, we have all hopefully learned a valuable lesson that will stay with us for 20 years or so — savings rates will generally increase, trade will be more in balance. Not to be pansglossian about things, but there are enormous challenges ahead, of which the ‘shadow inventor’ is only one symptom, but the world isn’t coming to an end.
Sounds a lot like America is going to turn into Europe.
I’m an artist and bohemian at heart so I don’t mind this at all. the more gov’t intrudes the less incentive people have to work…
At least that is the bright side of it. 😉
The recent surge in housing sales is just a “bull trap” created by aggressive FHA underwriting and the $8000 first-time-buyer tax credit. Don’t be gulled. We’re only a quarter of the way down the other side of the slope from the peak of 2006, at best.
The only reason housing sales are experiencing a spurt is because of government interference. As has been mentioned here, the FHA is hard at work underwriting the next wave of defaulting loans. This new layer of loans has a delinquency rate of 14%. Most of these loans are for 4X the buyer’s income, with 3.5% down. These loans will practically all be underwater within a year.
U6 unemployment nationwide is at 15% at least and U3 unemployment at around 10%. Unemployment here in Chicago is at 11% and in SoCal about the same- all the major urban areas are being hit extremely hard.
Worse, the “stimulus” money is going where the population, economic activity, AND unemployment are not. 67% of our population lives in the 100 largest metro areas and 75% of our economic activity takes place in them. They are also the areas where there is the most unemployment-yet 60% of the road stimulus funding is going to sparsely populated areas outside these major metros.
That’s right- the most productive areas are being taxed to feed places where the people, the economic activity, and the unemployment dwell not. So our scarce money will go to building more 8-lane superhighways through the middle of the Great Nowhere, instead of back into the areas that generated it and are capable of making use of it to employ people and make necessary infrastructure repairs.
By the way, the condo featured here is one of the most outrageously overpriced dumps I’ve seen featured on your site. The place is a rathole by Irvine standards, a dowdy, ordinary, outdated dump with no potential for improvement. What would it rent for around there? $1600 at the most, I’d guess from what I’ve read on your comment threads.
Um, I second everything Laura just said.
“U6 unemployment nationwide is at 15% at least”
With the current govt intervention which is clearly winning so far, you need at least 30% in U6 to have the crap hitting the fan. Otherwise, it’s still in the toilet waiting for it to be picked up and thrown.
“yet 60% of the road stimulus funding is going to sparsely populated areas outside these major metros.”
Maybe most of the mileage is out in the sticks? What I’ve seen in the Chicago suburbs is even more repairs than usual to existing roads which were made nearly unusable by last winter’s snow plowing. One thing I noticed when I was in LA this July, was all the nighttime road work. But your roads there are beautiful! If you saw what we put up with in Chicago, you’d appreciate the good condition of your roads. Then you could get rid of a lot of that make-work, and save a few billion per year.
I live in the city of Chicago, on the north lakefront, and we are at last getting streets resurfaced that are cratered with potholes big enough to break your axle.
Everything being done is barely-on-time repair&replace;, both on the roads and on our overburdened commuter rail systems. Forget about badly needed expansion of rail service.
When oil hit $150 a barrel back there, the Metra trains to the burbs were running so packed that they had to by-pass stops. CTA is barely managing to replace the track that is so bad the trains have to run at 25MPH in sections, and 15MPH in others, while the Red Line right-of-way is about to fall down.
Chicago, the SoCal counties of Orange, Los Angeles, Riverside-SanBernardino, NYC, and Boston metros contribute the lion’s share of tax revenues yet are receiving proportionately far less in road stimulus funds.
As usual, our tax money is being grossly misallocated as it has been since WW2, to lightly populated places where it will produce very few jobs proportionate to demand in the major city areas.