One Thing Leads to Another — The Fixx
Realtors are infamous for peddling the fallacies of housing leading to a housing bubble (The deception with tact). Of course, buyers want to believe in the fantasy of perpetual appreciation (If this is up, then I’m up). And few owners want to take responsibility for their decisions when their plans go astray (You run for cover and there’s heat). But they are not alone. The lenders do not want to take responsibility either, and we will end up paying for it (I’ve got to say enough’s enough, Bigger the harder he falls). Does anyone think the proposed bailout that is likely to be passed will solve all our problems? (But when the wrong antidote, Is like a bulge on the throat) It won’t save housing prices, and one can only speculate on whether or not it saves us from financial Armageddon.
So where does this all end? When do the bailouts stop? Each one of these bailouts has been sold to us based on the belief that the alternative was too dire to contemplate. One thing leads to another.
Let’s review the chain of cause and effect lest any of our politicians forget why these massive bailouts are necessary. Realtors peddle fantasies of unlimited wealth that leads to people wanting to overpay for houses. The desire for real estate at any cost provides an opportunity for lenders and mortgage brokers to make huge origination fees if they can lower standards and qualify more people. Appraisers use the comparative-sales approach which justifies current pricing based on the irrational behavior of buyers. Investors in mortgage backed securities enable the originations by purchasing any loan they can get. Default insurance companies like Freddie Mac, Fannie Mae and AIG provide false assurances to investors that they can insure their losses. Ratings companies provide dubious ratings that puts even more confidence into investor’s decisions. All of this together leads to a massive inflation of house prices. One thing leads to another.
Now, back to our buyers. People who overextended and overpaid for real estate cannot afford their payments. They are insolvent. This leads to defaults which leads to forced sales which leads to lower prices. The lower prices distresses more homeowners leading to even more forced sales and even lower prices. The defaults and resulting losses cause lenders to become cautious and tighten lending standards. This leads to fewer qualified buyers and a reduction in demand leading to even more price drops. The losses by lenders causes default insurance providers to pay claims. They have written more policies than they can cover, so they go bankrupt. The losses by lenders also lead to a depletion of their capital reserves which leaves them less money to lend. This leads to a massive credit crunch and widespread monetary deflation as the money created by lenders when they originated the loans disappears into the ethers. It also leads to a dramatic slowdown in our economy as the circulation of money slows and commerce dries up. All of this leads us to today where we are being forced to engineer massive bailouts of anyone who provided or insured loans. One thing leads to another.
So what comes next? A severe economic recession, more layoffs, less income, massive government debt, and lower house prices. Followed by increased personal savings, economic recovery and renewed (albeit tepid) house price appreciation. One thing leads to another.
Today’s featured property is another example of house speculation gone awry. We have a lot of foreclosing to do before the system is truly purged of these exotic loans and overextended owners.
Asking Price: $360,000
Income Requirement: $90,000
Downpayment Needed: $72,000
Monthly Equity Burn: $3,000
Purchase Price: $490,000
Purchase Date: 5/24/2004
Address: 51 Ardmore, Irvine, CA 92602
| Beds: | 2 |
| Baths: | 2 |
| Sq. Ft.: | 1,300 |
| $/Sq. Ft.: | $277 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Other |
| Year Built: | 2001 |
| Stories: | 2 Levels |
| Floor: | 1 |
| Area: | West Irvine |
| County: | Orange |
| MLS#: | P656811 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
Irvine! Open Floor Plan With Fireplace In The Living Room, Spacious
Kitchen With Tile Counters, Covered Balcony-Great For Relaxing, Inside
Laundry Area, Two Car Attached Garage With Direct Access! Close To
Schools, Shopping, Entertainment, Freeways, Parks And More!
It looks to me like the realtor could not even be bothered to get out of his car.
The previous owner of this property — it is now REO — was a classic real estate speculator. The property was purchased on 5/24/2004 for $490,000. The owner used a $391,920 first mortgage a $97,980 second mortgage and a $100 downpayment. At least he had some skin in the game. On 5/12/2005 he opened a HELOC for $113,100, and on 12/30/2005 he opened another for $148,223. On 8/1/2006 he refinanced with a $444,000 first and a $111,000 second. The total debt on the property was $555,000, and the total mortgage equity withdrawal was $65,000. BTW, assuming the $550,000 was loaned based on a peak appraised value, this property is being offered for 35% off. The lender took the house back on 9/9/2008 for $451,933 and quickly listed it for sale at $360,000. If this sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $216,600. I can’t help wondering how many losses like this have not been recorded by the lenders and investors and will be passed on to us taxpayers when we buy their toxic paper.
.
The deception with tact
Just what are you trying to say
You’ve got a blank face, which irritates
Communicate, pull out your party piece
You see dimensions in two
State your case with black or white
But when one little cross
Leads to shots, grit your teeth
You run for cover so discreet
Why don’t they
Do what they say, say what you mean
Oh well, one thing leads to another
You told me something wrong
I know I listen too long
But then one thing leads to another
The impression that you sell
Passes in and out like a scent
But the long face that you see
Comes from living close to your fears
If this is up, then I’m up
But you’re running out of sight
You’ve seen your name on the walls
And when one little bump
Leads to shock miss a beat
You run for cover and there’s heat
Why don’t they
Do what they say, say what they mean
One thing leads to another
You told me something wrong
I know I listen too long
But then one thing leads to another
Yeah, yeah, yeah
One thing leads to another
Then it’s easy to believe
Somebody’s been lying to me
But when the wrong word goes in the right ear
I know you’ve been lying to me
It’s getting rough, off the cuff
I’ve got to say enough’s enough
Bigger the harder he falls
But when the wrong antidote
Is like a bulge on the throat
You run for cover in the heat
Why don’t they
Do what they say, say what they mean
One thing leads to another
You told me something wrong
I know I listen too long
But then one thing leads to another
Yeah, yeah
One thing leads to another…
One Thing Leads to Another — The Fixx
Over a third of a million dollars for a claustrophobic condo with over $200 HOA dues. This one’s goin down over 50% (eventually).
The “happy days are here again” croud are fighting a losing battle. We are now paying for the false recovery after 2001, also called the housing bubble. Great comments IR. Keep preachin’.
It’s not a condo.
It’s a “CONDEAU”!
72K! and you are “IN” “DEWD”
Perhaps the $700B bail-out is necessary … although it does seem to be something of a “rush job” with “grave consequences” promised if it is not quickly passed. Hmmmmm … where have I heard this before? The run-up to the Iraq war? Naaaaah.
In any case, if it is passed it should include a dilutive interest (i.e. stock or warrants) passing to the US government from any institution that chooses to participate. Also, I don’t have a problem with limiting executive compensation at any institution that participates in this bail-out … these executives are the very folks who helped create this mess.
The current proposal (which I understand runs a whopping three pages) is short on details, but gives the Secretary of the Treasury basically a “blank check” for $700B with no oversight or even review. Why am I uneasy about this?
Henry Paulson was out yapping again this morning. He says he wants oversight, but it is the job of congress to figure it out.
How is that going to work? The lobbyists for the car makers and student loan companies are already out with their knives looking to cut a piece of this pie.
At this point I am not sure what is worse, this bailout or letting the sh%t hit the fan we see who ends up with a dirty shirt.
We should also require participating financial company execs and members of congress to subscribe to a daily read of IHB…had some been paying attention a couple years ago maybe much pain would have been avoided!
Nice thought. But the money was so good that was all that mattered.
I was in IT at New Century. I remember telling my co-workers this will end someday and they looked at me like I was a moron.
My business partners wife worked in IT at New Century when the party was just kicking into gear. He used to tell me stories about how they would finance anyone, in other words, any lead that came in on the internet was automatically qualified for a loan.
Her name was Derong
I was a developer at New Century. I joined the company (after struggling for a couple of years thanks to graduating in cs into a dot com bubble bust).
I was so glad to have a job! And then I asked my friend what the company did, and he said “subprime loans” and my response was, “Is that a good idea?”
I figured the higher ups knew what they were doing. Sure enough – it’s not like being SOX-compliant helped us from turning out like Enron.
And even when everything went down, I had no idea why. Head in the sand – that’s not me anymore!
Walter! I think I know you! =O Well we met a couple times at lunch at the Spectrum I think…
I’ve also heard of Derong, but she left before I joined.
Great song choice! I can’t believe you managed to hold back from using this song for so long, but it’s definitely appropriate.
I was a big fan of The Fixx in the 80s. I must have listened to Reach the Beach a hundred times.
I bought “Reach the Beach” and 650 other CD’s for $75 a couple of months ago. The seller was some leasing agent turned stay at home mom in Talega.
I love my ipod and itunes. Micro Center loves me because they continue to sell me new larger hard drives.
At the minimum, this one is going back to nominal 2002 price of $287k.
Huh, looks like they already have an offer in. I wonder if they’re taking 287k…
I’ve heard that song dozens of times, yet never had any idea what the lyrics were…
Why bother to get out of the car when you know that the chances of this selling anytime soon are small? It’s just like all the other housing out there without much to distinguish it.
Actually the REOs in my neighborhood are gone in days, maybe weeks. They price them 10% – 20% below market and they are sold pretty pictures or not.
Same goes for my neighborhood, Walter. Pictures are meaningless, because if it’s a three or four bedroom, buyers are immediately interested, interior be damned. While I hope (and need) prices to come down more, there are enough interested buyers for starter homes here to continue supporting the price that entry level homes have reach this past season. I’m now waiting to see what happens next spring.
I LOVE the FIXX! Great song…
This condo STILL seems overpriced at $360K.
Job losses are continuing. I have a good friend with a VERY good paying job at a financial institution. I thought she was exempt from downturn because she has a specialized skill set and a huge network of contacts in the business. She´s probably making $150K minimum – or was.
Job losses may be continuing, but median incomes are increasing if you believe the junk “American Community Survey” that is pumping up the numbers (http://www.modbee.com/local/story/408350.html) without conducting a proper Census.
It’s a good smokescreen to hide the inflation. Spin up a good lie and claim that incomes are on the rise.
The median Scottsdale, AZ income jumped about 15K between 2006 and 2007. I haven’t found anyone yet claiming a 15K pay raise between 2006 and 2007.
It’s all those people taking on a second job part-time to make up for the lose of a wage-earner (the house).
The bulls on the forums are all pumped up about the pumped up numbers. They did not bother to actually read the fine print on the information they were championing. Classic confirmation bias (and laziness).
http://www.crackthecode.us/images/IHBPumpers.jpg
Awesome picture, AZDave (although I don’t appreciate my hand hovering over Ahnold’s package).
With regard to researching the numbers, I guess it would not have occured to me to reach out to an article from the esteemed Modesto Bee — an article which speaks specifically of the income numbers reported for THAT area — to validate the OC numbers. But I guess if all you can find to support your theory is the Modesto Bee, than so be it. For me, if the fine folks at the Census thought it was good enough for them, its good enough for me.
Honestly, I really don’t care that much, and don’t want to argue with you about it. Personally, I’m rooting for prices to come down because I still rent. I’m just trying to be realistic here….and telling myself that nobody around here makes more the $50k and the median price will probably be $200k in a couple of years is an exercise in futility.
Spitting image!
Really though, I think you’ve gotta give some ground AZ. You’ve been calling pricedrops of 50% and more in Irvine for the last few years. We’ve certainly seem some good drops, but those houses you were so sure would sell for 100k are still going for 400… What happened?
Is the armageddon just coming next year now?
25 –
You have to wait. We still have a ways to go.
I don’t think I have been here more than a little over a year.
I’ll be more than willing to give ground when we get there.
Anyone up for a little alley way living ? :smirk:
I agree with George… It’s going back to 2002 prices (at the very least).
Photo from the outside on a REO only 2 weeks old?
I wonder if the real reason is either the inside is TRASHED or if they’re having legal issues getting the old tenants actually out (though the law is on the bank’s side, I’ve heard a few stories of people squatting after they were foreclosed on)
Same as the sub-prime, the $700B rescue is designed to fail. It is 100% political movement, period.
The credit crisis has been at least a year, Paulson has purposed so many solutions and none of them work, this is because there is no solution to “fix” it.
Now $700B with just three piece of pages – he might had a proposal with 1000 pages long time ago, but he knew this is no going to work.
Wake up, Democrats and American Please, you have been cheated on Iraq war,2001 tax cut, 2004 sub-prime, American has been refin once, and our children will be financial now (we own $12 trillion to the world), all for the sake of Oil, Texas, Wall St and Bush 3rd term.
This plan made purely for Bush 3rd term
What good fortune for governments that the people do not think.
Adolf Hitler
Actually, the 2001 tax cut was a benefit for me.
Fortunately, I got rid of all my RE holdings since last year (mind you…I actually paid more than 20% down payment on all the condos/homes, unlike some of the bastards listed on this blog by IR).
But I agree, we need Obama. Let’s re-regulate the living crap out of this country (and I’m a registered Repuke even though I’m more of a libertarian…Ron Paul type).
It’s not a bad community, but street parking really sucks for your guests there. I’ve had to park all the way by the pool on numerous occasions.
IR,
Do you ever see any distressed properties in Shady Canyon? I was walking around there this weekend and I was stunned by the opulence of the houses there. I wonder what the mediam income of the people living in Shady Canyon must be?
Dano
I’m not gonna panic until your theme song for the day is
Bound for the Floor
by Local H
What good is confidence?
Redfin says that this property is already accepting backup offers. That’s a sale in only 5 Days!!
IrvineRenter, I have a minor difference of opinion regarding one comment you made: << The losses by lenders also lead to a depletion of their capital reserves which leaves them less money to lend. This leads to a massive credit crunch and widespread monetary deflation as the money created by lenders when they originated the loans disappears into the ethers. >>
Pure monetary inflation arises when the Central Bank (the Fed) creates more money out of thin air, which they do to the tune of a few percent a year. But when credit is created, which is possible by our fractional reserve banking system (see wikipedia for detailed commentary on the multiplier effect that results), there is effectively a ‘temporary’ increase in the money supply as well. However, in theory, if and when the loan is paid back in full, that credit is extinguished. Hence, the borrower has effectively advanced his future income stream into the present so he may consume a good now (buy a house with credit instead of cash, and pay interest for that luxury). But net-net, when all is said and done, there is no monetary inflation resulting.
Now, back to when the loan is first made by the bank, the credit is perceived by the system as ‘real money,’ and is used by the homebuyer to pay the builder, who pays the construction crew, etc etc.. This NEWLY CREATED money is now out in the system. IF the debt is never repaid, then this ‘temporary’ monetary inflation via the credit system (and fractional reserve banking mechanism) becomes permanent.
So I do not understand the comment that the action of wiping out the loan rather than paying it from a future income stream is, in and of itself, ‘deflationary,’ when by my interpretation it is the exact opposite. Just like the Fed creating new money (whether by a printing press or by getting the congress to approve the massive issuance of new debt, to be paid by the taxpayers’ future income streams….) to purchase bad debts and (as we all know will happen), eventually just wiping out a large fraction (when they sell to someone else later for pennies on the dollar… the whole purpose of the proposed bailout scheme…): this amount is a permanent inflation of the money supply. Now, I suppose if the taxpayers ever really fully paid off all the gov’t debt, this monetary inflation would be pulled back in and extinguished… but for all intents and purposes, this debt will forever be rolled over, as far as we can see.
Now, is there deflation occurring in this process? Sure, the asset values are deflating, and as banks contract credit (wiping out credit lines, calling in loans, not rolling over loans, not to mention not making new loans) this asset deflation could accelerate as it did in the 30’s as people and businesses liquidate hard assets to get dollars to use to repay debts and simply survive day to day. But, when a loan is not repaid, and the extended credit becomes a permanent part of the money supply, that is not deflation but actually inflation.
If you or someone can argue otherwise, I’m very interested.
Thanks again for your blog, I truly enjoy it.
RichW
I see your point, the way I thought about in simple terms was like you said, when loans were made the last few years they were causing inflation (in a sense ) since so many people had money handed to them 😆
now that loans are written off, it is the reverse, kind like a vacuum, causing banks to fail, the ones left standing will make you bend over before lending any money
By the way
http://calculatedrisk.blogspot.com/2008/09/wells-fargo-30-year-jumbo-mortgage.html
I saw that post at CR – we are getting close to 10% for jumbos! That’s one way to price in a little risk (risk of mispricing of the asset being used as collateral), since it really reduces the leverage one can use when overpaying.
Continuing the thought above: I suppose that to be more correct, one should observe that the inflationary effect *actually* occurs at the time of credit creation, as that is when the ‘new money’ is pushed out into the system and begins circulating. So, the usual contraction of the money supply that results from repayment of debt is the ‘deflationary event’ that typically occurs over a long period of time for an amortizing loan (which completely extinguishes the full amount of money initially created). A fine point to make is to realize that the multiplier effect (see again the wiki link re: fractional reserve banking, it is well explained there) will result (in the limit) in up to 5x the original amount of deposited money (that was leveraged into making the first loan via credit creation in addition to the original loan amount) being put into the system. So while the original loan will normally be extinguished over the fullness of time, the multiplier-money that also gets added to the system may persist longer, and is an independent entity from the original loan.
Your particular comment that a bank writing off a loan was effectively a deflationary event may be true, to the effect that a bank’s balance sheet will have offsetting profits from assets (other loans) that are generating income, and the bank can remain solvent and not rely on FDIC money to make depositors (the liabilities on the bank balance sheet) ‘whole,’ with the result that there is a reduction in the ability to lend due to the taking of the loss.
I guess that my comment is that if the government steps in to create new money to give to the bank to ‘make it whole’ for the loss, and then that government (Fed) simply erases the bad debt, then that act simply makes permanent the original inflationary effect of the original credit creation, as there is no reduction the ability of bank to lend since the bank experienced no loss.
Hope this was not too long-winded, just trying to be precise in my language here.
I make no claims to be a professional economist, either! I just read and thought a lot about it over the years.
RichW,
You have obviously given this a lot of thought.
“I suppose that to be more correct, one should observe that the inflationary effect *actually* occurs at the time of credit creation, as that is when the ‘new money’ is pushed out into the system and begins circulating.”
Yes, this is true. In theory, this money goes toward the creation of something with added value, so even after the loan is repaid, an asset exists with greater aggregate value than the cost of the inputs. Therefore the FED grows the supply of “real” money each year to reflect the value added from asset creation.
Now, in the case of loans made against falling real estate values, when a loan is not repaid, and when the asset declines in value, the bank must take a loss. The losses were the “made up” money created through fractional reserve lending, but the write off is made against “real” money through balance sheet adjustments. This is the deflationary effect, and since real money is subject to the multiplier effect of fractional reserved lending, it has a huge impact on our financial system.
I think we are saying the same thing regarding the negative multiplier effect, when a bank itself takes a writeoff from a bad debt and thus has less capital to lever against to make new loans (hence the ‘deflationary’ component, aka the credit contraction).
Your other comment about justification for growth of the money supply, and comment that even after the loan is repaid, an asset exists. I observe that this occurs only through the application of labor over time – our labor (exchanged for an thus equivalent to money), over time (as we earn money and are able to repay loans made to finance current consumption aka home purchases), has been traded for someone else’s labor in creating the home. So in non-finance terms, the home exists because we traded our labor for someone else’s labor to create it. The fact that we used fractional reserve lending to facilitate lending money for the current purchase, with our future labor (earning stream) as a promissory note, is not really part of the equation.
However, I have always thought the Fed justified inflating the money supply because it reflected a larger population, equivalently a larger labor pool. Although, the original amount of money only needs to move faster through the system (higher ‘velocity of money’) – one could argue that there is NO need to inflate the money supply, other than to accommodate government deficit spending. It is ‘easy’ to get away with a ‘little’ inflation….
But I suppose Bernanke and Paulson were/are terrified of having to simply ‘print more money’ without authority from congress to back it with the issuance of debt obligations. Because simply ‘printing money’ at a rate more than the usual 3-5% per year will tend to frighten foreign buyers and holders of our debt, as they will have no visibility into the degree of inflation – and fearing we will only repay them with highly devalued dollars, they will cease to roll over much less purchase new debt. So Ben and Paul go to Congress, hat in hand, and suffer the (justified) slings and arrows – though they have a lot of nerve not to have proposed oversight or future compensation to taxpayers for the trillions that will be needed in the end… (end of rant).
That was a great rant. Come back and do it again.
There is a different reason for deflation in the current environment: selling performing assets. There were a ton of companies heavily leveraged who purchased everything from municipal bonds to MBS. Usually they borrowed short and purchased assets with longer durations.
There are a number of these leveraged investments unwinding. The money borrowed to invest is repaid without default. However, lots of people are getting rid of such assets. Even with no defaults anywhere, the price of the assets slowly drops.
I imagine there are many academics dusting off their old copies of Hyman Minsky’s writings. He described this phenomenon in the 60s. Most thought it could never happen with our modern financial systems.
great article
http://www.ocregister.com/articles/loans-people-house-2167891-bad-home
“Based on his reading of the market, the average family in Orange County can only afford a $300,000 home, which is where the market will go when it returns to sanity.”
Finally some truth spoken at OCR.