Dumb — Nirvana

I’m not like them
But I can pretend

In my ongoing, yet unintentional, campaign to obtain realtor hate mail, I would like to quiz you today. MalibuRenter conceived of this post, and he did all of the research — basically, he wrote it, and I got to add the snarky comments. Get something to write on and record your answers to the following questions, the complete questions and answers are below the fold:

{book}

Are You Smarter Than a Real Estate Agent?

1. Looking at the long history of US home prices adjusted for inflation (1890 to 2008), how long has it historically taken for US home prices to double (for the same type and size of house in the same location)? ___5-10 years, ___10-20 years, ___20-50 years, ___51-80 years

2. Adjusted for inflation, had real estate prices ever declined nationally before 2007? ___yes, ___no.

3. Can the value of a home drop so much that it has to be given away in order to find a new owner?

4. What portion of US homeowners take the mortgage interest deduction? ___under 30%, ___30-40%, __40-50%, __50-60%, __60-70%, ___over 70%

5. Assume a couple purchases a home at the US median home price of $200,000 (as of 3rd quarter 2008), puts 10% down, and gets a $180,000 30 year fixed rate loan at 6% interest. Assume they are in the 25% tax bracket. If they have no other itemized deductions, about how much is the mortgage interest deduction worth to them? ___$12,000 ___$10,800 ___$3,000 ___$2,592 ___Zero.

6. If overall inflation is 3% per year (with similar rates of inflation for home prices, maintenance, and property taxes), buying a house with a fixed rate mortgage means that the cost of living in that house will ____ stay the same for 30 years, ____rise by 1-3% per year, _____rise by 3%+ per year?

7. Through 12/31/05 (near the peak of the housing bubble), which investment had the highest return over the past 100 years? ____stocks (Dow/S&P 500), ____high grade bonds, ____ single family homes

8. Do children of renters and homeowners living in adjacent homes/condos typically attend different public schools? ___yes, no

9. If a stockbroker or investment advisor knowingly made misleading statements about historic returns on an investment to a potential investor, what would happen?

10. If a realtor (or the National Association of Realtors) made misleading statements about real estate, what would happen?

11. Which of the following groups files for bankruptcy most often, and is most likely to lose a home through foreclosure?
___Single men, ___Single women, ___Couples with no children, ___ Couples with children

12. If you have a 30 year fixed rate loan at 6% interest, how much of the principal will you have paid off after 15 years? __under 25%, __25-35%, __35-45%, __45-55%, __over 55%.

13. Does taking a home equity loan or refinancing for a higher amount make it more likely you will be foreclosed on? __ Yes, __No

14. In 2007, CA had 13.2 million houses, condos, and apartments. How many people in CA had real estate licenses? ___under 100,000; ___200,000-300,000; ___300,000-400,000; ___400,000-500,000; ___500,000-600,000; ___over 600,000.

I’m having fun
I think I’m dumb
Or Maybe just happy

For those of you who do not want to relive your school test nightmares, I have a property for you to look at.

Asking Price: $609,950

Income Requirement: $152,487

Downpayment Needed: $121,990

Monthly Equity Burn: $5,082

Purchase Price: $495,500

Purchase Date: 7/22/2004

Address: 145 Danbrook, Irvine, CA 92603

Beds:	2
Baths:	3
Sq. Ft.:	1,400
$/Sq. Ft.:	$436
Lot Size:	–
Property Type:	Condominium
Style:	Other, Tuscan
Year Built:	2004
Stories:	3+
Floor:	3
View:	Park or Green Belt
Area:	Turtle Ridge
County:	Orange
MLS#:	P518047
Source:	SoCalMLS
Status:	Active
On Redfin:	959 days
Unsold in 90+ days

Owner is motivated? After 959 days on the market, I don’t feel a big sense of urgency here.

This property was purchased on 7/22/2004 for $495,000. The owner used a $320,000 first mortgage, and a $175,000 downpayment.

Check out this listing price history. At one time this woman was asking $804,995. LOL! She probably deserved that $310,000 profit after owning it for two years.

This property is still grossly overpriced even after all these reductions. Most Irvine neighborhoods are at or below 2004 pricing, but this property is supposed to be 25% higher? Oh yea, it is Turtle Ridge…

{book}

Are You Smarter Than a Real Estate Agent?

1. Looking at the long history of US home prices adjusted for inflation (1890 to 2008), how long has it historically taken for US home prices to double (for the same type and size of house in the same location)? ___5-10 years, ___10-20 years, ___20-50 years, ___51-80 years

A. 51-80 years. From 1890 to 2000 this had never occurred, even if you purchased at the bottom and sold at the top. In 2001 home prices adjusted for inflation were twice as high as 1921, the first time a doubling had occurred. The shortest period of time for prices to double was from 1949 to 2006, 57 years.

2. Adjusted for inflation, had real estate prices ever declined nationally before 2007? ___yes, ___no.

A: Yes, prices drop about as often as they rise. When adjusted for inflation, home prices have dropped slightly more often than they have risen. This is true from 1890 to 2008 (52% of the years prices dropped after adjusting for inflation), from the end of WWII to 2008 (51% of the years prices dropped), from 1980 to 2008 (48% of the years prices dropped). The chart below shows inflation-adjusted single family home prices in the US (From Robert Shiller http://www.econ.yale.edu/~shiller/data/Fig2-1.xls ).

3. Can the value of a home drop so much that it has to be given away in order to find a new owner?

A. Yes. There are currently numerous examples in Detroit and Cleveland, and an assortment of others in places like Indianapolis. When prices drop below several thousand dollars, the current owner is very likely paying out more than the purchase price for a real estate commission, title search and title insurance, and documents fees.

This most commonly happens to smaller homes in poor repair, and in areas where the population is dropping. http://news.google.com/news/url?sa=t&ct=us/0-0&fp=49671eb0070dbe74&ei=K3FnSZnEKoKQNe2KwOkE&url=http%3A//money.cnn.com/2009/01/08/real_estate/thousand_dollar_homes/%3Fpostversion%3D2009010812&cid=1291117800&usg=AFQjCNHqWeJv4ixHrneUNW4mMuh0APfrLw

4. What portion of US homeowners take the mortgage interest deduction? ___under 30%, ___30-40%, __40-50%, __50-60%, __60-70%, ___over 70%

A. 40-50%. Approximately 43% of homeowners take the mortgage interest deduction.

In 2007 there were 75.6 million owner occupied homes. Owner occupied homes were 68% of all households. Only 29% of tax filers itemized and took the mortgage
interest deduction. 26.7 million (35%) of homeowners have no mortgage. 48.9 million (65% of homeowners) have mortgages. 42% of homeowners have mortages and take the mortgage interest deduction. Sources: Number of owner-occupied homes, 2007 American Housing Survey Table 1A. Number of owner-occupied homes with and without mortgages, 2007 American Housing Survey Table 2-19. Portion of tax returns with mortgage interest deduction from IRS Publication 1304 (2006), tables 1.1 and 2.1.

Note that many people who take the mortgage interest deduction don’t get to deduct the full interest cost. If you have no other deductions, the first $11,400 of mortgage interest doesn’t exceed the standard deduction.

5. Assume a couple purchases a home at the US median home price of $200,000 (as of 3rd quarter 2008), puts 10% down, and gets a $180,000 30 year fixed rate loan at 6% interest. Assume they are in the 25% tax bracket. If they have no other itemized deductions, about how much is the mortgage interest deduction worth to them? ___$12,000 ___$10,800 ___$3,000 ___$2,592 ___Zero.

A. Zero, zip, nada, zilch, absolutely nothing, a nullity. For 2009, the standard deduction for a married couple is $11,400. For a $180,000 loan at 6% interest, the interest is about $10,740 per year. Thus, there is no benefit for this couple to itemize and take the mortgage interest deduction.

Even if the couple had bought a more expensive house and taken the mortgage interest deduction, the interest would drop every year, and the standard deduction likely rises in future years. Thus, the value of the mortgage interest deduction drops every year the loan is outstanding.

Median home price as of Q3 2008 from National Association of Realtors , http://www.realtor.org/wps/wcm/connect/c5200d804bf84ae9beb7befda086cc0a/REL08Q3T.pdf?MOD=AJPERES&CACHEID=c5200d804bf84ae9beb7befda086cc0a .

Median national downpayment is from a Zillow survey for Q3 2008, http://www.zillow.com/reports/RealEstateMarketReports.htm. Even at a 5% downpayment, there would still be no benefit to the mortgage interest deduction.

Standard deduction for 2009 is from http://www.irs.gov/newsroom/article/0,,id=187825,00.html

6. If overall inflation is 3% per year (with similar rates of inflation for home prices, maintenance, and property taxes), buying a house with a fixed rate mortgage means that the cost of living in that house will ____ stay the same for 30 years, ____rise by 1-3% per year, _____rise by 3%+ per year?

A. Rise by 1-3% per year. Because the costs of maintenance, insurance, and property taxes all rise over time, having a fixed rate loan is only a partial hedge against inflation. The portion of the mortgage payment which is interest drops each year, and the standard deduction rises. For people who take the mortgage interest deduction, the aftertax mortgage payment rises slowly over time, even with a fixed rate mortgage.

7. Through 12/31/05 (near the peak of the housing bubble), which investment had the highest return over the past 100 years? ____stocks (Dow/S&P 500), ____high grade bonds, ____ single family homes

A. Stocks 6.7%, Bonds 2.6%, Single family homes 0.7%. Those are real numbers adjusted for inflation. Since they are all measured over the same time periods, without adjusting for inflation, stocks would still have outperformed bonds, and both would have outperformed houses. Sources: Real rates of returns for stocks and bonds Prof Jeremy Siegel, Wharton School, http://archives2.sifma.org/boca2005/pdf/JeremySiegel.pdf . Real returns on homes prices, from Robert Shiller, Yale University, http://www.econ.yale.edu/~shiller/data/Fig2-1.xls .

8. Do children of renters and homeowners living in adjacent homes/condos typically attend different public schools? ___yes, no

A. They all attend the same public schools. Parents don’t need to buy in a good school district in order to have their children attend school there.

9. If a stockbroker or investment advisor knowingly made misleading statements about historic returns on an investment to a potential investor, what would happen?

A. He would be subject to discipline, fines, revocation of his license, and under certain circumstances criminal prosecution. Rule 10b-5 of the Federal Securities Act of 1934 Employment of Manipulative and Deceptive Devices states:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

There are many similar state law provisions.

10. If a realtor (or the National Association of Realtors) made misleading statements about real estate, what would happen?

A. If recent experience is any guide, they would be ignored or mocked, but would not encounter any sanctions. Real estate itself is not classified as a security, and the Federal government does not regulate misrepresentation regarding investment returns on real estate.

An extremely public example of a questionable or misleading claim is a National Association of Realtors ad which first aired in 2008. It claims “On average, the value of a home nearly doubles every 10 years”, https://www.youtube.com/watch?v=AyZpNIyVKQk .
The Wall Street Journal skewered this claim, and another investment return calculation from the National Assoc of Realtors at http://blogs.wsj.com/developments/2008/01/29/nar-campaign-touts-real-estate-as-a-great-investment/ . Here is an excerpt:
“It’s a “very misleading statement,” said James R. Webb, director of the Center for Real Estate Brokerage and Markets at Cleveland State University and a professor of finance. Mr. Webb noted that housing-price appreciation rates vary across the U.S. and that “the rates for appreciation that we saw in the past few years were artificial due to the fact that we gave a zillion people mortgages who shouldn’t have gotten them. If we hadn’t given those people the mortgages, those rates of appreciation wouldn’t have happened.”
It’s best to view a house as a home – not as an investment he stressed, adding, “You shouldn’t buy a house if you don’t need a house. You should buy a house because you want to live in it, not because it’s a good investment. People have become seduced by the idea that a house is a good investment.”
We also phoned Chris Mayer, the director of the Milstein Center for Real Estate at Columbia Business School. About NAR’s down payment/stock market comparison, Mr. Mayer said, “That’s insane. If one of my students made that calculation, I would fail them.”
NAR’s calculation leaves out several important variables, such as closing costs, how much money goes into maintaining a property, brokers’ fees, property taxes and “the risk of using 95% leverage – in the example NAR puts forth, the buyer only puts down 5% of the home’s cost and borrows the rest, he explained.”

11. Which of the following groups files for bankruptcy most often, and is most likely to lose a home through foreclosure?
___Single men, ___Single women, ___Couples with no children, ___ Couples with children

A. Couples with children are the most likely to file bankruptcy, and the most likely to be foreclosed on. “The families in the worst financial trouble are not the usual suspects. They are not the very young, tempted by the freedom of their first cr
edit cards. They are not the elderly trapped by failing bodies and declining savings accounts. And they are not a random assortment of Americans who lack the self-control to keep their spending in check. Rather, the people who consistently rank the in the worst financial trouble are united by one surprising characteristic. They are parents with children at home.” The Growing Threat to Middle Class Families, Elizabeth Warren, Harvard Law School, http://www.nacba.org/files/new_in_debate/GrowingThreatMiddleClassFamilies.pdf .

12. If you have a 30 year fixed rate loan at 6% interest, how much of the principal will you have paid off after 15 years? __under 25%, __25-35%, __35-45%, __45-55%, __over 55%.

A. 25-35%. At the end of 15 years, at 6% you would have paid off 29.4% of principal. At 5% interest, you would have paid off 32.5%. At 7% interest you would have paid off 26.6%.

13. Does taking a home equity loan or refinancing for a higher amount make it more likely you will be foreclosed on? __ Yes, __No

A. Yes, because you now have higher monthly payments, and the total outstanding loans are larger. This makes it more likely you will have difficulty making payments due to job loss, divorce, or serious medical problems. It also makes it more likely that you cannot sell the house for at least the loan value.

14. In 2007, CA had 13.2 million houses, condos, and apartments. How many people in CA had real estate licenses? ___under 100,000; ___200,000-300,000; ___300,000-400,000; ___400,000-500,000; ___500,000-600,000; ___over 600,000.

A. 500,000-600,000 http://www.ocregister.com/money/estate-real-number-1970845-people-last. As of Dec 07 there were 548,959 people with CA real estate licenses. One for every 24.2 housing units. The number of housing units (including 8% vacant) is from http://factfinder.census.gov/servlet/NPTable?_bm=y&-geo_id=04000US06&-qr_name=ACS_2007_3YR_G00_NP01&-ds_name=&-redoLog=false. 60.2% were owner occupied as of 2006, *http://www.census.gov/hhes/www/housing/hvs/annual06/ann06t13.html . That means one real estate agent for every 14.6 households. Of course, not all real estate agents do residential sales. Some do commercial, some do leasing, and some have licenses for other purposes.

I’m not like them
But I can pretend
The sun is gone,
But I have a light
The day is done,
I’m having fun
I think I’m dumb
Or maybe just happy

I think I’m Dumb (x12)

Dumb — Nirvana

I Don’t Wanna Be a Loser — Lesley Gore

We are starting to see an interesting phenomenon in the housing market: knife-catchers changing their minds. The first one I noticed was in Quail Hill back in October. It was purchased by a flipper who put a large sum as a downpayment but then tried to sell quickly at a breakeven price. The only reasonable explanation is that it was purchased as a flip, and the owners changed their minds.

Changing your mind on a stock purchase is relatively easy. Stocks are very liquid, and transaction costs are very low. However, changing your mind about a real estate transaction is not so easy. Real estate is very illiquid in a declining market, and the transaction costs are very high. If you quickly change your mind about real estate, you will lose money. Of course, it is common to price it just above your purchase price and hope someone just a little more foolish than yourself comes along to bail you out. In a declining market, the greater fool is harder to find.

In the world of large real estate transactions, buyers do an enormous amount of due diligence to completely understand what they are buying and the state of the market they are buying it in. It is not uncommon for buyers to spend hundreds of thousands of dollars on property research and still walk away from the transaction. This is prudent because wealthy real estate investors know how illiquid these investments are, and they know how costly it is to change their minds later. Small-time residential real estate speculators know none of this. For many, the extent of their due diligence is walking the property with a salesman. Some will get the necessary inspections to accurately determine the status of the property, but many will not. Most amateur speculators simply don’t care: real estate always goes up you know.

The comedy of errors is amusing to us, but it must be very troublesome to the speculators who lose tens or hundreds of thousands of dollars of their own money. Many of the knife catchers who have been speculating have invested large downpayments, mostly because the banks wisely forced them to. The bagholders for the next leg down in the markets will be the knife catchers, and the money lost will be their own.

Today’s featured property is one such knife catcher who appears to be changing his mind on the viability of this investment. Is it too late?

Asking Price: $799,000

Income Requirement: $199,750

Downpayment Needed: $159,800

Monthly Equity Burn: $6,658

Purchase Price: $770,000

Purchase Date: 1/28/2008

Address: 21 Meadowsweet Way, Irvine, CA 92612

Live in the quiet Village 2 section of the Master
Planned City of Irvine…..where, over-time, real estate values are
maintained. ROFLMAO!!! I had to profile this property because I couldn’t stop laughing when I read that description…

This is a nice location. You can walk to a great pool less than 100 yards away, although the sand volleyball court in the back would be annoying if it were ever used.

This property was purchased on 1/28/2008 for $770,000. The owner used a $417,000 first mortgage (conforming limit), and a $353,000 downpayment. The only question now is “How much is this owner going to lose?”

If this property sells for its asking price, and if the owner did not put a lot of money into renovations (it looks updated), they stand to lose $18,940 after a 6% commission. Of course, that is assuming they get this asking price which doesn’t seem very likely. I suspect these sellers will lapse back into denial and wait out the recession. Prices will rebound in 2010, right?

What is it worth?

Based on my calculations, this would cost someone $4,361 per month to own. I would estimate it might rent for $3,000, although it might only fetch $2,800. Based on that rent, it is worth less than $500,000. In short, I think this property has a long way to fall.

{book}

I don’t wanna be a loser
I don’t wanna have a broken heart
Oh I don’t wanna be a loser
I don’t want another girl to tear us apart

Oh I’ll fight with all my might, kiss you & hold you tight
Until you say I’m right; I don’t wanna be a loser in love

I Don’t Wanna Be a Loser — Lesley Gore

Sweet Baby James — James Taylor

The low end of the market collapsed first while the mid- and high-end of the market dropped at a slower rate. There is still a great deal of denial at the high end, but now the mid range is starting to break down. I have profiled a number of properties in the $600,000 to the $1,000,000 range that are showing significant price drops from the peak. The collapse is working its way up the food chain.

The first sign of a troubled real estate market is a dramatic reduction in volume known as buyer exhaustion. There are simply not enough buyers able or willing to push prices any higher even at the lower transaction volumes. In a residential real estate market, this phenomenon is particularly pronounced at the entry level. The imbalance between supply and demand first becomes apparent at the bottom of the affordability scale with entry-level buyers because these buyers are not bringing the profits from a previous sale with them to the next property. Affordability is less of a problem for existing homeowners in the move-up market due to this equity transfer.

The real estate market can be visualized as a massive pyramid. There are very few multi-million dollar properties at the top of the pyramid, and a large number of relatively inexpensive entry-level properties forming the base. Like any structure, if the foundation is weakened, the structure may collapse. In the same way, housing markets collapse from the bottom up due to problems with affordability. The foundation of a residential real estate market is the entry-level buyer. Entry-level buyers are generally young people starting to form new households. When homeowners want to sell their house and move up to a nicer one, someone needs to buy their house. If you follow this chain of move-ups backward, eventually you come to an entry level buyer. If there are no entry level buyers pushing the sequence of move ups, the entire real estate market ceases to function.

Today’s featured property is one of the move-up type properties in one of Irvine’s most desirable neighborhoods: Turtle Ridge. We have not seen much distress in this neighborhood to date as knife catchers have been quick to gobble up any property coming on the market at a discount. The WTF prices at the high end are still living on healthy doses of kool aid. If (I should say when) more properties like today’s enter the market, the bough might break, and down will come prices, Turtle Ridge and all.

Asking Price: $849,000

Income Requirement: $212,250

Downpayment Needed: $169,800

Monthly Equity Burn: $7,075

Purchase Price: $985,000

Purchase Date: 5/24/2006

Address: 49 Bower Tree, Irvine, CA 92603

gurde? moulding?

This house was purchased on 5/24/2006 almost at the peak of the bubble for $985,000. The owners used a $738,750 first mortgage and a $246,250 downpayment. They are trying to sell while they still have some equity left. We are starting to see more properties with 10% and 20% downpayments enter the market.

If this house sells for its asking price, and if a 6% commission is paid, the owners stand to lose $186,940. Ouch!

This house is offered for 14% off its peak purchase price.

{book}

There is a young cowboy he lives on the range
His horse and his cattle are his only companions
He works in the saddle and he sleeps in the canyons
Waiting for summer, his pastures to change

(chorus)
Goodnight you moonlight ladies
Rockabye sweet baby james
Deep greens and blues are the colors I choose
Wont you let me go down in my dreams
And rockabye sweet baby james

Sweet Baby James — James Taylor

Building a Mystery — Sarah McLachlan

In sales, it is an effective technique to build mystery. Entice a prospective buyer with how great a product is, and often times he will purchase just to satisfy his own curiosity. If any of you have stopped by the web page for my book, you probably noticed it reads like one of those cheesy sales pages littering the web. Apparently, these pages are effective, or you wouldn’t see so many of them. Or perhaps, I have read too many realtor descriptions…

Today’s listing agent has come up with a fantastic way to market this property through building mystery. Look at the picture below. You don’t have to refresh your browser, the gray is not going to disappear. That is really the picture that was put on the MLS. Notice the MLS logo in the corner. Don’t you wonder what the property looks like? Aren’t you waiting for the gray to disappear so you can see the rest of the house? Maybe you should contact the realtor and schedule a showing. It might be the most attractive front elevation in Irvine. Or not.

Asking Price: $619,000

Income Requirement: $154,750

Downpayment Needed: $123,800

Monthly Equity Burn: $5,158

Purchase Price: $745,000

Purchase Date: 5/31/2006

Address: 7 Hickory, Irvine, CA 92614

Separate?

oversized side yard? Is it 12′ wide rather than 10′ wide? When the adjacent walls are taller than the space is wide, it doesn’t feel or look particularly “oversized.”

Priced to sell! We will see.

Most of the properties I profile are already underwater, and usually it is the bank that is losing a great deal of money. Today’s property is a bit different. The property was purchased on 5/31/2006, right at the peak, for $745,000. The owner used a $521,500 ARM, and a $223,500 downpayment. He refinanced into an Option ARM on 5/4/2007 also for $521,500.

Look at the situation these owners are in. They are not underwater yet, but they have a toxic loan, and property values are declining. I find it interesting that they are trying to sell. I believe most homeowers in their position would hang on to the property and try to wait out the market. Perhaps they must sell to relocate, or perhaps there was a job loss. I don’t know. It is possible they see the trajectory of prices and believe they must sell now to stop from losing even more money. Most readers of this blog believe that to be true, but based on the activity we have been seeing, it appears the buying public does not share our view. Regardless of their motivations, they are now bargaining to see how much of their downpayment they will recover. It must be an agonizing position to be in. Most people in their circumstances would price over the market and chase it down to an even larger loss.

If this property sells for its asking price, and if a 6% commission is paid, the total loss of the owner’s equity will be $163,140. This would allow them to escape with $60,360 minus the negative amortization on the loan. This is priced 20% off the peak, and in Woodbridge, we have seen properties selling at an even larger discount. They may get lucky and find a knife catcher at this price, or they may not. They may end up losing all the money they put into the deal. They probably wish they would have taken out a HELOC…

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

{book}

You come out at night
That’s when the energy comes
And the dark side’s light
And the vampires roam
You strut your rasta wear
And your suicide poem
And a cross from a faith that died
Before Jesus came
You’re building a mystery

Cause you’re working
Building a mystery
Holding on and holding it in
Yeah you’re working
Building a mystery
And choosing so carefully

Building a Mystery — Sarah McLachlan

Blossom — George Winston

The word “blossom” conjures up images and feelings of hope, renewal and possibilities for the future. But what happens when these dreams turn into a nightmare? What do you feel when your blossom becomes a turd? Our most famous “turd blossom” is Karl Rove, although I won’t pursue that thread much further…

Hope and optimism are wonderful qualities, and Americans are noted worldwide for our abundance of both. It is part of the American spirit. The Great Housing Bubble rally was a period of boundless hope, or more accurately stated, a period of irrational exuberance. Rational or not, periods of great prosperity fill everyone with hope for a better tomorrow. During the bubble, we pinned out hopes on the unstable ground of Ponzi Scheme financing. While everyone thought they were spending free money, they were really borrowing prosperity from the future. Now that the bills are coming due, the illusion of wealth and prosperity are gone; people feel hopeless and despondent.

Today’s featured property is a reflection of the American dream, circa 2005. The borrower overpaid for property using an Option ARM to acquire a property he really couldn’t afford. When properties are going up in value quickly, there is a strong incentive to overpay. Ten percent if a $1,000,000 is $100,000, whereas 10% of $500,000 is only $50,000. The more you paid, the more you made. It isn’t surprising that many people got in way over their heads, particularly when toxic financing and the elimination of standards made it easy to do.

Given the strong incentive to overpay, the foolish assurance that prices could not go down, and the willingness of lenders to give out practically unlimited funds, it should not be surprising to see properties like today’s coming on the market. Too many people have borrowed too much money. There are going to be many, many more just like it over the next several years. Even if people’s payments didn’t increase, their burdensome debt-to-income ratios would push them to sell. With the ARM resets coming and people’s payments set in increase significantly, it seems likely we will have a very serious foreclosure problem right here in Irvine.

Asking Price: $689,900

Income Requirement: $172,475

Downpayment Needed: $137,980

Monthly Equity Burn: $5,749

Purchase Price: $810,500

Purchase Date: 5/26/2005

Address: 42 Blossom, Irvine, CA 92620

Why Is This Written In Title Case? I really don’t get realtor punctuation. Why ALL CAPs? Why Title Case? Do they think it makes their description stand out? I suppose it does. It makes it stand out, and it makes them look stupid.

This property was purchased on 5/26/2005 for $810,500. The owner used an Option ARM for $648,006, and a $162,494 downpayment. Not to worry though, he opened a HELOC on 1/3/2006 for $200,000, and on 12/29/2006 he increased it to $222,700. Rather than losing his $162,494 downpayment, it seems likely that he tapped these HELOCs and made $60,206. It is possible that he didn’t, I don’t know for sure. Either way, if he gets his asking price, and if he pays a 6% commission, the transaction will bring in $648,506. Since his original first mortgage amount was $648,006, it isn’t too difficult to figure out how he arrived at this asking price. I imagine he will be pretty firm on the price — at least until the property goes to auction in foreclosure.

This property is being offered for 15% off its 2005 purchase price.

{book}

Let’s assume this house does sell for its asking price and the first mortgage is paid off. In that case, either this guy lost his entire $162,494 downpayment, or the bank lost $222,700. Let’s further assume the more likely scenario: the bank lost $222,700. Without going through a judicial foreclosure, it will be difficult for the bank to collect this money even though it is a recourse loan. How is this not theft? Do you see the moral hazard here? If we inflate another housing bubble, won’t you be maxing out your HELOC every few months until the bubble bursts? Why take any market risk when you can be paid the maximum appraised value by a bank?

I hate to say it, but some of the most memorable lessons of the bubble are the ones that are most financially advantageous and most morally repugnant.