We are seeing more discretionary sellers with significant equity trying to exit the market. Is this the beginning of capitulation?

Asking Price: $329,900

Address: 1306 Terra Bella Irvine, CA 92602

There’re secrets in this life
That I can’t hide
Somewhere in this darkness
There’s a light that I can’t find
Maybe it’s too far away…
Or maybe I’m just blind…

When I’m Gone — 3 Doors Down

Is there a light at the end of this tunnel? The green shoots meme is dying, the housing market continues to show weakness, and more supply is coming. Maybe the end is too far away, or maybe I just can’t see it.

We are navigating uncharted waters in our housing market. Never before has there been such efforts to manipulate prices by our Federal Government and the Federal Reserve. The artificially low interest rates have caused debt to be far more affordable, and it has allowed homebuyers to bid higher than they otherwise could with conventional loan terms. The result of this manipulation is that many properties outside of Irvine have already reached rental parity. Does that make it a good time to buy? I don’t think so.

Last month, we saw a sudden spike in interest rates caused by a selloff in 10-year Treasury Notes. There are a number of reasons why this happened, but one of the main causes was the belief among investors that they could find superior returns elsewhere. This will be a big problem with house prices going forward. Let me explain why.

Interest rates are low because Treasury Bills and Notes are the only safe haven during a time of economic contraction. When there are no competing investment opportunities that provide better yields, investors will flock to the safest investment that pays them something. It is better to make very little than it is to lose money. However, the moment the economy starts to recover, there will be many investment opportunities that will pay better than the 3% investors are accepting in 10-year Treasury Notes. The flow of money out of Treasuries and into competing investments will drive up yields on Treasuries and in the process drive up interest rates on home mortgages.

There is no way to prevent this flow of money out of Treasuries and into better yielding opportunities. Even if the Federal Reserve where to buy the Treasuries itself by printing money, the resulting increase in money supply would cause inflation which would cause investors to dump long-term Treasuries as well. In short, once the economy improves, interest rates will go up, and house prices will continue to go down.

Many people who are underwater on their mortgages or who view prices as being “depressed” are waiting for the economy to improve with the assumption that an improved economy will result in improved house prices. It will not work that way. An improving economy will result in higher interest rates and continued pressure on house prices.

We are witnessing the deflation of a massive, worldwide credit bubble. The effect has been most dramatic in real estate because much of the money flow during the credit bubble went into real estate. Everyone is waiting for the return of all this leverage in the hope that the bubble will reinflate. This leverage is not coming back; nor should it.

There is a meme floating around in the financial media that lending is a confidence game, and if lenders would just start lending again, asset prices would stabilize and everything would be back to normal. This is nonsense. Lending is not a confidence game. Lenders are actually quite confident that they will not be repaid if they loan money to people who cannot service the debt and pay back the principal. No amount of “confidence” can change the basic math. Insolvent borrowers do not repay debt, and loaning them money to sustain a Ponzi Scheme does not work; in fact, it just creates larger losses later. In case you didn’t notice, later is now.

Asking Price: $329,900

Income Requirement: $82,475

Downpayment Needed: $65,980

Purchase Price: $379,000

Purchase Date: 11/6/2003

Address: 1306 Terra Bella Irvine, CA 92602

ENJOY RESORT LIKE LIVING IN THIS SPACIOUS CONDO LOCATED INSIDE
PRESTIGIOUS & PRIVATE GATED NORTHPARK. FEATURES AMONG OTHERS ARE
LARGE LIVING ROOM WITH A MEDIA NICHE, FORMAL DINING AREA, BRIGHT
KITCHEN WITH CERAMIC TILE COUNTER TOPS, OAK CABINETRY & QUALITY
BUILT-IN APPLIANCES, BALCONY TO RELAX & BBQ, MASTER BEDROOM WITH
WALK-IN CLOSET & DUAL VANITIES, UPSTAIRS LAUNDRY, DECORATOR’S
PAINT, 2 CAR GARAGE WITH EXTRA STORAGE, CLOSE TO COMMUNITY POOL &
SPA, CONDO IS 3RD BLDG ON THE LEFT.

ALL CAPS

DECORATOR’S
PAINT? Yikes!

This property was purchased on 11/6/2003 for $379,000. The owner used a $279,000 first mortgage and a $100,000 downpayment. This owner did not refinance or HELOC his investment (he lives somewhere else). Despite a 2003 purchase date, he is offering it for $40,000 less than he paid, and he is hoping to get out with a little of his downpayment. I think this is a wise move, but few in his circumstances are doing the same. Maybe a little IHB publicity will help him out.

Not a short sale? Yes, if you raise your asking price enough, a sale would cover your mortgage debt. Now if you could only find a buyer….

Go check out an interview with me at the Irvine Homes Blog (Blogger: Irvine housing market nowhere near bottom).

Asking Price: $729,000

Address: 56 Oakdale Irvine, CA 92604

{book6}

I know the breakdown
Everything is gonna shake now someday
I know the breakdown
Tell me again am i awake now maybe
You can find the reason that no one else is living this way

Breakdown — Tantric

I wanted to profile this property because I find this listing phenomenon amusing; typical homeonwers who have borrowed themselves to oblivion offer their homes for sale at a prices that would pay off their debts and advertise that it is not a short sale.

It is a nice bit of denial fantasy, but most of these properties will not transact at price levels where they will not be short sales, particularly as these mid to high end properties when prices really start to drop. This property and others like it do not show up as distressed inventory, but this property will be sold in the next 24 months either as an open market sale, a short sale, or a foreclosure. The owners spent their bubble equity by doubling their debt. It is likely that they cannot afford the debt service, and they will eventually give up. This is must-sell inventory, so it is just as distressed as those properties that fit the traditional definition.

Asking Price: $729,000

Income Requirement: $182,250

Downpayment Needed: $145,800

Purchase Price: $350,000

Purchase Date: 7/26/1991

Address: 56 Oakdale Irvine, CA 92604

• This property was purchased on 7/26/1991 — near the peak of the last bubble — for $350,000. They endured being underwater for about 8 years before we inflated the Great Housing Bubbble. When prices started going up, they finally got to enjoy the fruits of their homes labor: HELOC money.
• On 07/06/1999 they opened a HELOC for $50,000.
• On 06/06/2003 they took out a new loan for $277,000. This may have been a refinance of their first mortgage. The records are not clear.
• On 4/20/2004 they opened a HELOC for $275,000.
• On 3/10/2006 they opened a HELOC for $250,000. At this point, there is no conclusive evidence of MEW.
• On 8/3/2007 they refinanced with a $630,000 with a 1-year ARM. OK, now we know they took out the money.
• Total debt is $630,000.
• Total mortgage equity withdrawal is $280,000 plus their downpayment.

These owners more than doubled their mortgage just as most homeowners I see who are selling their homes now. In fact, as prices start to fall, the percentage of distressed properties will pick up quickly because there will be fewer and fewer of these properties who think they can ask for an amount that will pay off their mortgages.

Rising interest rates will be the end of our Spring rally. Transaction volumes will fall first, and prices will fall later.

Asking Price: $399,000

Address: 157 Lockford, Irvine, CA 92602

I’m sitting over Neptune City
I used to love it
It used to be pretty
I’ll come down, walk around a while
Until I’m sure I can never go home again

Neptune City — Nicole Atkins

Prices have stabilized locally through a combination of very low interest rates and very high downpaments. Downpayment amounts have been steadily declining as those few with substantial downpayments have spent themselves. Now, the other component of the purchase price is under tremendous pressure; rising interest rates is reducing loan amounts.

When interest rates go up and incomes do not — a condition we are witnessing now — the amounts people can borrow declines. In the short term it means many deals that went into escrow assuming the borrower could get a 4.5% rate are going to fall out of escrow. The cumulative impact of all these deals falling out of escrow over the next 30 to 60 days is going to be a drop in transaction volumes. By August, this will translate into lower prices as people bidding on properties must adjust their offers to the new level of financing.

It looks as if 4.5% interest rates are gone for good. So what does that mean for future home values?

The brief stabilization we have been experiencing was caused by
interest rates under 5%, and large downpayments. Now that most of the
knife catchers have burned up their downpayment money and interest
rates are approaching 6%, 15% of the buying power in the market just
evaporated. As interest rates keep climbing, buying power keeps
diminishing. This will lead to even lower transaction volumes and lower
prices.

Unless interest rates start dropping again — which doesn’t seem likely — the Spring rally the market has been enjoying is dead.

It should not be surprising that the rally isn’t sustained. There is no way our housing market or the local economy is at a
bottom. Californians have borrowed too much money, far more than their incomes can support. As long as this debt exists, house prices will continue to
decline, and the economy will suffer.

Think about it, if 20%-30% of the population has more debt than they
can service—which they do thanks to liar loans and unstable loan programs—these debt levels must be decreased to
serviceable levels. Reducing these debt levels requires a sale,
foreclosure or bankruptcy. To complete a sale, someone who can afford
the debt must buy a house from someone who cannot afford the debt.
There are only so many of these people out there who are able and
willing to do this. The rest—all the rest—will go through foreclosure.

There are many who believe that loan modifications are the answer. I have expressed my doubts about principal reductions being part of these modifications (see No Forgiveness). Any loan modifications that do occur will simply restructure debt to the maximum serviceable payment level. This will drain all disposable income from borrowers and wipe out our local economy–unless you believe appreciation and mortgage equity withdrawal are coming back soon.

To the extent that loan modifications succeed, our local economy
will suffer. Imagine an economy where everyone is has received loan
modifications. They are all trapped in their homes because they have no
equity, and they are making the maximum possible loan payment their
overlords believe is possible. How is that any different than serfdom?
In such an economy, there would be little or no discretionary spending
to support local businesses because every available penny will be going
toward debt service.

Many individual homeowners are praying for loan modifications that are not going to happen. It is a classic example of being careful what you wish for because if everyone were to get a modification, it would be a disaster.

Asking Price: $399,000

Income Requirement: $99,750

Downpayment Needed: $79,800

Purchase Price: $645,000

Purchase Date: 1/26/2007

Address: 157 Lockford, Irvine, CA 92602

Somebody paid $645,000 for a two bedroom condo. Unreal.

It didn’t take long for this woman to lose everything. The property was purchased on 1/26/2007 for $645,000. The owner used a $516,000, a $129,000 HELOC, and a $0 downpayment (it is possible she put $129,000 down and was pre-approved for a HELOC).

If this property sells for its teaser asking price and a 6% commission is paid, the total loss on the property will be $269,940. This property is being offered for 38% off its peak purchase price.

2003 Rollbacks are the leading edge here in Irvine, and they are becoming much more common.

Asking Price: $299,900

Address: 123 Huntington, Irvine, CA 92620

{book1}

Make sure you check out this post over at Huntington Homes.

Take Me Back to Chicago — Chicago

I still dream of the lake of peacefulness
The warm summer breeze
cause my life was so much simpler then

I grew up in the Midwest. My hometown has a population of 2,000 people; the entire county has only 15,000. Needless to say, the pace of life is much slower there, and you have an overriding sense than nothing important ever happens. It is either peaceful or boring depending on your point of view. Sometimes I long for those carefree summer days spent in the woods or at the lake. Maybe after I stop stressing about the economy and the housing market, I will take a vacation.

I remember looking at properties when I first moved to Irvine in 2003. I thought the prices were absurd. Anyone who compared the cost of renting to owning in 2003 knew immediately that something was wrong.

Not being a California native, I had never tasted kool aid. Housing markets in the Midwest where I grew up are notoriously stable. The economics nearly always favors ownership there because it is almost always cheaper to own than to rent (the bubble changed that in many big cities); there is little volatility. Even in Florida where I lived before coming here, prior to the Great Housing Bubble, prices matched the cost of construction, and they were not volatile.

It is clear to anyone who comes to California from a market with little or no volatility that the beliefs of Californian’s about home price appreciation are crazy; trees cannot grow to the sky. For people that grew up here, it is taken as a normal part of life. Don’t prices go up 10% or more where you are from?

Now that we are getting back to 2003 price levels, the prices are still crazy. If interest rates fall back below 5%, this property might be at rental parity, but it is still not a bargain. This is not typically owner-occupied quality property. This is a place you rent while you are saving up to buy a home; it is transitory. It should be much less expensive.

When properties like this one represent a 20%-25% savings over renting considering the total cost of ownership, the low end will find a bottom. The artificially low interest rates have slowed the decline, but with higher interest rates on the horizon and the second wave of foreclosures on its way, it certainly looks as if lower prices are on the way.

Asking Price: $299,900

Income Requirement: $74,975

Downpayment Needed: $59,980

Monthly Equity Burn: $2,499

Purchase Price: $368,500

Purchase Date: 12/5/2003

Address: 123 Huntington, Irvine, CA 92620

ADRESS?

This property was purchased on 12/5/2003 for $368,500. The owner used a $168,500 first mortgage and a $200,000 downpayment. There were no other refinances.

I feel sad for this guy. Here is a responsible buyer who put a huge amount down, he did not HELOC himself up to peak values and rip off a lender, and now he is going to lose money for it. By the time he sells this place, he is probably out $100,000 of the $200,000 he put down.

Many of us who rented during the bubble have joked about our regrets for not gaming the system and siphoning a couple of hundred thousand from some stupid lender, but few of us lost anything. Imagine how this guy must feel….