The Art of War — Sabaton

Speculation is a battle. The forces of greed and fear drive the financial markets, and the speculator attempts to profit from these moves. Speculation is not investment, although most do not understand the distinction. Speculation is the battle of the individual against the herd. For those who understand it and have learned to move against the emotional forces of fear and greed, there is opportunity to profit. For those who follow the herd, there are brief moments when profits are available, but few have the discipline to take them. Most speculators are slain by the market.

Like many others, I have a disdain for pure speculative flips.
People who buy properties, make no improvements, and attempt to resell
it for a profit simply inflate market prices. There is no value added.
People who rehab old or run down properties do a community service, and
they earn the money they make. However, flippers are merely financial
parasites profiting by constricting supply at reasonable price points.
Of course, flipping is a dying art, and those who are attempting it now
are losing money which makes for great schadenfreude.

Flipping is much more difficult now, not just because prices are
dropping, but because the constriction of credit and the tightening of
financing terms makes it much more costly and difficult to do. The
Option ARM with 100% financing was the ideal tool for the flipper. It
allowed him to enter the market with none of his own money, it
greatly reduced the carrying cost of the property, and it gave him downside protection in the event prices fell. With these conditions in
place, it is no wonder speculative flipping became the pastime of every
would-be Donald Trump in California.

Another behavior enabled by loose credit during the bubble was
cash-out serial refinancing. With the ability to get access to cash
from the property without selling it, there was no need to sell the
property, and many speculators held their properties and withdrew their
cash as needed. Houses were treated like savings accounts earning a
very high return. Of course, they were not withdrawing free money, they
were adding huge amounts of debt, but since the debt service costs were
low, and since nobody thought they would ever have to pay this money
back out of their income, cash-out refinancing became the rule rather
than the exception.

Today’s featured property is an example of a speculative cash-out
serial refinancing flip-flop. The speculator bought the property with
100% financing using a 1-year ARM, took out some cash, refinanced with
an Option ARM, took out some more cash, and now they are walking away.

Asking Price: $599,000

Income Requirement: $149,750

Downpayment Needed: $119,800

Monthly Equity Burn: $4,991

Purchase Price: $740,000

Purchase Date: 7/9/2004

Address: 23 Muir, Irvine, CA 92620

fantistic, seperate, celing, granit?

If the “forth” bedroom is really a den, then it should be advertised as a 3/2.

This property is sporting a 20% discount off its 2004 purchase price and represents a significant discount from neighborhood comps.

• It was purchased on July 9, 2004 for $740,000. The owner used 100% financing — kind of. She obtained a $592,000 first mortgage, when she bought the property and put down $148,000.
• One month later on August 27, 2004, she obtained a second mortgage for $173,000 and cashed out $25,000 (I wonder how much she kicked back to the appraiser?)
• On 5/5/2005 she opened a $58,900 HELOC and got some more cash.
• On 9/27/2005 she refinanced with an Option ARM with a 1% teaser rate for $640,000. She opened another HELOC for $80,000 at the same time.
• On 11/10/2005 she opened a stand-alone second for $173,000.
• And finally on 10/27/2006 she opened another HELOC for $250,000.
• The total of the first and second mortgages is $813,000. If the HELOC was used to pay off the second mortgage, the total debt rises to $890,000. If the HELOC was an add on, the total debt on the property is $1,063,000. I doubt Washington Mutual gave the huge HELOC without paying off the second, but you never know.
• Total mortgage equity withdrawal was $250,000 not including the recapture of her downpayment.

When speculation pays that well, it isn’t a surprise many people were doing it. Of course, she has to deal with the consequences to her credit, but for $250,000 in free money…

.

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

That’s the Art of War
That’s the Art of War

The Art of War — Sabaton

Columbus Stockade Blues — Brother Oswald

One of the myths about Christopher Columbus and his voyage to discover a quicker trade route to the East was that he had difficulty getting crewmen to serve because they believed the world was flat, and if they sailed far enough, they would fall off. Similarly, one of the myths about residential real estate is that prices always go up, and if they rise too high, they will not fall off. The people who bought in Columbus Grove did so right at the peak, and the continuing activities of the builders finishing off the community pushed their resale prices off the edge of the flat earth. The drop there has been remarkable.

The Columbus Grove experience shows what happens when large amounts of must-sell inventory is concentrated in one place. When prices become extremely inflated, and the market finally starts to fall, it creates a downward spiral that does not abate until prices are at fundamental valuations. However, the rate of decline is largely dependant upon the amount of must-sell inventory in specific areas. So far, the areas that have fallen the quickest have been those with large percentages of subprime loans (Santa Ana,) large numbers of new homes (Columbus Grove,) or both (Riverside County). This does not mean that the neighborhoods like those in Irvine are immune from the crash, it will just take longer here, and since it will take longer, they may not fall quite as far on a percentage basis because rents and incomes will be increasing as prices fall (we hope). Irvine and other neighborhoods will fall in time, most likely when all the Alt-A and Prime ARMS reset.

Asking Price: $880,000

Income Requirement: $220,000

Downpayment Needed: $176,000

Monthly Equity Burn: $7,333

Purchase Price: $1,226,000

Purchase Date: 8/31/2006

Address: 22 Honey Locust, Irvine, CA 92606

IMO, the front elevation is ugly and boxy.

This property is being offered for 28% off its peak purchase price. Since fundamentals have not caught up much in the two years since this was purchased, it is probably only a little more than half way to its bottom value. This property was at least 100% overvalued at the top, so a full 50% haircut is in order to get the price back to sanity. Maybe in 2 or 3 years if incomes have gone up, this property might be worth $700,000, but on a breakeven cashflow basis today, it is probably only worth $600,000.

The owner actually put some of his own money into this deal. The property has a $980,700 first mortgage and a $184,000 second mortgage leaving a 61,300 downpayment. That loss probably stings a bit, but it is the lender who is getting really hosed. If this property sells for its asking price, the total loss will be $398,800 after a 6% commission. Greenpoint Mortgage originated the loan. There is no telling who owns that toilet paper now.

In many ways, this former loanowner is one of the lucky ones, he has escaped his debtor’s prison. The rest of the neighborhood is trapped, and 15-25 years from now when values get back up to the peak prices they paid, they might be able to get out…

.

Way down in Columbus, Georgia
Want to be back in Tennessee
Way down in Columbus Stockade
Friends all turned their backs on me

Many a night with you I’ve rambled
Many an hour with you I’ve spent
Thought I had your heart forever
Now I find it’s only lent

Columbus Stockade Blues — Brother Oswald

Infatuation — Rod Stewart

Remember during the bubble rally when everyone was in love with real estate? Turns out it was an infatuation. The fickle homeowners who sought to possess real estate at any price are now dumping their lovelorn properties en masse. Of course, it is easy to become infatuated when something or someone is making your dreams come true. All people had to do was buy a property and begin extracting and spending all the free money it provided. Now that the market has reversed, and people are saddled with crushing debts, and the property is no longer providing free money, it is easy to see why the object of their infatuation has lost its luster.

Today’s featured property is another casualty of the low end of the market. There is much less denial at the low end, and much more carnage — for now. The married woman who bought this as her sole and separate property has some of her own money in the game, so she showed more resilience than those who bought with 100% financing. You see, with any market price collapse, it starts with the weakest hands — those that paid way too much and have little incentive to hold on. When these people sell, it drives prices lower and distresses a whole new group of market participants — people like today’s owner that have some money in the game, but not very much. The people who put 5%-10% down who are currently underwater will be the next group to give up. Of course, this will distress those who put more money down or purchased even earlier. Eventually, all of those who are overextended or deeply underwater will give up and capitulate to market forces.

Asking Price: $354,720

Income Requirement: $88,680

Downpayment Needed: $70,944

Monthly Equity Burn: $2,956

Purchase Price: $525,000

Purchase Date: 10/11/2006

Address: 22 Claret #42, Irvine, CA 92614

Beds:	2
Baths:	2
Sq. Ft.:	1,145
$/Sq. Ft.:	$310
Lot Size:	–
Property Type:	Condominium
Style:	Cottage, Craftsman
Year Built:	1980
Stories:	1 Level
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	S544801
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Chateaux Condo? What kind of pretentious bull$hit is that?

The fact that the garage is detached is something to get excited about?

kithcen?

2nd
bedroom is a den? So this isn’t even a true 2 bedroom…

If this property sells for its asking price minus a 6% commission, the total loss on the property will be $191,563. The seller will be losing her $105,000 downpayment (or $55,000 if she maxed her HELOC,) and IndyMac (now us taxpayers) will be losing the rest.

I posted the chart below on Monday, but it is worth a more careful look. If you really want to understand the housing bubble psychology demonstrated by today’s losing speculator, it is encapsulated in the figure below.

Behavioral Finance Theory

The whole point of boiling down posts to laughable ideas like infatuation is to underscore the psychological aspects that inflated the bubble. There is no rational justification for paying $525,000 for this property other than you believe it will continue to appreciate in price. Collectively, the more people that believe in perpetual appreciation and act on those beliefs, the more prices will rise. This does require enabling on the part of lenders, and with the virtual elimination of standards during the bubble, there were no barriers to market entry, and no limits to how high people could bid up prices. It was incomprehensible to people in 2006 that prices could drop 50%. Surely if prices had detached from fundamentals, they couldn’t have detached that much. Well, they can, and they did.

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.

🙂

.

Early in the morning I cant sleep
I cant work and I cant eat
Ive been drunk all day, cant concentrate
Maybe Im making a big mistake

Oh no not again
It hurts so good
I dont understand
Infatuation
Infatuation
Infatuation
Infatuation

Infatuation — Rod Stewart

Mysterious Ways – U2

The movements of financial markets are very mysterious and notoriously difficult to predict. Where will the stock market be today? Up or down? Your guess is as good as mine. Of the various types of financial markets, residential real estate markets are probably the easiest to predict because they trend for long periods of time. Of course, the difficult part is predicting when they will reverse. I thought our local real estate market would reverse in 2004, but the widespread sale of the Option ARM delayed the crash for two full years.

The top of the market is relatively easy to identify after the fact. When sales fall off a cliff, prices will soon follow. The bottom is a bit trickier. Sales volumes will pick up at the bottom, but it will also pick up in the false rallies leading to the bottom. Upticks in prices are not telling either because bear rallies have that feature as well. The relationship between price and rent is a good indicator. It predicted the last two bottoms, but if the price-to-rent (GRM) is at historic lows, we may not necessarily be at the bottom because inventories and foreclosures may be very high. In fact, I am of the opinion (and I am not alone) that we will have an overshoot of fundamentals based purely on supply and demand problems due to the REO inventory. Too many people borrowed too much money, and these owners will need to be flushed from the system before it is over.

Personally, I will not try to time the bottom tick of the market. I will buy when I can save money versus renting. In fact, I would prefer to buy before the bottom when inventories are high because I will have the widest selection of properties to chose from. If you wait until the bottom is clearly in the rear view mirror, inventories will be low, and you may not find the property you want (don’t worry, you will not be priced out forever.) The previous bottoms gave about a 3-5 year window of opportunity before prices rose to valuations that were too high relative to rents. This time, the window of opportunity may be longer. The ARM reset problem will persist into 2012, and it will take another 2 or 3 years for all the foreclosures to work their way through the system. I may buy in 2010, but I will not expect to see any appreciation before 2015. That will not matter to me because I will be saving money each month versus renting, and I don’t plan to sell any time soon.

Today’s featured property is as mysterious as the markets. It was only listed yesterday, and there are no pictures. Perhaps they will be up by the time this post airs.

Asking Price: $400,000

Income Requirement: $100,000

Downpayment Needed: $80,000

Monthly Equity Burn: $3,333

Purchase Price: $562,500

Purchase Date: 1/31/2006

Address: 52 Vintage #106, Irvine, CA 92620

Beds:	3
Baths:	2
Sq. Ft.:	1,550
$/Sq. Ft.:	$258
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2006
Stories:	3+ Levels
Floor:	1
View:	Has View
Area:	Woodbury
County:	Orange
MLS#:	S544575
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Descriptions don’t get much shorter than that.

This guy will not accomplish much listing this property as a short sale. It is very unlikely that it will get approved. However, he does destroy the neighborhood comps for everyone in Woodbury. Remember the post Financing in a Declining Market? Lenders are now looking at the lowest sale or offered for sale comparable home in a 1 mile radius. In short, everyone with a similar property just got hosed.

This guy bought at the peak paying $562,500. He used a $449,800 first mortgage, an $84,300 second mortgage and a $28,400 downpayment. Not to worry though, he refinanced through Countrywide with a $544,000 first mortgage in April 2007, and he opened a $68,000 HELOC which one would assume he maxed out (I don’t know for sure.) If he did, the total debt on the property is $612,000, and his total mortgage equity withdrawal was $77,900 including his downpayment. If this property sells for its asking price, and if a 6% commission is paid, Countrywide stands to lose $236,000.

This borrowing behavior makes me wonder about another class of distressed homeowners we have not talked much about. How many people out there banked some of their ill-gotten gains and are making payments with borrowed money? If this guy had put $80,000 in the bank, he could have made payments for quite some time. People who have pulled out hundreds of thousands of dollars can do the same. How many Ponzi-Scheme financiers are out there? How long can they hold out? One thing I am nearly certain of is that they cannot hold out longer than the bear market lasts. Each homeowner in this circumstance has a different holding period, and as the weak hands implode, they knock prices down for the remaining holdouts. Some will survive, but the majority will not. This phenomenon is also one of the reasons banks everywhere were freezing HELOCs, even for borrowers with equity. They might have improved their short-term cashflow to keep allowing Ponzi Scheme financing, but ultimately it hurts their bottom lines when these loans get wiped out in a foreclosure.

.

Johnny take a walk
With your sister the moon
Let her pale light in
To fill up your room
You’ve been living underground
Eating from a can
You’ve been running away
From what you don’t understand…
Look

Johnny take a dive
With your sister in the rain
Let her talk about the things
You can’t explain
To touch is to heal
To hurt is to steal
If you want to kiss the sky
Better learn how to kneel
On your knees boy

Mysterious Ways – U2

Free Fallin’ — Tom Petty

Do you remember the days when a relatively low-priced property would bring out the knife catchers and get bids over the ask? Those days appear to be behind us. The price on today’s featured property was dropped $100,000 at the beginning of the month, and it is still there. It is discounted 30% off its 2005 purchase price which likely represents almost 35% off the peak valuation. With another $70,000 to $90,000 off, this property would be at rental parity. Prices are still free fallling, but at least a potential bottoming figure is in sight. To be honest, I did not think we would be seeing prices like this in 2008.

Asking Price: $549,900

Income Requirement: $137,475

Downpayment Needed: $109,980

Monthly Equity Burn: $4,582

Purchase Price: $780,000

Purchase Date: 9/22/2005

Address: 415 E Yale Loop #13, Irvine, CA 92614

COZY BRICK FIREPLACE? Is it just me or do the words “cozy” and “brick” seem incongruous when put together?

WECOND?

ALL CAPS and three exclamation points.

Today’s owners are losing some of their own money. The property was purchased on 9/22/2005 for $780,000. There is a $624,000 Option ARM first mortgage with a 1% teaser rate, and a $78,000 HELOC. If this HELOC was used for the purchase, the downpayment was $78,000. If not, the downpayment was $156,000. It seems likely this 10% was put toward the purchase. Either way, all downpayment money is gone, and the first mortgage is significantly imperiled. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $263,094. The loss to Countrywide/Bank of America will be $185,094.

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.

🙂

.

Shes a good girl, loves her mam a
Loves jesus and america too
Shes a good girl, crazy bout elvis
Loves horses and her boyfriend too

And Im free, free fallin
Yeah Im free, free fallin

Free Fallin’ — Tom Petty