Short Shorts — The Royal Teens

Why are people selling for a loss? Nobody wants to lose money when they sell their house. Many of the sellers we have seen to date put no money down, so they were not losing any money, only their credit score. Lately, I have been seeing more and more sellers who have lost some of their own money. So why are they selling? In the crash of the early 90s many people submerged beneath the debt on their homes. They were unable to sell, and the few that had to sell due to job loss, divorce or other circumstances created the foreclosure problems of the early 90s. However, for as bad as the foreclosures were then, we have already quadrupled the previous peak, and the problem is only getting worse.

I suppose the easy answer to why people are selling is that the owners cannot afford the payments. Many probably still believe real estate is a great investment and all the other kool aid nonsense they believed when they bought the property. Unfortunately, they were unable to hang on long enough to enjoy the benefits of their great purchase. The ones who have capitulated already are the lucky ones in many ways. The disaster is over for them. Now they can go back to living within their means in a rental, and the crushing debt service payments are a distant memory. The owners who have not capitulated yet, the ones who have the means to hang on longer, they are the ones for whom this price collapse will be a major disaster.

Bear markets are self fueling. Once a price decline gains momentum, the “weak hands” are shaken out, and as they are, they sell and drive prices even lower. This puts a new series of owners in distress and creates a downward spiral. The only thing that stops a bear market like this one is capitulation among owners who give up waiting for prices to come back to breakeven, or a new influx of buyers.

Larger numbers of buyers will not enter the market until prices are affordable. This isn’t because it is financially prudent or because people started reading this blog. Once a vicious price decline gets underway, the tightening of credit prevents many buyers from committing financial suicide. Whereas lenders were willing to give anyone $600,000 a few years ago, now they are only willing to give $300,000 to a select few with good jobs and solid credit ratings. The realtor spin about “pent up demand” is complete bull$hit. There is probably a lot of pent up desire for housing, but demand is measured in dollars, and there is a major lack of demand with the absence of lender funds, and a large and growing “pent up supply” of REOs.

I have mentioned a number of times that I believe this fall and winter will see another major leg down in the market. The economic recession will be in full swing. When times are tough and jobs are uncertain, it is not a time when people commit to large purchases like houses. Also, it is becoming increasingly obvious there is strong downward momentum in prices. This is prompting many to put off purchases because prices will be lower later. As the foreclosure problem worsens and more and more loans begin resetting to higher payments, supply will continue to enter the market.

Usually there is a strong seasonal component to inventory. This year we did not get a big inventory spike in the summer. Perhaps it is our “inverted year” and we will see ballooning inventories this fall and winter. There are many REOs that are not listed yet, and these will hit the market eventually. The lenders would have been better served selling them this summer when there was some volume. Now many of these will hit in the fall and winter when few buyers are around. Since this is must-sell inventory, it will push prices lower.

We live in interesting times…

Asking Price: $430,000

Income Requirement: $107,500

Downpayment Needed: $86,000

Monthly Equity Burn: $3,583

Purchase Price: $536,000

Purchase Date: 5/25/2006

Address: 308 Quail Ridge, Irvine, CA 92603

Beds:	2
Baths:	2
Sq. Ft.:	1,450
$/Sq. Ft.:	$297
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2006
Stories:	2 Levels
Area:	Quail Hill
County:	Orange
MLS#:	P609489
Source:	SoCalMLS
Status:	Active
On Redfin:	274 days
Unsold in 90+ days

Unnecessary Capital Letters… Check.

Three exclamation points… Check.

CAPS LOCK PROBLEM… Check.

Spelling errors… Check. (possilbe, Desireable, Sprectrum)

Gourmet Kitchen… Check.

Lame attempt at humor… Check. (Friendly cat not
included…)

Bogus Clichés… Check. (Highly Upgraded)

This realtor earns an “A” for realtorese.

[adsense-ir}

So what do people do when they actually put a little money down? They start with an asking price that gets their money back.

Six months of denial, then two big price drops followed by more market chasing. The asking price is only 20% off the peak, so they will likely have to discount this another 5% to 10% to attract a knife catcher. This will likely bottom between $290,000 and $320,000. It is only two bedrooms, so it may go lower. Only time will tell. Our seller originally paid $536,000 on 5/25/2006. She used a $428,400 first mortgage, a $80,300 HELOC and a $27,300 downpayment. There is no other activity, so the seller is at least out her $27,300 downpayment. It is possible that the HELOC was not tapped for the downpayment, but at some point along the way, it probably was. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $131,800.

.

Ooh man, dig that crazy chick.

Who wears short shorts
We wear short shorts
They’re such short shorts
We like short shorts
Who wears short shorts
We wear short shorts.

Short Shorts — The Royal Teen

Fifty Ways to Leave Your Lover — Paul Simon

There are many ways people lose their houses. Borrowing two and one-half times what you paid for it is one method unique to the Great Housing Bubble. Perhaps I am just naive, or perhaps it is because I had never lived in a bubble market prior to moving to California, buy I had never heard of mortgage equity withdrawal for anything other than necessary home repairs and improvements. The whole idea that one could or would add to a mortgage to pay off other debts, buy consumer goods, take vacations or supplement one’s lifestyle is an alien concept. In fact, I did not realize how common this behavior was until I started studying what went on during the bubble. I am still astonished every time I see a property like today’s.

Asking Price: $535,000

Income Requirement: $133,750

Downpayment Needed: $107,000

Monthly Equity Burn: $4,458

Purchase Price: $195,000

Purchase Date: 8/15/1988

Address: 7 Skipper, Irvine, CA 92604

Beds:	4
Baths:	3
Sq. Ft.:	2,000
$/Sq. Ft.:	$268
Lot Size:	2,720 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1976
Stories:	2 Levels
Area:	El Camino Real
County:	Orange
MLS#:	S531617
Source:	SoCalMLS
Status:	Active
On Redfin:	92 days
Unsold in 90+ days

When I first saw this property, I was prepared to write a post on how owners with a great deal of equity are in a position to drive prices lower because there is nothing stopping them from lowering prices to find the market. Since this owner has lowered his asking price $90,000 since May, he has been behaving like an owner with a lot of room to maneuver. Little did I know…

This property was purchased during the frenzy of the late 1980s. The owners paid $13,000 more than a flipper paid 8 months earlier. The property records do not show the amount of the original loan; however, it does show a refinance in 1998 for $180,800 which was probably when the values came back enough for the owners to refinance their original loan. In 2002, they refinanced with a $195,000 first mortgage and got their first taste of kool aid. It must have been good. A couple of weeks later they opened a $50,000 HELOC. They were relatively conservative borrowers until May of 2005 when they took out a $381,700 first and a $185,000 HELOC pulling out some serious cash. In December of 2005 they took out an Option ARM with a $552,000 balance. It had a 2.75% teaser rate. They also took out a $68,000 HELOC. The total debt on this property is $590,000 — which explains their initial asking price. The total mortgage equity withdrawal exceeds $395,000.

Another day, another Option ARM/HELOC implosion.

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.

🙂

.

The problem is all inside your head, she said to me
The answer is easy if you take it logically
Id like to help you in your struggle to be free
There must be fifty ways to leave your lover

She said why dont we both just sleep on it tonight
And I believe in the morning youll begin to see the light
And then she kissed me and I realized she probably was right
There must be fifty ways to leave your lover
Fifty ways to leave your lover

Fifty Ways to Leave Your Lover — Paul Simon

Hold On — Wilson Phillips

Last Friday, I wrote a post titled Downpayments Are Back. After taking the weekend to contemplate what this really means for homeowners who are thinking about walking away from their obligations, I have changed my mind on what I believe they should do. If they can manage their payments, they should consider trying to hold on, even if the house value has dropped well below their purchase price. There are still a great many overextended homeowners and speculators who cannot possibly manage their payments, and trying to hold on until the market comes back is a foolish waste of time and resources. The market is not going to come back before they go under. However, for those who can make the payments, there emotional benefit of home ownership may be worth the financial hardship it entails. When downpayment requirements were eliminated during the bubble rally. Many people who are not in the habit of saving were suddenly able to purchase a home — albeit at a greatly inflated price. For people who do not have the habit of saving money, they will never come up with even a 3% downpayment to obtain an FHA loan much less a 20% downpayment like everyone else will need. The house they are in right now may be the only house they ever own in their lifetime. If they bail out, the new (and permanent) downpayment requirements will probably ensure they never own again. Under these circumstances, even if they are upside-down on their mortgage, and even if it might make more sense financially to go back to renting, there is a strong emotional desire to own a home, and this may be their only chance to satisfy this emotion. Many of our decisions in life are not based purely on a basis of economics. Having children is not a great economic decision, but the love of family makes the economic sacrifices worthwhile. If satisfying the emotional desire to own a house is worth the sacrifice in terms of elevated household expenses, perhaps it is the proper decision for those owners on the margin to stay put. It is not the right financial decision, but perhaps it is the right life choice.

I have another piece of advice for the homeowners who are facing an exploding Option ARM that will not save them from foreclosure, but it may provide a way for them to reenter the housing market at some future date. Freddie Mac recently changed their servicer guidelines and eliminated compensation to servicers who foreclose quickly. The effect of this change in incentives will be a longer foreclosure process once people stop making payments. This is where the advice comes in. When owners with an Option ARM face their loan recast, there is little hope of affording the payment, so they should not try. What they should do is immediately start saving the amount of the payment they used to make on their mortgage. If the foreclosure process drags out a year or more, they could easily save the 3% necessary for a downpayment on an FHA loan. They may have to wait a while for their FICO scores to improve to qualify for the FHA loan, but when they do, they will already have saved their downpayment. Will many people do this? Probably not. Many people will simply spend the money they should be saving and be no better off for not having a housing payment for an extended period of time, but for those that do, they have the opportunity to save and prepare for home ownership again.

So what do you think? Should they stay, or should they walk?

Today’s featured property is a short sale. It is owned by a speculator who already got what he could out of the property, and now he is walking away.

Asking Price: $250,000

Income Requirement: $62,500

Downpayment Needed: $50,000

Monthly Equity Burn: $2,083

Purchase Price: $330,000

Purchase Date: 5/27/2005

Address: 139 Briarwood, Irvine, CA 92604

Beds:	2
Baths:	1
Sq. Ft.:	921
$/Sq. Ft.:	$271
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	1985
Stories:	1 Level
Area:	West Irvine
County:	Orange
MLS#:	R807405
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

The pictures in this listing are ridiculous. They show one ugly photo of the outside of this apartment condo, and 13 of nearby facilities. Most of the pictures are from Woodbridge, and this unit is not even in Woodbridge. I guess that is why you have to take a long walk around the lake.

For those of you tracking percentage declines, this one is a healthy 25% off. The owner used 100% financing when it was purchased, and then opened an HELOC that allowed him to extract another $34,000. It was if he sold at peak pricing. The total debt on the property is $354,000. If this property sells for its asking price, and if a 6% commission is paid, the total loss will be $119,000. Washington Mutual gave him the HELOC, and they will absorb the loss.

.

I know this pain
Why do lock yourself up in these chains?
No one can change your life except for you
Dont ever let anyone step all over you
Just open your heart and your mind
Is it really fair to feel this way inside?

You could sustain
Or are you comfortable with the pain?
Youve got no one to blame for your unhappiness
You got yourself into your own mess
Lettin your worries pass you by
Dont you think its worth your time
To change your mind?

Hold On — Wilson Phillip

Life’s Been Good — Joe Walsh

I nominate today’s featured song as the ode to The Great Housing Bubble. If you drank the kool aid, I mean really drank the kool aid (like today’s owner), life must have been very good. All this free money allowing you to do whatever you want whenever you want. Life must have been very good to those who lived off their houses. There is nothing wrong with living well, and there is nothing wrong with becoming accustomed to a certain style of life, it just isn’t very wise to build this life on an unsustainable foundation of Ponzi Scheme financing — it will collapse, and you will lose the life to which you have become accustomed.

Perhaps I should nominate Tequila Sunrise by the Eagles? The hangover must be a killer…

Asking Price: $489,000

Income Requirement: $122,250

Downpayment Needed: $97,800

Monthly Equity Burn: $4,075

Purchase Price: $289,500

Purchase Date: 6/21/2000

Address: 16 San Clemente, Irvine, CA 92602

Highly sought after floor plan,
rarely on the market. This kind of nonsense statement always annoys me.

Sep. Laundry Room upstairs. What is going on with this sentence? Why abbreviate separate? Perhaps the realtor can’t spell it? Why capitalize Laundry Room? In fact, why did the realtor switch between Title Case and sentence case throughout the description?

Have you had your fill of HELOC abuse stories yet? I am constantly amazed at how common this behavior was. Today’s owner is going to make $200,000 on the sale and fail to pay off the bank. Let’s look at what she did:

• The house was purchased on 6/21/2000 for $289,500. There was a $231,200 first mortgage and a $58,600 downpayment (20%).
• On 11/5/2001 she refinanced with a $235,000 first mortgage and opened a HELOC for $85,000.
• On 2/4/2004 she opened a HELOC for $150,000. So far she was conservative by local standards, but the kool aid must have tasted good because she went all out afterward.
• On 4/30/2004 she took out a stand-alone second for $233,500 and paid off the HELOCs.
• On 9/16/2004 she opened a HELOC for $250,000.
• On 4/20/2006 she opened a HELOC for $395,600.
• On 9/27/2006 she refinanced with a $559,200 first mortgage.
• On 9/27/2006 she opened a HELOC for $84,860. Based on her history, it is safe to assume she spent it.
• The total property debt is $644,060.
• The total mortgage equity withdrawal including her downpayment is $412,860

Countrywide was her last refinance, so they will endure the losses, or perhaps it is the CDO these loans were packaged into. Who knows? If this property sells for its asking price, the total gain on sale will be $170,160. The total loss to Countrywide will be $184,400.

This woman is obviously a serial refinancer whose spending is out of control. I can understand the borrower. She is just acting like a child trying to get whatever she wants without regard to the consequences, foolish but understandable. I can understand the lenders. They did not care if she defaulted because these losses are passed on to some investor somewhere who doesn’t have the slightest clue what they are investing in. I can understand the investors because they were buying a product given a AAA rating from a rating agency who is supposed to understand this stuff. I can understand the rating agencies that were running statistical analysis on data from a bull market. As long as the bull market continued, everything would be OK. Of course, the ratings agencies were so far removed from the micro circumstances of the individual borrowers that they had no idea whether or not people could afford their payments to keep the bull market going. Everyone was doing the right thing in their little world, and the system was too complex and unwieldy to hold together. Those few people who saw this and warned of its collapse were ignored because everyone involved was making money and the religion of real estate said prices always go up, so we built an enormous financial bubble. All perfectly understandable and totally wrong.

BTW, you have to love the album cover for this one.

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I have a mansion but forget the price
Ain’t never been there, they tell me its nice
I live in hotels, tear out the walls
I have accountants pay for it all

They say I’m lazy but it takes all my time
I keep on goin’ guess I’ll never know why
Life’s been good to me so far

Life’s Been Good — Joe Walsh

Deadhead — Devin Townsend

Our market is experiencing wave after wave of pain. Will the owners endure, or will they give in and sell? It depends on the circumstances and the constitution of each owner, but those with little to lose are giving up without much of a fight, and they are passing the pain on to the lenders. Today’s featured property is a classic illustration of kool aid intoxication and bubble behavior. The owner bought with 100% financing late in the rally, she managed to pull out a bit of spending money, and now that prices are crashing she is bailing out and leaving the losses to someone else. The losses to the lenders are accelerating along with the decline in prices. This one is gonna hurt…

Asking Price: $574,900

Income Requirement: $143,725

Downpayment Needed: $114,900

Monthly Equity Burn: $4,790

Purchase Price: $764,000

Purchase Date: 4/22/2005

Address: 46 Townsend, Irvine, CA 92620

I have seen this floorplan, the dual master layout is interesting, but not practical for a conventional family. I could see a roommate situation working out, particularly if one of the roommates has a child. Also, a household with a single child might like it, particularly if the in-laws visit frequently. There is no yard, but you do get a claustrophobic patio surrounded by two-story house elements. It feels like a cave.

Today’s seller used 100% financing, so any money pulled out of the property was the bank’s money. Their rate-of-return would be infinite as they have zero initial investment. On 5/4/2006 almost 1 year after the initial rental purchase, the owner refinanced with a $688,000 first mortgage and a HELOC for $86,000. Apparently, she was not happy with only getting $10,000 spending money out of her little investment (she had owned a whole year, surely she should have made $100,000, right?) On 5/23/2006, she must have found a “better” appraiser because she was able to open a HELOC for $172,000 which enabled her to pull out $96,000. This left a total debt on the property of $860,000. If the lender can get the asking price, and if a 6% commission is paid, the total lender loss will be $319,594. That is almost 30% off the peak valuation for this property.

Here is another property in Woodbury looking to drop below the $300/SF mark. In early 2007, I saw one of these properties asking $3,000 per month in rent which based on similar properties at the time was a reasonable rental rate. Assuming $3,000 per month is a valid rental rate, and assuming this rate will not decline in the face of a deteriorating economy, the value of this property based on its rental cashflow is around $480,000. The asking price of this property is within $100,000 of its cashflow value.

Those homeowners who are holding on and those holding their breath because they are underwater have people like today’s seller to thank for the continuing decline in prices. In a normal market (if there is such a thing in California) this property would not be for sale. It is only being sold because the owner can’t afford it and the values have dropped too much to warrant hanging on. As prices drop further, it creates more owners like this one. In short, it is a downward spiral. After our brief summer leveling period, expect another big drop this fall and winter. We are not at the bottom yet.

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You are a sun Goddess
Will you save me?
Hooray for you.
Hooray.
Now the rain it comes, the rain it blurs the grey line
…the grey line…the Greyhound home
You are so vicious (Hurt me, I can take it)
Cause it’s all in the heat of the moment,
It’s all in the pain
Sonar, sonar again…
It’s on again, (got no wings…gossamer wings…) …on again…
You are a sun Goddess!!!
Will you save me? …babe…babe…babe…
Cause it’s all in the heat of the moment
It’s all in the pain!!!
So give in to the heat of the moment
Give in to the pain!!!

Deadhead — Devin Townsend