Failure’s Not An Option — Chamillionaire

The old adage in real estate is location, location, location. During the Great Housing Bubble, location and quality really didn’t matter much. It all came down to financing and the options it created. 100% financing gave all buyers a “Call” option on real estate. If the price went up, they got to keep all the money, and if it went down, the losses were passed on to the lender. 100% refinancing gave all owners a “Put” option on real estate. If the property went down in value, they had already extracted all their equity, so again the risk was passed on to the lender. Of course, the real bonanza for speculators was the Option ARM. This gave speculators a way to drastically reduce the carrying costs on their speculative investment. Many could even rent the property out for positive cashflow, particularly if they used a 1% teaser rate like today’s speculator. With all the incentives favoring speculative betting in the housing market, it is really any wonder people got a bit carried away? Is it any wonder lenders are now expected to lose $1,600,000,000,000? (That is $1.6 Trillion.)

Asking Price: $639,000

Income Requirement: $159,750

Downpayment Needed: $127,800

Monthly Equity Burn: $5,325

Purchase Price: $815,000

Purchase Date: 3/15/2006

Address: 129 Roadrunner, Irvine, CA 92603

ATTN INVESTORS!! Here is your opportunity to prove you have no idea what you are doing. Someone needs to buy this overpriced property before the lender losses any more money. HURRY!!!

Note the increasing number of exclamation points as the realtor got excited at the beginning of the description.

Don’t be surprised if this property gets multiple offers over the asking price. After all, this is Turtle Ridge, and properties there are immune to price declines — except perhaps for this one that has declined 20%…

If this property sells for its asking price, the lender stands to lose $214,340 after a 6% commission. The seller didn’t use 100% financing at first, but after 30 days, she opened a third mortgage and extracted her downpayment plus $2,000. She won’t lose anything other than her good credit.

.

Do it do it
Do it do it
Do it do it
Ain’t got to tell you I’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest) everyday AY

I keep a ear to the street u can see im eves droppn
They talkn bout my buzz tryn to picture me floppn
Under ground ruler wreck on every beat knockn
Gobble gobble all the green so they call me green goblin

Failure’s Not An Option — Chamillionaire

Mercy — Duffy

By now most of you have seen the revised Option ARM reset schedule.

There is one more variable that this schedule does not capture, and neither does the ARM reset schedule: people who give up early. Being trapped in a property you cannot sell is torture. You just want to be released from your obligations and go about your life. Begging for mercy probably doesn’t help much, but it might make some of these sellers feel better.

Today’s featured property is an Option ARM holder who gave up early.

Asking Price: $389,000

Income Requirement: $97,250

Downpayment Needed: $77,800

Monthly Equity Burn: $3,241

Purchase Price: $443,000

Purchase Date: 5/19/2008

Address: 8 Eastmont #46, Irvine, CA 92604

Gourmet Kitchen and pregraniteel.

{Adsense-ir}

Today’s sellers are going to lose their own money. They put 20% down ($88,600) and took out an Option ARM for $354,400 with a 1% teaser rate. As one might imagine, they likely made only the minimum payment, and now they are hoping to sell for enough to pay off the debt and a commission. If they get their asking price and pay a 6% commission, they stand to lose $77,340. Assuming they have added almost $11,000 to their loan balance during the period of ownership, this sales price reflects the minimum they need to salvage their credit. Their downpayment is lost.

Both of this chart and the Option ARM reset chart are very ominous, and they show the tentative schedule of the disaster in our housing markets. However, the whole ARM reset issue is more complex than either chart makes apparent. Most people when they read the chart assume that houses will hit the market on the same schedule. This is an overly simplistic reading. Some people, like today’s featured owners, give up early. Some people, will try to make the new payment for an extended period of time before they give up. Some people will make the new payment and keep their houses. All of the people who give up, will go through a foreclosure process (which they can drag out) before the property is sold at auction and finally added to the MLS inventory. I have outlined this whole process before. It takes almost a year from reset to final sale.

What is really important is not when the ARM resets, but when the property is added to available inventory. As we have seen with the lenders slowly adding their REOs to the market, prices do not get hammered until the REOs are actually put up for sale. We are starting to see more REOs on the market, and the process will likely accelerate this fall and winter. We will probably see another big drop then. It is hard to say when we will see a bottom, but it doesn’t seem likely that there will be any sustained appreciation before 2012-2014.

The Gods of the market have no mercy…

.

I love you
but i gotta stay true
my morals got me on my knees
I’m begging please stop playing games

Why wont you release me yeah yeah
break it down

Mercy — Duffy

Problem Child – AC/DC

Do you get the impression from the behavior of speculators and HELOC abusers that it isn’t their problem? I do. Today’s featured property was bought in 2005, the equity was quickly extracted right up to the peak, and now that prices are dropping, the speculator is simply walking away. It isn’t his problem anymore, it is the problem of Residential Mortgage and Investment, Inc. or whatever CDO the loan was packaged into.

Day after day, we document lenders taking huge losses. It is not the kind of thing that promotes a loosening of credit and increasing prices. Yet there are still people trying to flip houses (a post for another day, perhaps.) WTF? Do people have so little understanding of credit markets that they believe lenders are suddenly going to go back to the practices of the bubble? Faced with daily huge losses causing unprecedented price declines, lenders will become more restrictive of credit — much more. Either that or they will go bankrupt (I am still waiting on Countrywide, IndyMac, Downey and WAMU.) Prices will fall to the point where people can afford to buy houses with a conservative percentage of their income because lenders will require it. The days of DTIs in excess of 28% may return again someday, but not until that becomes the standard for quite a while. Lenders will retreat to this level because they know people can really afford that. That will become the standard until people stop defaulting. People are going to continue to default until prices stop declining and they stabilize at affordable levels. That is just the way credit markets work.

Asking Price: $575,000

Income Requirement: $143,750

Downpayment Needed: $115,000

Monthly Equity Burn: $4,791

Purchase Price: $680,000

Purchase Date: 6/28/2005

Address: 13 Pebblewood, Irvine, CA 92604

Beds:	3
Baths:	3
Sq. Ft.:	1,853
$/Sq. Ft.:	$310
Lot Size:	2,645 Sq. Ft.
Property Type:	Condominium
Style:	Colonial
Year Built:	1976
Stories:	2 Levels
Area:	Woodbridge
County:	Orange
MLS#:	S538513
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Even the description says, “I don’t care anymore.”

This owner did not own the property long enough to seriously abuse HELOCs, but he did what he could.

• The property was purchased on 6/28/2005 for $680,000. There was a $600,000 mortgage and a $80,000 downpayment.
• On 11/28/2005 he owner withdrew his downpayment with a $80,000 stand-alone second.
• On 5/18/2006 he refinanced with a $607,240 first and a $114,000 stand-alone second.
• Total mortgage equity withdrawal of $121,240 including his downpament.
• The total debt on the property is $721,240

If this property sells for its asking price, Residential Mortgage and Investment, Inc. stands to lose $180,740. The loan is barely two years old.

.

Cop this
I’m hot, and when I’m not
I’m cold as ice
Get out of my way
Just Step aside
Or pay the price

I’m a problem child, hey
I’m a problem child
I’m a problem child
Just runnin’ wild

Problem Child – AC/DC

She’s So High — Tal Bachman

Many people fueled the market rally with a frenzy of fear buying. Fear
of being priced out of the market, and fear of missing the great
profits to be made through home ownership. Those who did not participate by wanted to
became the stereotypical “bitter renters.” These
people were bitter because they believed the nonsense of kool aid
intoxication, and they believed that they missed their chance. Of course, over the last year,
many of these people got their chance and became knife catchers.
Today’s featured song encapsulates the feelings people had toward
houses and those who owned them — they were so high above them. The
bitter renters were jealous and felt unworthy. Little did they know…

Dr. Housing Bubble has an ongoing series he calls “Real Homes of Genius.”
He profiles really awful properties in bad neighborhoods going for
ridiculous prices. There is an intuitive revulsion from seeing these
properties and the prices attached. It does not take a sophisticated
financial analysis to recognize the housing bubble when viewing these
properties. We don’t have any run down properties of that sort in
Irvine, but I remember having the same revulsion when I would
see 1 bedroom condos going for over $400,000. I don’t care how used to
bubble prices you get, when you see tiny condos going for $400,000, the
mind simply cannot grasp it. These prices were just wrong. No amount of
kool aid could drown out the doubts about the prices of these units. Of
course, the people who bought these units almost exclusively used 100%
financing, so it didn’t really matter what they paid, and they did not
care. It wasn’t their money. An Option ARM with a 1% teaser rate made
owning one of these cheaper than renting, and in due time, it would be
selling for millions. Even if it didn’t, any losses would be someone
else’s problem — which is where we are now. Today’s featured property is a simple 100% financing deal gone bad. It is the collapse of prices at the low end of the market like this one that are serving as a drag on market prices, and they will continue to do so until we reach the bottom.

Asking Price: $299,900

Income Requirement: $94,975

Downpayment Needed: $59,980

Monthly Equity Burn: $2,500

Purchase Price: $410,000

Purchase Date: 1/21/2005

Address: 722 Timberwood, Irvine, CA 92620

Why Use Title Case?

Spacious And Rare… Rare Spacious… That description is common and vacuous.

If this property sells for its asking price, and if a 6% commission is paid, First Franklin stands to lose $128,094 — on a 1 bedroom condo. As a side issue, if someone would like to investigate, it appears as if the seller brought in a straw buyer last summer. The property records are a bit confusing.

When you see properties like this one, it isn’t too difficult to see how prices were bid up to such ridiculous levels. During The Great Housing Bubble, you did not need to have verifiable income or good credit to qualify for 100% financing loans. In short, anyone could get as much money as they wanted simply by asking. Nobody would put any of their own money into a $410,000 one-bedroom condo, but if the lenders are giving it away and making the payment very, very small, why not? Properties like this one when it sold in 2005 made someone a lot of money. That person probably took those profits and bought a larger, nicer property. This pushed up the prices of the next tier of houses. As each move up was fueled by a combination of equity and loose financing terms, prices were pushed up very high. It also isn’t too difficult to see how this process can work in reverse.

People buying properties today are making one simple bet: credit will loosen again soon. I discussed this idea in the post Your Buyer’s Loan Terms. Incomes do not support peak price levels or even current price levels. The only way to keep prices inflated is through unstable credit terms. Credit is clearly more restrictive than it was during the bubble. If credit loosens up again, people will bid up prices and kool aid intoxication will grip our society. The problem with the “bet” today’s buyers are making is that credit is not going to loosen again any time soon. The lenders are still losing money even on loans they made after the credit crunch took hold (see yesterday’s post.) Credit will not loosen again until lenders stop losing money for an extended period of time. So far, they haven’t been able to write loans that don’t go bad quickly. Credit will continue to tighten until they can, and that will not occur until prices are so low people can truly afford the properties. We are not there yet.

.

She’s blood, flesh and bone
No tucks or silicone
She’s touch, smell, sight, taste and sound

But somehow I can’t believe
That anything should happen
I know where I belong
And nothing’s gonna happen
Yeah, yeah
Yeah, yeah

She’s So High — Tal Bachman

Raindrops Keep Fallin’ On My Head — B.J. Thomas

In today’s market conditions, there are 4 types of market participants: 1. Renters, 2. Owners who bought before 2002 and did not abuse home equity lines of credit (HELOCs.) 3. Owners who bought after 2002, and 4. Owners who abused HELOCs. Obviously, when prices drop precipitously as they have over the last year, renters are the happiest of the group. Owners who bought before 2002 and did not abuse home equity lines of credit may be bummed that their illusory wealth is disappearing, but they will go on with life much as before. They have no particular reason to be stressed. Owners that bought after 2002 will probably go underwater, and the closer the purchase was to 2006, the further underwater they will fall. Owners who abused HELOCS have put themselves in the same situation as late buyers by increasing their mortgage balances mostly through foolish consumer spending. These last two groups will experience a great deal of stress once the veneer of
denial is stripped from them by the continuing decline in prices.

Stop for a moment and contemplate how large a group of people it is that purchased after 2002 and/or abused HELOCs. Given the degree of kool aid intoxication we all witnessed during the Great Housing Bubble, it is obvious that this describes many, many homeowners. The numerous posts I have done on HELOC abuse are a testament to the scope and scale of the problem. The behavior of these people is not the exception, it is the rule. How many of you know friends or family that fall in this group? Or perhaps the question should be how many of you do not know friends or family that fall into this group? I hope they are preparing themselves financially and emotionally for what is to come. It will not be a good time.

But there’s one thing I know
The blues they send to meet me won’t defeat me
It won’t be long till happiness steps up to greet me

Today’s featured property is a high-end Irvine property rolling back below its 2004 purchase price.

Asking Price: $1,150,000

Income Requirement: $287,500

Downpayment Needed: $230,000

Monthly Equity Burn: $9,583

Purchase Price:
$1,200,000

Purchase Date: 8/27/2004

Address: 9 Raines Corner, Irvine, CA 92602

Beds:	5
Baths:	3
Sq. Ft.:	3,374
$/Sq. Ft.:	$341
Lot Size:	–
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	2002
Stories:	2 Levels
Area:	Northpark
County:	Orange
MLS#:	S537735
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

When did asterisks become periods? Is there something wrong with periods? Is the asterisk supposed to catch my attention in a positive way? I think it just makes realtors look stupid.

Why Is Every Word Capitalized? I suppose it is easier to read than ALL CAPS, but it is just as unnecessary.

There is an interesting subplot to this property. The current owner purchased the property from someone who paid $638,000 on 8/12/2002. In two years, that owner made $562,000. It is a good thing the greater fool came along because he was abusing his HELOC before the sale. I followed this owner to a property in Woodbury where he opened a HELOC for $100,000 shortly after buying a new house with a small downpayment. I don’t know what he did with the $562,000 he made, but it isn’t serving as equity in the new property. HELOC abuse is everywhere. There are so many people who are so screwed…

When this property was purchased in summer of 2004, the borrower put $60,000 down on a $1,200,000 purchase. In the summer of 2006, the borrower took out a HELOC for $90,000 and drained all his equity. The total debt on the property is $1,230,000. If this property sells for its asking price and a 6% commission is paid, the total loss on the property will be $149,000. The borrower will make $30,000 while the lender loses $149,000, assuming of course that the house sells for its asking price.

There has been much speculation about the apparent resiliency of the high end. If any of you have been going to Piggington.com, you have seen what has been going on in San Diego.
It hasn’t been pretty. I have forecast a 40% decline in prices here in
Irvine. The low end of San Diego’s market is almost there already. Ours
is not far behind. The low end of the market leads prices higher or
lower (see The Plankton Theory Meets Minsky.)
When prices are rising at the low end, sellers are flush with cash from
the sale of their property and use this money as downpayments on larger
homes which push those prices higher and so on through the housing
market. When prices are falling at the low end, sellers do not have
significant (or any) equity to move up to a larger property. This
depresses prices up the housing scale in the same way higher prices
boost them. The sharp decline of prices at the low end of the market
will act like an anvil weighing down all prices. Part of the greater resiliency of the high end is that subprime loans were not concentrated there. The Alt-A and Prime borrowers still used toxic financing, and their loans will blow up, but many will have greater holding power after their mortgage explodes, and they are not scheduled to explode until 2009-2011. In short, the high end
will fall, it will just take a bit longer.

Thus concludes another 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.

😉

.

Raindrops keep fallin’ on my head
And just like the guy whose feet are too big for his bed
Nothin’ seems to fit
Those raindrops are fallin’ on my head, they keep fallin’

Raindrops keep fallin’ on my head
But that doesn’t mean my eyes will soon be turnin’ red
Cryin’s not for me
‘Cause I’m never gonna stop the rain by complainin’
Because I’m free
Nothin’s worryin’ me

Raindrops Keep Fallin’ On My Head — B.J. Thoma