Nothing you can make that can’t be made. No one you can save that can’t be saved. Nothing you can do but you can learn how to be you in time. It’s easy.
All you need is love. All you need is love. All you need is love, love. Love is all you need.
All you need is love… and a 42″ flatscreen, a new Cadillac Escalade, Pergo wood floors, granite countertops, stainless steel appliances, weekends in Vegas, vacations in the Seychelles…
Do you remember the Castle at Kron and Ecclestone Circle? Or perhaps the monstrosity at Angell and Michelson? Or the Joke on Karen Ann Lane? The trend in over-improvement during the bubble is most noticeable in the omnipresence of pergraniteel.
During the bubble, the more you spent, the more you made. People
actually believed that adding common improvements — something anyone
could do to their own taste — would add more value than the
improvement cost. Flippers made money because they were there; breathing was the only prerequisite to success. Skill
and financial acumen had nothing to do with it, as evidenced by the losses they took when they were left holding the bag.
Home improvement and flipping shows became so common, they developed
their own channel. Like moths to a flame, fools flocked to flip houses.
The infamous flops are profiled here.
Today’s featured property is another one where you have to ask yourself, why?
Why did someone take an ordinary house — overpay for it — then proceed to demolish it in favor of something that is vastly over-improved for the area. This makes no sense. If this made sense, we could drive our entire economy on building and rebuilding homes… wait, we tried that once, didn’t we?
Beds 5 Baths 4 full 1 part baths Size 3,990 sq ft ($298 / sq ft) Lot Size 7,020 sq ft Year Built 1979 Days on Market 7 Listing Updated 9/25/2009 MLS Number P704661 Property Type Single Family, Residential Community Northwood Tract Cust According to the listing agent, this listing is a bank owned (foreclosed) property. RE-BUILT IN 2007. JUST UPGRADED. FRESH PAINT, NEW CARPET, NEW APPLIANCES. CUSTOM LIGHTING. MOVE-IN READY ! ! !
This owner buys the property for $640,000 on 4/7/2005. By the time he finished construction, he hit the peak of the housing market. Unfortunately, he did not find a mark(et) for his monster.
Washington Mutual loaned this guy $1,200,000 on 1/12/2007. I imagine there is a fair amount of mortgage equity withdrawal in that number. Then on 8/24/2007 he got a HELOC for $250,000. WTF was WAMU thinking? The builder made his profit.
The rest is history…
Foreclosure Record Recording Date: 10/10/2008 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2008000471693
Foreclosure Record Recording Date: 06/13/2008 Document Type: Notice of Default Document #: 2008000285894
Where are you going With the long face pulling down Dont hide away like an ocean But you can see, but you can smell and the sound Of your waves coming down I am no superman not at all But I have no answers for you I am no hero, and thats for sure But I do know one thing Where you go, is where I want to be Where are you going? Where do you go?
There are a number of important people who played a role in The Great Housing Bubble. Some of the more famous ones have written books or had books written about them. There are men like the Tan Man, Anthony Mozilo, who are infamous in housing blog circles, but who emerged from the bubble wealthy and with limited legal problems. Today, I want to look at a couple of D-List players who failed spectacularly. These are colorful men who will be footnotes in housing bubble history.
Casey Konstantin Serin
Casey Serin was the infamous blogger of I am Facing Foreclosure blog. He purchased nine properties in a few months during early 2006 using liar loans. He rolled the dice on the housing bubble, and came up snake eyes.
He has managed to get a Wikipedia entry made about him as he has made a career out of his failure. The following is a list of Serin’s known mainstream press coverage in reverse chronological order.
Casey Serin has come to epitomize everything that went wrong with the real estate bubble. At least he understands the importance of positive cashflow now…
Jon Ronson interviewed Casey with his trademark wit on BBC Radio.[22] While in Australia, Casey Serin appeared on Top Shelf Radio with Robbie Buck[26]. The Official IAFF (I Am Facing Foreclosure) Theme Song received 400 plays in one day during Serin’s rise to fame — a small example of his cult-like status among bloggers. Apparently, Casey is still trying to cash in on his infamy. The latest attempt is a book called The Foreclosure Code Book. Having gone through it nine times, he is certainly an expert on foreclosure now.
David Lereah
David Lereah was the chief economist for the National Association of Realtors during the housing bubble. He wrote about about the virtues of investing in residential real estate just as the market was peaking. He was as wrong as wrong can get and as public as one could possibly be. I cringe when I think about it.
In his heyday, there was a blog devoted to watching for his fall. With his fall from prominence, the blog isn’t updated as much as it used to be. It will sit there like a dormant archive of his misdeeds waiting to strike him down if he rises up again.
BTW, did you know that David Lereah wrote a book touting tech stocks that came out in early 2000? This man’s timing is amazing. He managed to write two books that came out right at the peak of their respective financial bubbles that were totally wrong!
For the sake of contrast, let’s compare David Lereah with Robert Shiller, an author who also had books come out at the peak of the NASDAQ bubble in early 2000 and the peak of the Great Housing Bubble in 2006. Robert Shiller correctly called the top of both financial bubbles and laid out a conceptual framework that better explains asset price movements.
Robert Shiller was right, and he was very publically right at the perfect time. David Lereah and Robert Shiller are the outliers — the two extremes of being wrong and being right.
It hasn’t turn out well for Mr. Lereah. I was interviewed for a Wall Street Journal follow up that appeared on the front page of the print version in January of 2009. It was a hit piece; Realtors’ Former Top Economist Says Don’t Blame the Messenger.
Mr. Lereah admits to one mistake: believing there would be no national
housing crash. “I have to take the blame for that,” he says. “I never
thought it would be as bad as this.”
{insert humorous quip that disguises my gloating over his demise} Nobody saw the collapse of housing prices back then, right?
So where is David Lereah now? From the WSJ article:
Mr. Lereah now works in a small upstairs office that doubles as an
exercise room. He has started his own company, Reecon Advisors, that
puts out a weekly newsletter on the housing market and provides
consulting services. “I feel I have such a refreshing view now because
I’m not representing any interests,” says Mr. Lereah.
He charges $495 annually for the newsletter, and currently has fewer than 50 paying subscribers
So the most powerful real estate economist in the country is now making $25,000 a year ($495 x 50) and working out of his exercise room. How the mighty have fallen…
Beds 2 Baths 2 baths Size 1,123 sq ft ($312 / sq ft) Lot Size n/a Year Built 2005 Days on Market 1 Listing Updated 10/2/2009 MLS Number S591293 Property Type Condominium, Residential Community Airport Area Tract Watr
According to the listing agent, this listing is a bank owned (foreclosed) property.
Experience the urban OC lifestyle in the sophisticated community of WATERMARKE providing you with amenities such as Concierge sevice, fitness center, pool, spa, tennis, movie room, etc.
Casey Serin made nine purchases similar to this one. The property was purchased on 8/26/2005 for $501,000. The owners used a $400,800 first mortgage and a $100,200 second mortgage; there was no downpayment. They refinanced in April of 2007 and took out $12,000. I imagine they needed some help with the payments…
On 9/21/2009 HSBC BANK USA NATIONAL ASSOCIATION bought it at auction for $427,500. Just as in Casey Serin’s case, the lenders are the ones who absorbed the losses from the speculation.
Balance in the System
In a way, the Casey Serin’s of this world do serve as a check and balance on our banking system. When lenders are not regulated — and really stupid — the Casey Serins of this world rise up and cause such enormous losses that it brings down the whole system. Casey Serin was not trying to break the law (he did most of his malfeasance in ignorance); think about the scope and scale of the fraud that was perpetrated. Very little was ever caught.
Good financial regulation may or may not have prevented The Great Housing Bubble. Absent any future regulatory changes, the only thing standing between us and another housing bubble is the willingness of lenders to inflate one. How long before they lose their minds again?
Irvine doesn’t have any great cashflow properties. Today’s is cashflow positive, but it is still have to believe in appreciation to pay these prices for small condos.
I’m givin’ up, on everything Because you messed me up Don’t know how much you Screwed it up You never listened That’s just too bad Because I’m moving on I won’t forget You were the one that was wrong
Investment wisdom of yesteryear has been forgotten. People started drinking kool aid and convinced themselves they can make and spend a fortune through real estate appreciation alone. They were wrong. This mistake caused The Great Housing Bubble, and the result is foreclosure, ruined credit and even bankruptcy. Most have not learned this lesson yet.
{book5}
Time to Payoff
When people examine investments, they often look at rates of return to compare between asset classes. Rates of return are a valuable metric. When thinking about retirement finance, rates of return become less important than steady cashflow. We need a new measure of success for reaching your retirement goals: Time to Payoff. The Time-to-Payoff is the amount of time it takes to retire the debt used to acquire the asset (house). It is a handy tool of those who use Accelerated Amortization.
Today, I want to look at another feature of cashflow investing: debt retirement. In Real Estate, Cashflow Investment and Retirement I noted, “… you can take the excess rent and put it toward the mortgage paying off the debt more quickly. Remember, the goal is to have maximum free cashflow in retirement, so you want to pay off those debts.” Retiring debt is part of the cashflow investment mindset; it is diametrically opposed to speculation.
Paying off debt is as difficult as dieting — there is always a temptation — whether it be spending or eating. The success rates for debt retirement are no better than they are for weight loss. Perhaps we should have a TV Show for the Biggest Saver.
Calculating Time-to-Payoff is a challenge. It requires looking at the available sources of cashflow and the impact the property has on its owner. There is a level of cashflow that can be diverted toward debt service that otherwise does not impact the owner’s life.
For example, if a property is about $600 per month cashflow positive before debt or taxes, the debt service payments can actually be closer to $900 per month before the owner is truly cashflow negative. How can this be? Isn’t paying out $300 a month more in payments making you cashflow negative? Not really. Part of that payment is equity that is paying down debt, so that is not a true expense. The interest will be tax deductible for most wage earners, so the owner can adjust paycheck withholdings to compensate for the difference in payment. In short, the property has no net financial impact on the owner.
If the property is cashflow positive — which it must be for this analysis to work — there will be money that can be put toward debt service. If the maximum available cashflow is put toward debt service, how quickly does the loan amortize? That is Time to Payoff.
If you invest in the Time-to-Payoff way, your property investments will have no impact on your financial life — plus or minus — until you retire. There is no demand on your income to service the investment, and there is no net benefit for you to spend on your lifestyle. Let’s just say, it isn’t a lifestyle alternative many people were choosing during The Great Housing Bubble.
{book2}
IHB Investor Report
A few weeks ago, we introduced IHB Investor Reports. After reviewing the comments and some further reflection, we have updated our reports to include new features — one of which is the Time-to-Payoff calculation. Today’s featured property is as close to an investor property as I could find here in Irvine. The deal still isn’t very good unless you are betting on appreciation.
One of the changes we made was to run the report based on what we believe to be the most likely transaction price. It does nobody any good to run a report based on an asking price that is either WTF high or so low that you know 20 bids will be over the ask. The comps are what guide short-term pricing.
Another feature we added is a chart showing the impact of different downpayment and interest-rate scenarios. Rather than run multiple financing scenarios, I set up the spreadsheet to automatically run 165 of them and report the results in terms of cash-on-cash rates of return. What you will notice is that low downpayments and low interest rates increase returns at any given price. BTW, you don’t want to know how it is calculated…
We are up and running and ready to serve. If you want to see an IHB Fundamental Value Report for either your own home or a house you are looking to purchase, you can request a report at our newest navigation stop: Reports. You will be automatically signed up for our introductory emails and our periodic newsletter when you request a report. In order to avoid responding to robot submissions, we will process your
request when we receive confirmation from your email address.
Beds 1 Baths 1 bath Size 471 sq ft ($276 / sq ft) Lot Size n/a Year Built 1976 Days on Market 359 Listing Updated 8/3/2009 MLS Number F1786080 Property Type Condominium, Residential Community Orangetree Tract Cm
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Charming end unit. Lower level one bedroom with full bathroom and kitchen. Inside laundry. Living room and patio area overlooking water stream and soothing sounds of a waterfall. 1 car port. Association has pool, spa, tennis courts and clubhouse. Excellent location next door to Irvine Valley College. Near 5 and 405 Freeways, Irvine Spectrum Entertainment Center, Business District, Shopping. Located in Building # 12.
Mars ain’t the kind of place To raise your kids In fact, it’s cold as hell And there’s no one there to raise them If you did
And I think it’s gonna be a long, long, time ‘Til touchdown brings me ’round again to find I’m not the man they think I am at home Ah, no no no… Imma rocket man Rocket man Burnin’ out his fuse Up here alone
I would love to go to the moon. If I live long enough (and make enough money), I will visit the moon. Would the moon be an interesting final resting place?
Extraterrestrial real estate is land on other planets or natural satellites or parts of space that is sold either through organizations or by individuals. Ownership
of extraterrestrial real estate is not recognised by any authority.
Nevertheless, some private individuals and organizations have claimed
ownership of celestial bodies, such as the Moon, and are actively
involved in “selling” parts of them through certificates of ownership
termed “Lunar deeds”, “Martian deeds” or similar. These “deeds” have no
legal standing.
A number of individuals and organisations offer schemes or plans claiming to allow people to purchase portions of the Moon or other celestial bodies. Though the details of some of the schemes’
legal arguments vary, one goes so far as to state that although the Outer Space Treaty,
which entered force in 1967, forbids countries from claiming celestial
bodies, there is no such provision forbidding private individuals from
doing so.
Many states and countries have corollaries to their real estate and
property laws to prevent wanton claiming of new-found lands, that state
that a simple claim to the territory is not enough; the claimant must
also demonstrate “intent to occupy,” something that, at this time, is
obviously difficult to do with the Moon or any other celestial body.
Considering these facts, legally, the schemes’ “deeds” have only
symbolic or novelty value and no official governing body in the world
has yet granted any legal validity to them.
When you are ready to start your search for moon property, you can start with Google Moon. Since there are no surveyed properties, you will have to explore and stake your claim on your own. There are organizations (Lunar Registry and Moon Shop among others) willing to take your money and give you some paper saying you own a piece of the moon, but as noted above, these claims have no legal standing.
Beds 3 Baths 2 full 1 part baths Size 1,500 sq ft ($353 / sq ft) Lot Size n/a Year Built 2001 Days on Market 32 Listing Updated 9/11/2009 MLS Number P701348 Property Type Condominium, Residential Community West Irvine Tract Mand
Quiet inner location and very desirable open floor plan, rarely on the market. Oversized Master bedroom + 2 larger bedrooms, upstairs laundry room. Walk-in closet in the Master bedroom and one of the bedrooms. Plenty of storage spaces throughout, in addition to storage cabinet in the garage. Custom painting throughout and designer carpet upstairs. Porcelain tile in Living room & kitchen area.
Today’s featured property was purchased on 11/10/2005 for $595,000. The owners used a $476,000 first mortgage, and a $119,000 downpayment. They are hoping to recover some of their downpayment and get out without this becoming a short sale. Unfortunately, the property next door has an even more motivated seller; twenty-one Moonstone is being offered for $499,000. They competition puts the owners of today’s featured property underwater.
Buying in 2005 cost these owners their substantial downpayment, and they too may end up as a short sale.
Come fly with me, let’s fly, let’s fly away If you can use some exotic booze
Once I get you up there where the air is rarefied We’ll just glide, starry-eyed
Come fly with me, let’s fly, let’s fly Pack up, let’s fly away!!
Very low interest rates make prices affordable. We used to have unsustainable loan programs; now we have unsustainable loan terms. Affordability at these price points is fleeting. It is an opportunity for home ownership most people should pass on.
The people were intrigued His wife held back her fears The headlines gave acclaim He’d realized their dreams.
Faster than a bullet from a gun He is faster than everyone Quicker than the blinking of an eye Like a flash you could miss him going by No one knows quite how he does it but it’s true they say He’s the master of going faster. Faster — George Harrison
Most people realize their dreams of home ownership when they purchase a house. This is not ownership; it is debt slavery. You don’t own the property until the debts are retired. Real home ownership is the reward for those who master paying debts faster.
Affordability is a measure of people’s ability to raise money to obtain real estate; it is a function of financing. During The Great Housing Bubble, financial innovations dramatically increased the amounts people were able to borrow; unfortunately, Affordability Products Make Prices Unaffordable. The affordability was short lived because the loan programs themselves were unstable. The collapse of these loan programs resulted in a massive credit crunch that removed affordability from the market; prices fell.
During The Great Housing Bubble, the loan programs were unstable and interest rates were too low because lenders were not property pricing risk. Now, the Federal Reserve has artificially engineered unsustainably low 4.5% Mortgage Interest Rates? to compensate for the affordability lost when toxic loan programs got crunched. In short, we substituted unsustainable interest rates for unsustainable loan programs — the key word being unsustainable.
I have predicted that we will see a 2011 Inflation Spike. If inflation does go up, mortgage interest rates will go higher because banks will not loan money at rates lower than the level of inflation because they would come out behind. So what happens when interest rates go up?
Is it about the payment?
It is worth noting here that lower prices does not increase affordability. What? Yes, that is right, lower prices does not necessarily increase affordability. A house loan of $460,509 at 4.5% has the same payment as a $317,995 loan at 8%. The loan balance is 31% smaller, but the payments are the same.
From a cashflow investment perspective — assuming the property will never be sold — the Federal Reserves efforts to lower interest rates has increased affordability. Like the loan programs the FED initiative replaces, ultra-low interest rates are not sustainable.
So why shouldn’t you be buying now?
Most people will sell their home, so resale value does matter.
You can never refinance into a lower payment or faster amortization schedule.
If there are properties in which you would be willing to live for the
long term, and if they can be had for at or below rental parity, then
you are only hurt by rising interest rates and declining prices if you must sell while resale values are depressed (an event that happens more often than most believe). Eventually—cue
the 20 year holding time—fundamentals will rise to support prices at
higher interest rates. On an inflation adjusted basis, you can never
recover from overpaying up front, but in nominal terms, there will come
a point when you can get out at breakeven. Keep in mind, you are
trapped in an underwater situation once interest rates start going up
and values start going down; however, you are trapped in a property that still costs you less than renting, so you are far better off than the typical homedebtor trapped in their homes today.
From a purely cashflow perspective, buying now is not a problem; however, in the real world, people need to sell their homes for many reasons. If they are underwater when they need to sell, bad things happen. Are you willing to take that risk?
It point #2 that I want to examine more carefully today. In Real Estate, Cashflow Investment and Retirement I noted, “… you can take the excess rent and put it toward the mortgage paying off the debt more quickly. Remember, the goal is to have maximum free cashflow in retirement, so you want to pay off those debts.” Retiring debt is part of the cashflow investment mindset; it is diametrically opposed to speculation. Retiring debt is the key to retiring from work. The faster you can
accelerate the repayment of debt, the sooner your investments are paid
off, and the sooner you can retire.
Pay more when you can
There are methods anyone can use to accelerate their home mortgage payments: (1) pay more when you get a raise and (2) make extra payments. One of the advantages of home ownership is that you have a stable house payment while renters face yearly increases. Why not take that raise and put some of the extra into your payment? If you get a 3% raise, you should be able to put 3% more toward your mortgage. If you do this, a 30-year amortization drops to 20 years.
Another method people use to pay down their mortgages is to make extra payments. If you are like the many people who are paid every two weeks, you get what seems like two extra paychecks a year. If you make one extra payment a year, you can pay off your mortgage five years early. If you can make two extra payments a year, you can pay it off almost eight years early.
If you combine both methods, you can pay off your mortgage in 16.5 years!
This plan does not require heroic efforts. You are putting the same percentage of your income toward housing, and you are spending part of two extra paychecks per year. It that too much to ask in order to pay off your debts early? Good financial planning can accelerate your retirement by many years. Do you want to work longer than you need to?
Refinancing for accelerated amortization
During The Great Housing Bubble, and even now, most people who refinance do not accelerate their amortization. If given the chance, most people will suck the equity out of their home and spend it. The more conservative ones will refinance into a lower payment and enjoy more spending money that way. What I am proposing is the most conservative alternative; take out no money, make the same payment, and pay off the debt quicker.
Those that fail to learn the lessons of history are doomed to repeat its mistakes. What did you learn from The Great Housing Bubble?
Beds 3 Baths 1 full 1 part baths Size 1,610 sq ft ($403 / sq ft) Lot Size n/a Year Built 2004 Days on Market 1 Listing Updated 10/1/2009 MLS Number S591179 Property Type Condominium, Residential Community Turtle Ridge Tract Whgl
Beautifully upgraded single level home in Turtle Ridge’s Whispering Glen. This lovely home features maple flooring in most rooms, a gourmet kitchen with granite counters and GE Profile stainless steel appliances, a stone faced fireplace in the living room, a separate dining room, a large master bath with separate shower and tub, a large walk in closet, an inside laundry and an attached two car garage with built-in storage units. The home is currently configured as two bedrooms and a den, but the den can be converted back to a third bedroom. Highlighting this home is the very private back yard and patio area that looks out onto a lush greenbelt. It provides a wonderfully serene setting that is a true delight. The association also has a resort-like pool and spa area.
If my property information is correct, this was an all-cash purchase by a knife catcher. Perhaps the $220,000 loss will cause him to rethink his investment strategy….
