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