Thursday, June 23, 2011

Irvine Housing Blog

Irvine Housing Blog

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The housing bubble and crash is causing great psychological harm

Posted: 23 Jun 2011 03:30 AM PDT

From loan owners caught up in the frenzy to renters being forced to wait for lower prices, the housing bubble and crash has caused everyone psychological harm in one form or another.

North Korea at Night Marquee at Park Place at Night

Irvine Home Address ... 3131 MICHELSON Dr #304 Irvine, CA 92612
Resale Home Price ......  $380,000

There's no way we can sell our house now
so we'll just have to stay.
Suppose we found a buyer
so we could go our separate ways.

Loudon Wainwright III - House

When house prices were going up, real estate was very liquid, and everyone who played the game was making lots of money. realtors, mortgage brokers, homebuilders and ordinary homeowners all enjoyed the false prosperity of a debt-driven boom. Even those who did not sell their properties for a profit were given the ability to extract their equity and spend as they pleased. It was the best of all possible worlds.

Then the crash came.

Everyone who prospered as prices went up began to suffer as prices went down. Transaction volumes were the first to plummet, so everyone who made a living off real estate transactions began to suffer. They are still struggling today. As loan owners saw the housing ATM shut off, their entitled lives began to fall apart, and the crushing weight of their bubble debts started to take a toll.

There were a few responsible renters who foresaw the crash, and many more who decided to wait for prices to bottom once the downtrend became apparent. These wouldbe homeowners were forced to wait, and when the government and lenders conspired to keep prices artificially high, these people were forced to wait even longer. And in areas like ours, we are still waiting.

IrvineRenter says renting sucks

I have enjoyed the financial freedom and lower cost of housing renting has afforded me over the last decade, but I used to be a home owner, and I would like to own again someday. Renting lacks an emotional quality of belonging that is difficult to replicate. Intellectually, I tell myself it shouldn't be that way, but emotionally, I know it to be true.

Back when I owned my own house, I maintained many house plants, and I always enjoyed keeping up with the landscaping. Having grown up in a rural area surrounded by nature, I liked the spiritual connection to the earth and life that maintaining plants can bring. For the first four or five years of renting, I killed a dozen or more plants. It didn't dawn on me why this kept happening. I thought it was because my transitory living kept me too busy. The reality was, I didn't feel connected. My spirit was withering, and my house plants were the outward sign of my distress.

I gave up on growing house plants, but my longing for connection remains. I find other outlets, and my connection to Irvine comes through this daily writing, but on a deeper emotional level, I am still a detached observer who's just passing through. It's difficult to feel rooted when you know you aren't. There is an emotional quality of ownership you just can't replicate in a rental.

Ownership in a declining market sucks too

Perhaps it goes without saying, but owning property that is declining in value sucks too. Overpaying for property so the cost of ownership exceeds a rental can only be compensated for by increasing values. When the cost of ownership is too high and the value of the house is declining, it is the worst of both worlds.

Few who strategically default make that decision lightly, and few who go through short sale or foreclosure want that outcome. Leaving a family home and losing money is a double whammy. For as much as I find renting emotionally unsatisfying, owning an overpriced and declining asset is far more emotionally damaging. I don't regret my decision to rent, and I suspect many who are facing the perils of ownership in today's declining market wish they could trade their problems for mine.

Denial is dead

The double dip in home prices has forced loan owners to give up their denial and accept their fate. Every foolish belief that prompted buying during the bubble has been thoroughly discredited. Real estate does not always go up. Financing will not always be made available. Everyone does not want to live here. We are not running out of land. Home equity is not free money. Appreciation is not income. Credit is not savings. And debt is not wealth.

With the death of denial comes a new era. Market participants are fearful, and many have capitulated and either sold or walked away. Over the next couple of years, the pain of the market declines will lead to widespread despair. When kool aid is really dead, the market will bottom, and the cycle will start all over again.

Does gathering gloom raise risk of double dip?

With recovery limping along, pessimism could begin weighing on growth

John W. Schoen Senior producer
updated 6/17/2011

This month marks the second anniversary of an economic expansion that began at the end of what is now being called the Great Recession. But for millions of small businesses and households, the economic recovery has yet to arrive.

Frank Goodnight, owner of Diversified Graphics, a Salisbury, N.C., printing company with 12 employees, is among them. In 37 years, he has survived some tough economic times. But never like this.

"This recession is equal to the other four doubled,” he said. “Business has just been so bad for so long that right now we’re just hunkered down trying to survive.”

Everyone I know in the homebuilding industry -- what's left of it -- is hunkered down trying to survive. Over half the industry is unemployed, and many with jobs are underemployed making a fraction of what they were five years ago.


Consumer sentiment worsened more than expected in June on renewed concerns about the outlook for the economy, a survey released Friday showed .  It was just the latest in a series of surveys that have pointed to a marked downward shift in the outlook for jobs, housing and the stock market. ...

If you think things are going to get bad and you stop buying, things will get bad,” said Goodnight, the printing company owner. “And that’s where we are right now. Everyone is afraid of the deficits. They’re afraid of the new regulations that are coming down fairly soon. They’re afraid about health care. And no one’s going to make a major investment when there’s this much uncertainty in the air.”

You don’t have to look far to find the source of all this gloom. A solid economic expansion slowed to a sluggish 1.8 percent annual growth rate in the first quarter. After posting healthy gains for most of this year, the job market stalled badly in May. The rising cost of gasoline has taken a big bite out of household budgets, though pump prices have recently begun to back down from a peak of nearly $4 a gallon. After stabilizing last year, home prices have begun falling again.

Since the housing bubble burst in 2006, about $10 trillion in household wealth has been wiped out. Some 12 million homeowners with mortgages — roughly one in four — owe more than their home is worth. That means they’ll be cutting into future savings to pay off a debt that will leave them with little to show for it once they’re done. ...

The pain is very real. Unfortunately for the herd, the more people who need a market to move in a certain direction, the less likely the market is to comply. If everyone is bullish, they have likely already purchased. With no buyers, prices are certain to go down. We see that in the housing market right now as the tax credit pulled forward what little demand their was, and the buyer pool is seriously depleted. Everyone is on the wrong side of the trade, so prices are likely to fall further.

“We are forecasting that real household net worth should take a major hit in the second quarter of this year because the stock market is not doing well and there’s going to be no relief from housing,” said Chris Christopher, an economist at IHS Global Insight. “When people take a loss on their financial assets they’re going to step back on their spending."

The recovery has also been weakened by sluggish wage gains and fears that future paychecks aren’t going to grow.

There’s not really much impetus for spending other than wages,” said Franco. “And what we’re seeing is that a lot of the profits that companies have made over the last several quarters have not filtered down to the consumer’s bottom line.”

In a healthy economy, there shouldn't be much impetus for spending other than wages. Money isn't free. As the debt addicted abandon their entitlements and adjust to living within their means, the economy will slowly improve and be put back on stable footing.

U.S. Housing Crisis Taking Strong Psychological Toll on Many Families

Alex Finkelstein -- 06/06/11

The value of single-family homes in the U.S. has been dropping like a stone in the last four years of the Great Recession.  And it hasn't hit bottom yet.

The continuing decline in housing values is changing the lives of numerous Americans for ever, The Wall Street Journal finds in a recent informal survey with various sources.

The most frightening aspect of the falling-prices phenomenon the WSJ finds is that prices now stand at 2002 levels.  That means, the WSJ reports, "Nearly a decade's worth of appreciation has been wiped out.

"If you bought anytime in the last 10 years, chances are your house is worth less than you paid. You're trapped in a loss.

That has to be disheartening. It's worse in Las Vegas. If you bought any time in the last 16 years, your house is worth less than you paid. There is little joy in that reality.

The WSJ states "the housing funk is even seeping into popular culture. In his new album, called "10 Songs For the New Depression," Loudon Wainwright sings to a wife seeking divorce in the tune "House:" "There's no way we can sell our house now so we'll just have to stay."

He also ponders: "Suppose we found a buyer so we could go our separate ways."

How would you like to be in that situation? Trapped in a marriage you can't escape because you can't sell your house. Yikes!

The WSJ states Wainwright has captured the moment. The economy has wreaked havoc on personal lives, transforming decision-making in the household."

Psychologists say the phenomenon is more than just a musical expression of home-sweet-home.

"More and more divorced couples are forced to remain in their homes while their houses are for sale, which creates extreme stress on the couple and their children," Margo Meeker, a clinical psychologist, tells the WSJ.

"Having to live under one roof post-divorce and then having to stage and show the house while the family is going through such a major transition and loss creates even more anguish in an already stressful situation."

People get divorced because they often can't stand one another. Imagine being forced to live with someone you may have grown to hate. The distress of losing large amounts money is bad enough without adding more anguish to the situation.

The WSJ reports a recent survey by the National Foundation for Credit Counseling concluded that "financial distress was having an impact on our marriages, our roles as parents, our jobs, health and even sleeping patterns."

Just 6% of respondents said financial distress wasn't a factor in their daily lives.

Contrast that with the carefree feelings people had in 2006 when house prices were going up, everyone had nearly unlimited spending money, and projections were for them to be able to live that lifestyle forever.

The ripple effect has become larger partly because so many Americans have tied up their wealth in housing, the WSJ reports. In 1985, 12% of personal disposable income came from savings, while just 1% came from home-equity lines, according to the Federal Reserve and Congressional Budget Office.

"By 2007, 10% of personal disposable income came from housing credit: second mortgages, home-equity lines and so on," notes the WSJ. Less than 1% came from savings

Wow! I find that statistic truly remarkable. People really did believe credit was savings and home equity was a personal piggy bank.

"Today, Americans are saving more and spending less", the WSJ states. "Their homes are no longer piggybanks or sources of free money. That's a good thing, but we spend less when we're saving. Falling home prices have failed to translate into demand. People who want to buy homes still can't afford them."

In another National Foundation for Credit Counseling survey, the WSJ found nearly half of respondents said they could never come up with a down payment for a new home. Another 17% said they would have to borrow from family or friends. And 21% said they would need to get a low down payment if they used their own funds.

"The confluence of sellers unable to sell and buyers unable to buy has created what Meeker calls a "housing trap."

If sellers can't sell and buyers can't buy, it isn't a housing trap; it's a recipe for continued low sales volumes and a major decline in prices.

"People who anticipated home prices rising-or at least staying level-can't afford the economic hit even if they choose to move to a place that is less expensive."

People anticipating higher home prices was the root cause of the foolish buyer behavior that inflated the bubble. Lenders provided the air in the form of stupid loans, but buyers had to borrow that money, buy houses and drive up prices. Many knew they couldn't afford the house without mortgage equity withdrawal, yet they went through with the purchase anyway. Those foolish buyers are suffering right now. The sad truth is, they deserve it.

How to lose $75,000+ per year for 5 consecutive years.

Some people who bought at the peak are suffering worse than others. The owner of today's featured property bought in the North Korea towers (Marquee at Park Place) in 2006. The description claims the property is not a short sale, so the buyer is losing well over $400,000 of their own money (purchase price plus upgrades).

This one has to hurt.

North Korea at Night Marquee at Park Place at Night

Irvine House Address ...  3131 MICHELSON Dr #304 Irvine, CA 92612   

Resale House Price ......  $380,000

House Purchase Price … $778,000
House Purchase Date .... 3/31/2006

Net Gain (Loss) .......... ($420,800)
Percent Change .......... -54.1%
Annual Appreciation … -13.4%

Cost of House Ownership
$380,000 .......... Asking Price
$13,300 .......... 3.5% Down FHA Financing
4.49% ............... Mortgage Interest Rate
$366,700 .......... 30-Year Mortgage
$79,536 .......... Income Requirement 

$1,856 .......... Monthly Mortgage Payment 
$329 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$79 .......... Homeowners Insurance (@ 0.25%)
$422 .......... Private Mortgage Insurance
$840 .......... Homeowners Association Fees
$3,526 .......... Monthly Cash Outlays

-$298 .......... Tax Savings (% of Interest and Property Tax)
-$484 .......... Equity Hidden in Payment (Amortization)
$22 .......... Lost Income to Down Payment (net of taxes)
$68 .......... Maintenance and Replacement Reserves
$2,834 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$3,800 .......... Furnishing and Move In @1%
$3,800 .......... Closing Costs @1%
$3,667 ............ Interest Points @1% of Loan
$13,300 .......... Down Payment
$24,567 .......... Total Cash Costs
$43,400 ............ Emergency Cash Reserves
$67,967 .......... Total Savings Needed

Property Details for 3131 MICHELSON Dr #304 Irvine, CA 92612
Beds:  2
Baths:  2
Sq. Ft.:  1369
Property Type: Residential, Condominium
Style: One Level, Contemporary
View: Park/Green Belt
Year Built:  2006
Community:  Airport Area
County:  Orange
MLS#:  S653854
Source:  SoCalMLS
Status:  Active
This is NOT a short sale! Beautiful condo in Irvine's finest highrise at the Marquee in Park Place. Resort style living! Located on the 1st residential level in the West tower, with garden view, facing away from the freeway. Original owner with totally custom re-modeling with Black granites thru-out, black carpet, black sink, Jacuzzi tub, custom black drapery. .. etc. If you love black, you will fall in love with this place! Enjoy the amenities: pool, spa, fitness center, BBQ area, billard room, and conference rooms. State-of-the-art security including 24/7 concierge service, guard-gated access, keyed elevator access, and security cameras. Conveniently located, close to John Wayne Airport, renowned restaurants, beaches, shopping and tollroad/freeways. Unbelievably priced for quick escrow! A must see!

totally custom re-modeling

This interior might appeal to someone, but I suspect it is a turn off to most.

Do you think this owner cooks much with those paintings on the stove?

Is that a statue of the Borg? Is that fine art included in the purchase price?

real estate home sales


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