Rental Parity II

XXX Presque Isle Lane $153/sqft. Asking $250,000

Yesterday I promised to show an example of rental parity that's already arrived in Chapel Hill. According to IriveRenters criteria, someone looking to either rent or buy this house should buy it. It's a little cheaper to buy than to rent. If it is cheaper to buy than to rent, then rational market participants should snatch up this property. There should be a price floor at rental parity.

So are we at a price bottom? I don't think so.

Today's property may be rented for $1500/month or mortgaged for $1656/month*. Another house a few doors up may be rented for $1600/month so I would guess that the $1500/month rental rate is pretty accurate.

*Assuming a 5.5% 30-year fixed rate mortgage. Accounting for the tax breaks, the total cost of ownership is $1364/month.

The problem is that today's owners couldn't afford the house at that price. They took out a first mortgage with Central Carolina Bank for 80% of the 265K purchase price in 2004. The took out an immediate HELOC to cover another 10% of the purchase price. They put only 10% down but today's buyer will have to put 20% down. In 2008, the owners refinanced their HELOC with Bank of America to $38K. Assuming they fully tapped their HELOC, they owe $249,950, explaining the $250K price tag. Todays sellers can't negotiate lower.

But bad financing aside, why don't I think today's price for this house is the bottom? Because the monthly cost of ownership hinges on a 5.5% interest rate. When interest rates go up, then buyers for this house would have to pay more per month. If you assume that the buyers today and the buyers tomorrow are the same people making the same ammount, then they can't afford a higher payment. Therefore the demand for the house at todays price point lessens. To match the demand for this house, the price must drop.

If you're buying today at a 5.5% interest rate, then 5 years from now when you want to sell to someone who gets an 8.0% interest rate, then the principal has to drop 17%. (Plug 100K as the price for a house with a 5.5% interest rate into the IHB Calculator, the monthly payment is $662. Plug in 83K as the price for a house with a 8.0% interest rate and the monthly payment is $660). Congratulations, you lost 85% of your down payment.

Rule of thumb: You want to buy when mortgage rates are high. You want to refinance when mortgage rates are low.

Remember, you can refinance your interest rate, you can't refinance your principal.

Rental Parity

XXX Worth $175/sqft. Asking $978,000.

IrvineRenter was one of the first people to publicly announce in 2007 that the housing market was in a bubble. That's when he started his blog, at least. His basis for this conclusion was that it was cheaper to rent than to own. Properties in Irvine had inflated to a point that the monthly mortgage payments were more than the properties could fetch as rentals. Home owners (home debtors) were the ones throwing their money away.

The price point at which IrvineRenter stated he would enter the market was rental parity. Rental parity denotes the price at which it is equivalent to rent or own the property; a break-even point. If you're thinking in terms of "monthly payment" where you factor in the tax incentives and the upkeep costs into the mortgage payments and the home owners insurance payments, then that monthly cash outlay would be equal to the monthly rent someone would be willing to pay.

Since figuring out what the monthly payment is on a house is complicated, IrvineRenter has created a calculator to crunch the numbers for you.

Today's property is both for sale and for rent.

It's really a beautiful property, though, I don't know what a million dollar house should look like.

You could either rent at $3,800/month or buy for $5,438/month*. Plug in the numbers into the calculator. It's cheaper to rent this property than to buy. If you buy this home at this price, you're throwing away your money.

*Assuming a 5.5 30-year fixed rate mortgage.

This house is in Chatham county, so I don't have access to the property records. At least, I haven't started trying to figure out the Chatham county records yet.

...

We're at an interesting point in the deflation of this housing bubble. Some properties I've looked at have deflated to rental parity. The reason seems to be that interest rates are at historic lows. In my next post, I'll run the numbers on a house that's currently at rental parity with a 5.5% mortgage, but that would not be at rental parity at a higher mortgage rate.

Foreclosure in the works

XXX Tinkerbell Road $151/sqft. $389,000.

I'm going to predict that today's property will end up in foreclosure. The "owners" owe $368,037 on this property which they purchased a year and a half ago for $296,500. To avoid a shortsale/foreclosure situation, the owners have to get at least $143/sqft.

In their neighborhood, two houses just sold:

6/30/2009 -- 421 Tinkerbell Road. $119/sqft. $222,350 for 1862 sqft.
6/26/2009 -- 508 Colony Woods Drive. $100/sqft. $233,000 for 2367 sqft.

The next most recent sale in this neighborhood was back in May.

A third house is currently listed for $100/sqft. It's larger than today's property. It's also a few years younger (1968 vs 1962). This third house is priced to sell, and it will. Its owner even stands to make a profit.

When this third house sells, there will be three perfect comps -- comparison sales -- for today's property which an appraiser will use to measure the value of today's property. If the appraisal comes in at $119/sqft (generous), then the bank will only loan $243K. The buyer would have to put up a $143K down payment. If the appraisal comes in at $100/sqft (likely), then the bank would only loan $204K and the buyer would have to put up a $183K down payment. I don't think there are buyers with that much money saved who will consider this property.

The owners of today's property purchased the house in January of 2008. They payed the previous owner $296,500 in February 2008, but took out a 332K loan with BB&T. I don't understand why the bank wanted to loan 112% of the property value. Apparently, First Medallion Bank didn't think this was unreasonable and so they allowed the owners to refinance in December 2008, into a $346,800 loan. Then in January 2009, they took out a second mortgage from Kingsford Home Improvements for $21,237. Ahh. Serial refinancing. Did all that extra cash go to good use?

From the picture of the kitchen, it looks like they put in a granite counter top. The cabinets look new, but are ugly. I'm guessing the flat top range was installed as well. I personally dislike the idea of flat-topped ranges. They certainly didn't make the kitchen larger, it looks tiny. Maybe there are other improvements they made to the rest of the house, but then, why aren't they showing them in the pictures (there are only four), or at the very least, including a description of them? Geez, any description at all would be nice.

These owners intended to flip the house. Instead, they're going to get burned.

As good as sold

XXX Canterbury Lane $296/sqft. Asking $999,000.

Todays owners have been in their house since 1991.

In 1991, they bought the house. The county's stamp-tax records are incomplete. They took out a $55K 15-year mortgage with Wachovia

In January 1999, they refinanced with the State Employees Credit Union (SECU) for $75K.

By December 1999, they were ready for a little more of that delicious MEW, so they opened a HELOC with SECU for $100K.

It looks like they tapped $75K of that $100K HELOC since in November 2007, they refinanced with SECU into a $150K mortgage.

So far, they are $150K in the hole for a 3300 sqft house. That's less than $50/sqft + whatever down payment I don't have record of. These owners are expanding their debt through the bubble years, but still not going crazy, at least by Irvine CA standards.

They put their house on the market in March of this year, 118 days ago.

And now, the WFT portion of our story:

In May, they opened a $530K HELOC from Harrington Bank. WTF? The house is already on the market, can't you just wait until it sells to spend that equity? If they tapped that HELOC, then they're $680K in the hole.

I just can't figure out why someone would do that. $530K is not a small amount of money. $530K is the price of another house. Did our current owners pay cash for another house with debt from this house? (Is that really paying cash?). Is it really wise to spend the profits of a home sale before the sale completes?

If they sell at their asking price, they stand to make a fortune. They would get $220K in addition to whatever portion of the $530K HELOC they haven't already spent. But who is going to pay $300/sqft for this house?

Tally: 1 for 5

I've now looked at the debt history for 5 houses, and it's only been the first one that I looked at that showed evidence of mortgage abuse.

XXX Westbury Drive $119/sqft. Asking $400,000

Today's property was purchased in 1992 by its current owners for $235K. At the time it was $70/sqft. It looks like they put 65K down and had a mortgage of ~$175. In 1999, they refinanced to a ~$185K. In 2004, they refinanced again to ~$213K -- and it appears to have been into a fixed-rate mortgage at that! This refinancing does not qualify as serial or abuse.

If these owners have to drop their price by $50K, then they still walk away with an additional $122K in profit (well, $98 after the realtors take their 6% cut) -- that's beyond the $38K they already extracted from their two refinancings. What's funny is that, in spite of having so much of an equity cushion, these owners have not dropped their price to move the house (I don't know how many times they dropped the price, they likely have, all I'm claiming is that they haven't dropped it sufficiently to move it); the house has been on the market for 233 days. Besides that previous bit of snark, all I can say about these owners is that I wish I were in their situation.

...

One thing that's confused the hell out of me as I've been looking at properties around Chapel Hill: there's no clear price per square foot that sellers list for, and there's no clear price per square foot that buyers are willing to pay. Sometimes, it seems like $160/sqft is the average, but then you have places like Sothern Village and Meadomont that are nowhere near the same price. It vaguely looks like many sales are occurring at the $140/sqft range. Today's property is cheaper than that, though. Why hasn't it moved? Certainly it is a big house and I hear it's now in vogue to buy a smaller house, but at it's current price, it's a much better deal than a lot of other properties I've seen on the market. I can't figure out why it would have remained unsold for so long.


Mortgage abuse tally: 1 for 5. 20%.

Instructions for Finding House Debt History

Say I'm interested in looking at the debt history for 123 Hoosuredaddie St in Chapel Hill. Maybe I'm interested in purchasing this house and want to learn what it sold for recently, or maybe I'm curious if it's owners were serial refinancers.

I have to go to two websites:

1) I go to the Address Inquiry page on the Orange County property records website.. There I search for "Hoosuredaddie St" in the street name drop-down menu, and click on the "Display addresses for street" button.

This takes me to a page that lists all the houses on Hoosuredaddie Street; I click on the "PIN" link for 123 Hoosuredadie Street. This takes me to an intermediate page that lists the current owner. On this page is a link for a "Property Summary Page".

I follow this link to an "Orange County Land Records Data" page. At the top of this page there is a row of orange rectangles.

The "Prior owners" link inside the right-most orange rectangle will list the number of tax stamps paid to the county for each transaction. From the tax-stamp count, you can figure out the selling price for the house. This page also has the date of the sale and the name of the owner prior to the sale.

The "Documents" link inside the third-from-the-right-most orange rectangle lists all of the documents relating to this property including all the liens on the property. This list is almost completely useless since all you have is the title of the form; there are no links on this page to the documents themselves. THIS PAGE IS REALLY IMPORTANT. Each document is identified by two numbers: the "book" and the "page". The first column contains this information with a "/"... e.g. "4309/527"

2) If you have the "book" and the "page" numbers, you can then go to the AiLIS Public Inquiry page. On this page click on the "Book & Page" tab. This brings you to a form where you can enter in the book and page for a particular document. This then brings you to a page listing all of the signatories to the document -- each one has a link to the document as a PDF. This is where the gold is.

For example, if you go to book 4309 and page 527 you will see the record of an Orange County resident who, in 2007, paid off his mortgage, 3 years after taking it out. Good for him.

Count your chickens

XXX Perry Creek Drive $142/sqft. Asking $460,000

(This property is not listed for sale on realtor.com. One source tells me it's for sale, but another says it's no longer on the market.)

5/28/2002 -- Bought for $350,000 -- $280,000 ARM Mortgage and a $70,000 downpayment.
9/26/2003 -- Refinanced for $289,000
1/6/2004 -- Took out a second mortgage for $26,600
2/2/2007 -- Opened a HELOC for $99,400
5/17/2007 -- Extended the HELOC to $129,600

Total property debt: $445,200 if you assume they fully tapped their HELOC.

The owners have already spent the money that they will make on the sale of this property. They've counted their chickens before they hatched.

...

I've finally figured out how to look at the debt record for a property. This is the first property I looked at, and it shows the same pattern of mortgage abuse seen and documented in Irvine, California.

I intend to keep a tally that I will update on this blog: the percentage of houses for sale that I investigate which show signs of HELOC abuse. The tally so far is 1 of 1, or 100% of all homes I've looked at.

Ghost Town

113 Atterbury Street $237 / sqft. $799,900


Orange County records show that every single house on this street is owned by an investor or the builder. The other houses aren't listed for sale, however.

For some reason, I can't find this address on any map. Buyers aren't biting; 309 days on the market. Maybe they can't find it either.

What a view

For $273/sqft, this house offers you the opportunity to bathe in front of your neighbors

Stress

When the bubble burst in San Diego, the city that first saw the end of the bubble, it was greatly effected by foreclosures at the bottom end of the market; the subprime implosion. As subprime mortgages were pulled from the offerings, volume disappeared. Prices had risen to a point that, without subprime mortgages, there were no buyers. So prices had to drop to return to a point where the population could afford houses. The irony is that the subprime mortgages was touted as an "affordability product" that allowed more people to enjoy home ownership. Instead, subprime mortgages made housing unaffordable.

I don't get the sense Chapel Hill saw much of the subprime fallout; I do think that we'll see more of a problem when the Negative ARM loans recast (scheduled to begin this fall) and we will probably see problems with regular-old ARM mortgages now that interest rates are starting to creep up. There will be more stress in the Chapel Hill market in the near future.

5526 Spring House Lane. $154/sqft. $649,000.

Here's an Orange County property that's currently on the market as an REO -- it's a foreclosure -- it's not in the Chapel Hill school district.

It was originally purchased in 2005 for $870K ($206/sqft) and was bought back by the bank (US Bank National Association acting as a trustee for Credit Suisse) for $739K in March of 2008 ($175/sqft).

The reason foreclosures often go for much less than the market price is that banks have rules about keeping non-performing assets on their books. They are in a hurry to get rid of real estate. For some reason, US Bank National Association was not, and is not currently:

Orange County property records show this foreclosure occurred on March 19th 2008. The property did not get listed until March 7th 2009. This property sat unoccupied for a full year before making it to market? It could have been listed once, de-listed, and then re-listed to give it a fresher look. Regardless, the property is on the market for 25% off it's 2005 purchase price and it's still been on the market for 52 days. An obvious question is: if the market won't snatch up a property when it's owners are aiming to price it below market value, then haven't the owners over-estimated the market value?

How it will burst

130 F-9 Estes Drive

I don't have enough data to definitively prove that the appreciation seen in Chapel Hill during the bubble years was driven by the exotic loans and the subsequent self-reinforcing euphoria over home ownership (and in particular, mortgage equity withdrawl -- MEW). What I have is this: a simple argument that appreciation is due to changes in the desirability of an area (and not simply its desirability), and a pretty short list of things that have changed about Chapel Hill in the last 10 years.

I also have evidence of a significant real estate bubble that happened during the same period and its subsequent burst in many metropolitan areas. I have two dots that are not very far apart and I see how one could draw the line. We have rampant appreciation in Chapel Hill occurring at the same time as rampant appreciation took place in the rest of the country. The bubble burst elsewhere, it's going to burst in Chapel Hill.

How will it happen?

Sales volume will dry up across the board. Foreclosures will represent a majority those sales that do take place. Volume at the bottom of the market will return, but the mid- and high-end properties will languish. These sales will be to new home buyers and investors, but the move-up buyer (the buyer that in normal times makes up 80% of the market) will be stuck in the homes due to depreciation. Eventually, the debt-riddled mid- to high-end properties will succumb to foreclosure. Once a neighborhood has been overtaken by 3 or 4 foreclosure sales -- or even sales reflecting mild depreciation, they define the selling price for the neighborhood; no sales are possible at the previous "value."

This last point is subtle but important. A bank will only loan 80% of the appraised value of a house. If a buyer wants a loan on a house that's asking $300K and has $60K ready for a down payment, then if the bank appraises the house at $250K, they will only loan $200K. The buyer has to come up with the remaining $40K for a total downpayment of $100K, or the sale falls through. (Incidentally, the National Association of Realtors has been complaining loudly about appraisals not coming in high enough.)

I exaggerate when I say no sales are possible at the previous value; they are, but they require buyers with enormous down payments. The number of such buyers are few, and, given that they're frugal enough to have saved up in a time when everyone else was digging their debt hole deeper and deeper*, they're probably smart enough to know that time is on their side.

(*some such buyers merely cashed out on the bubble and may not be the clever buyer I'm envisioning)

What have we seen in Chapel Hill so far?

Volume is down: first quarter closings dropped 42% relative to first quarter 2008. Volume in 2008, mind you, was down 29% from 2007.

Meanwhile, the average price is up 11% from last year. WTF?

So far, it doesn't seem like many foreclosures have come through Chapel Hill. That's the next step.

Today's property:

130 F-9 Estes Drive, $71/sqft, $49,900.

I believe this property is a foreclosure as it matches the free data I found here and the complete lack of effort by the realtor in the listing supports my belief. (I'm not ready to pay $40/month for the foreclosure.com subscription service.)

This property sold for $58.5K in 2008 after being sold at $65.5 in 2007. That's 23% off 2007 pricing.

This looks like price weakening at the bottom of the market...

Was Chapel Hill's appreciation justified?

106 Baskerville Circle in Durham County

Acknowledging that housing prices have increased over the last ten years, I have to counter the second of the two arguments home owners like to use to justify current prices:

Our area is better, so the appreciation is justified.

I have a funny story.

So, when I first started thinking about the housing bubble and how it related to Chapel Hill, I ran a quick google search and found this exchange on an internet forum. That's basically all google turned up besides the new Bubble Tea place on Franklin.

In that forum, about half way down the page, "Omamia" says she'd rather rent for a year and watch how the housing bubble plays out -- she's worried there would be a 20 or 30% decline in prices. "MrsSteel" respectfully disagrees. She responds that the reason that Chapel Hill is not experiencing a bubble is because of the *schools* -- "the very best in the area -- possibly in the entire state." According to MrsSteel, 20% declines will not happen.

What struck me as being so funny about that response was that a few days before I found this thread, I had been on the phone with my grandmother, who lives in Wilmington, Delaware. Her neighborhood also saw significant appreciation in the past ten years, and when I expressed concern for her over possible depreciation, she said that she wasn't worried about it. Why? The schools.

"The schools will save us" is a thought that comforts many people.

The problem with that logic is the same problem one might have with buying stock in Dell. Sure, Dell sells a lot of computers, but are they ever going to sell more computes than they are already? Is there reason to believe Dell's current sales expectations are not already built into the stock? Chapel Hill's schools might be better than Chatam county schools, so you would expect to pay a premium on a Chapel Hill house, but that premium was already built into the price of the Chapel Hill home before the housing bubble began. Appreciation during the bubble was not due to any feature of the area before the bubble began.

Fundamentally, appreciation is due to a *change* in the desirability of an area, not simply its desirability. In order to justify appreciation, one has to point at what has changed to make an area more desirable. Did incomes increase, did employment increase?

I will start looking for that data. I don't have the impression that incomes increased during the bubble years. The University is the largest employer in Chapel Hill proper, and I don't have the impression that they started paying higher salaries, or that they increased employment.

Maybe the triangle as a whole? RTP has been expanding, right? Maybe RTPs expansion has something to do with Chapel Hill's appreciation?

I don't believe this is the case and here's my flimsy data to back it up: Durham properties did not show the same appreciation Chapel Hill properties did. I would expect that RTP would have had a similar effect on Durham properties as they would on Chapel Hill properties; RTP is in Durham.



The Durham median-price line is the orange one that's pretty much flat (143K in 2005, 160K in 2008). I need to look harder to find a 10-year plot for Durham.

There are many Durham properties that are listing in the $130/sqft range -- I happen to have found this one because it turns up when you search for Chapel Hill on Realtor.com. How much of a premium should a Chapel Hill property command over a Durham property?

106 Baskerville Circle $131/sqft. Asking $369,000

*Update*

I'll weaken my own argument here: Durham county housing did appreciate during the bubbble; it looks like it saw a 50% appreciation in the last ten years. This is less than the appreciation Chapel Hill housing saw.

Prices rose

102 Windhover Place.

There are two common defensive tactics that current home owners will take when trying to defend the idea that current housing prices are here to stay.

1) Our area didn't see appreciation the way other areas did (e.g. California).
and
2) Our area is better than other areas, so any appreciation made sense.

In this post, I'll address tactic #1.

Did prices rise in Chapel Hill? Yes.

This tiny graph from Zillow shows the median home price in Chapel Hill over the past ten years.



Ten years ago, the median home sold at $178K, Back in March, the median sales price was $356K. Prices doubled. I don't think these figures are inflation adjusted; however, inflation has been in the 2% range during this time. 1.02^10 = 1.20, meaning that if property values merely kept up with inflation without any of that evil appreciation like they had in California, then they should be selling for 20% more than what they were 10 years ago. In this time, housing prices appreciated at roughly 7% a year (1.07^10 = 2).

Put another way, houses currently are 40% more expensive than they should be.

Today's property:

102 Windhover Place $148/sqft. $359,500

This is home is a little bit better than the median in Chapel Hill. Back in April, its owners were asking $379,500 -- a bit above the median selling point in March. In 1998, it sold for $230,000 -- a bit above the median selling point in 1998. The current owners stand to make $120K for having lived in a house for 10 years. Good job guys. Way to house live.

Of course, they only make this money once they have found someone who wants to assume an extra $120K worth of debt. The house has been on the market now for 74 days.

Meadowmont, 18 months of supply

207 Oval Park Place

The rule of thumb, according to the Seatltle Bubble Blog, is that 6 months of supply is a balanced market. Fewer than 6 months of supply is a sellers market, more than 6 months of supply is a buyers market.

Meadowmont has seen 2 properties close in the last 31 days. There are 36 active listings. There are 2 continent listings, and 5 pendings. Discounting the contingent and pending listings, Meadowmont is looking at 18 months of supply.

So, should we count the pending sales? How likely are they to go through? Given the rapid rise in the interest rate on 30-year fixed-rate mortgages, (roughly 20% increase as interest rates went from 4.5% to 5.5%), many pending sales are falling through at the last minute; if a buyer got a quote but didn't "lock in" the rate, then when they go to close, they'll find out they're no longer eligable, the sale falls through, the home ends up back on the market.

Generally, people are no longer looking at ARM mortgages. If you can only afford the monthly payment when the government is artificially holding interest rates at historical lows, then you'd be in trouble the moment they let go; maybe the government won't let go? Well, looks like last month, their grip wasn't strong enough.

Pending sales in Meadowmont:
331 W Barbee Chapel Road, $593/sqft, Asking 1,550,000
341 W Barbee Chapel Road, $551/sqft. Asking 1,400,000
343 W Barbee Chapel Road, $530/sqft. Asking 1,100,000
339 W Barbee Chapel Road, $517/sqft. Asking 1,100,000
709 Spring Street, $142/sqft. Asking $174,900

I'll keep you posted when and if these homes close or if they end up back on the market. That first home had been looking for a buyer for 593 days before it found one. Let's say all of these homes close in the next week; then Meadowmont would be showing 7 sales and 36 listings; less than 6 months of supply. A seller's market? I remain skeptical.

That last listing is on the other side of 15-501. Seems much more reasonable.

Today's property:

207 Oval Park Place. $308/sqft. Asking $1,395,000.

This house has been on the market since March 17th, 2007. It's been 830 days.

It was purchased in 2001 for 1,089,500. Apparently, the next generation needs to pony up another quarter million to keep the Ponzi scheme going.

Southern Village: 170% appreciation.

203 Edgewater Circle. Asking: $206 / sqft. Price: $634,900.

I'm starting a new theme to my sporadic posts on this blog.

I have been in awe of the incredible reporting on the housing bubble in Irvine California from the Irvine Housing Blog as well as from the Seattle Bubble Blog, the Real C'Ville Blog and the Housing Bubble Blog. The new theme will describe properties in Chapel Hill, North Carolina, which I believe are over-valued. I am looking to eventually buy a house in Chapel Hill, but I don't want, having saved up money for several years, to put a down payment on a house and then watch that down payment evaporate as the house depreciates. The purpose of this blog is mostly to remind myself* of two things:

1) In the past 12 years or so, the selling price of homes in Chapel Hill has grown beyond historical standards.
and
2) The selling prices of houses in Chapel Hill have not yet deflated significantly the way they have in California, Nevada, Florida, DC, and other parts of the country. I think they should and that they will.

(*I don't believe anyone reads this blog besides a handful of close friends. I've always kept this blog for me more than for my readers. That will likely continue.)

There are bears out in the world, and in the past few years, their voices have had more sway. Their basic premise is this: "exotic" financing changed the supply/demand characteristics in the housing market, causing an increase in prices. Exotic financing is now gone, therefore, the supply/demand characteristics in the housing market should cause a return to affordability in the housing market.

Coincidentally, "exotic" it an anagram for "toxic". Well, it's almost an anagram. Maybe you've heard of toxic assets and the ruin that they have brought upon Wall Street? Those toxic assets are these exotic loans. They're being flushed out of the system at considerable expense to the tax payer. New mortgages are no longer exotic, but older toxic mortgages are still out there and will be bleeding the housing market for the next few years or so... we'll have to wait and see.

What I love about the Irvine Housing Blog is IrvineRenter's ability to look into the financing history for properties. He's watched California residents go deeper and deeper into debt to afford their extravagant lifestyles. I would love to be able to look into the financing details of home owners (often called home debtors or fauxowners -- come on, being $500K in the hole doesn't make you an owner, it makes you a debtor) in Chapel Hill. I don't have access to the same data that IrvineRenter has; I'm not in the real estate business, so I don't have access to the same database.

But I do have access to public records online through the Orange County website. I admire IrvineRenter's insistence on home-owner anonymity. While I intend to talk about specific properties, I have no intention of talking about names of actual owners. Like IrvineRenter, I will monitor the "comments" section of this blog and delete posts that mention the home-owner's name.

So that brings me to today's post:
203 Edgewater Circle in Southern Village.

Currently, it looks like sales in Southern Village are happening at the $205 /sqft range -- except, there aren't many of these sales, and there are a lot of houses for sale. This house is not overpriced when it comes to comparable recent sales, but it is way more expensive today than it was in 1998 when this house was built.

In 1998, public records for this property show a sale at $235K, or $76/sqft. In 2002, this house sold for $360K, or $117/sqft. In 2007, at the height of the bubble in every other city in North America, this house sold for $598K, or $194/sqft.

Now, two years later, the owner is seeking a futher appreciation of $12/sqft. If the current owner gets their asking price, then in the 12 years since its construction this house will be sold for 270% of it's original price.

See, now, here's my problem. This is a Ponzi scheme. Future residents purchase the debt burden of previous residents and then kick in extra money for the time and effort of having lived in a house.

What? You make money by living in a house? Sign me up!

The thing about house-living is that it's not hard. Anyone can do it. You can do nothing with your life, contribute nothing to humanity or society, and yet be rewarded by having resided in a house. House-living is the occupation of the future. Right?

I think Southern Village will bottom out in the neighborhood of $117/sqft when this bubble finally deflates.

Recast

The foreclosure crisis is not nearly done. It's just beginning. The key is that "exotic financing" will lead to monthly-payment increases for homeowners EVEN IF interest rates remain at these historically low levels. These exotic loans "recast" to regular old amortizing loans ~3 or 5 years after the original loan date. We will see record default levels this fall.

Don't trust me, trust IrvineRenter of the Irvine Housing Blog.

From Today's IHB:



There are three types of ARMs: (1) amortizing, (2) interest-only, and (3) negatively amortizing. When prices reached the practical limit of fixed-rate mortgages, many people turned to adjustable rate mortgages to increase affordability because they have lower interest rates. At first people turned to amortizing ARMs, but that soon gave way to interest-only ARMs and finally to negatively amortizing ARMs.

When the FED aggressively moved to lower interest rates, many cheered that the ARM crisis was averted; at best it was delayed. The assumption most people made is that all the ARMs written are amortizing ARMs. There is no payment shock with an amortizing ARM unless interest rates rise; unfortunately, reality is that very few of the ARMs still utilized by borrowers are amortizing ARMs.

The first wave of the foreclosure crisis was subprime. That wave has crested, and its devastation is nearly done.

The second wave that is building now is caused by the deteriorating economy and ARM mortgage recasts (Calculated Risk has a good post on this). As I wrote in The ARM Problem, it is not the reset of interest rates that is the problem, it is the recasting to a significantly higher payment caused when the mortgage goes from interest-only to fully-amortized. The negatively amortizing ARM, also known as an Option ARM is shown in yellow on the chart above. It is the most toxic loan product ever conceived. The Option ARM and the interest-only ARM—and their associated recasts to amortizing loans—are the two loans responsible for the second wave of the foreclosure crisis.

Repeat after me: Saudi Arabia is moderate

Just keep saying it and it will be true.

Ignore anything that suggests otherwise.

Shaky Grounds

From an editorial by Frank Rich in the Times

Five years after the Abu Ghraib revelations, we must acknowledge that our government methodically authorized torture and lied about it. But we also must contemplate the possibility that it did so not just out of a sincere, if criminally misguided, desire to “protect” us but also to promote an unnecessary and catastrophic war.

...

That sums up the editorial, but the very bland summation, if it is correct, should have America outraged.

Torture confessions are highly unreliable because the tortured person confabulates to end the pain. They are the weakest form of testimony one could imagine. For very obvious reasons, torture confessions cannot be used in a court of law.

So why would the evidence one wished to build a case for WAR from require a lesser standard than what could be used in a court of law? It's WAR. Maybe just maybe the pro-torture lobby can construct a hypothetical (e.g. Jack Bauer interrogating bin Laden) that might induce the otherwise rational public to break their resolve on an issue as fundamental as a torture free America so that a handful of marines could swoop down on a terrorist cell. (I'm not conceeding that this scenario should break the rational public; I'm just entertaining a hypothetical.) But when the country is being asked to commit blood and treasure to go to WAR, to put 200K boots on the ground in another country, then the evidence ought to be beyond reproach.

Shame on Bush. Shame on Cheney.

Bailout

This morning, I went to my sock drawer to find out that I was completely out of socks. The drawer was empty, much to my surprise, since over the past three weeks it has averaged half full. No one could have seen this coming.

The problem seems to be that all of my current sock assets are tied up in the dirty laundry pile. It's strange to be in this situation where I have plenty of socks, but I'm simply unable to pay out more socks at the moment because the socks I have are not liquid.

My problem is liquidity, not solvency!

That's why I'm asking the federal government for $130 Billion to purchase new socks and hopefully take some of my illiquid socks off the books (the floor).

It's a miracle!

Pastor deflects a gunshot with a bible. Nothing short of a miracle. Fucking atheists need more proof in God than that?

Oh. That's not fair, right? "The man died, have some respect."

So what would the headline have been if the shooter's gun had jammed after the first shot instead of after the fourth? When a plane crashes and the carefully trained flight attendants get everyone out without injury: a miracle. When god fails to deliver a miracle for a man of the cloth on his holy day?

You're right. I forgot. I should only ever talk about good things that happen in this world.