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Irvine Housing Blog

Irvine Housing Blog

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The housing crash trapped a generation in their starter homes

Posted: 09 Sep 2011 03:30 AM PDT

Trapped in houses worth less than their mortgages, many loan owners are unable to move to take jobs or accommodate their growing families.

Irvine Home Address ... 134 ECHO Run #48 Irvine, CA 92614
Resale Home Price ......  $199,900


Trapped in a box of tremendous size
It distorts my vision, it closes my eyes
Attracts filthy flies and pollutes in the skies
Sucks up our lives and proliferates lies
Trapped in a box

No Doubt -- Trapped in a Box

The people who have endured foreclosure, sold in a short sale, or walked away from their mortgage debt are the lucky ones. For them, the ordeal is over. They still have ramifications with bad credit, but they now enjoy the freedom of renting -- and lower housing costs to boot. The underwater loan owners who stay in their homes are the ones living in quiet desperation trapped in a stucco box.

Generation of homeowners stuck in first houses

By Rick Daysog
Published: Monday, Aug. 29, 2011 - 12:00 am

They're trapped, like so many members of their generation.

Steve and Tasha McLaughlin have had two kids since they bought their two-bedroom "Brady Bunch"-style house in South Natomas seven years ago. They need more room, but they can't move: The house they bought for $256,000 is worth just $90,000, and an attempt to sell it failed.

This family would be foolish to remain. The shortest path to equity is through strategic default. It will be 25 years or more before a $90,000 home triples in price to the $270,000 it would need to sell for in order for them to cover their closing costs and get out at breakeven.

"We are literally stuck," said Tasha McLaughlin, 33. "There's no light ahead."

The McLaughlins and tens of thousands of others like them in the Sacramento region are unable to take the traditional second step on the American home ownership ladder. They are captive to outsized mortgages born in a real estate bubble, which have balances much higher than the homes are now worth.

During the boom years, young families could sell their first homes to buy larger ones, using the equity they built up in their starter models. But for those who bought at the height of the market, plunging prices have wiped out their equity and then some.

Many of these people haven't lost their jobs and aren't behind on their mortgage payments, so they don't qualify for a loan modification that could shave off big chunks from their monthly housing payments.

"If you bought in the last few years, you're not going to have a lot equity, and you're going to be stuck for a while," said Andy Thielen, a Realtor with Lyon Real Estate's downtown office.

That's an optimistic assessment. Unless borrowers put 20% or more down, nearly all buyers from the last decade cannot sell their house for enough money to pay off their loan and their realtor. If people feel they have to move, they can either attempt a short sale, or they can strategically default.

Or course, in our culture of entitlement, borrowers who consider short selling believe lenders should approve the short sale and simply eat the loss. Lenders in California now have no recourse after a short sale, so very few will be approved unless borrowers agree to repay what they can. Or course, most borrowers believe they shouldn't repay anything. They liked keeping the upside, but borrowers don't want to take the pain of the downside they didn't think was possible (real estate always goes up, right?) Most borrowers would be far better of strategically defaulting then declaring bankruptcy.

One of the only ways to move with intact credit is to rent out the first house and buy a second, bigger one to live in. But only those owners with enough money for a second down payment can afford to pursue that course.

The forced absence of so many young adults from the homebuying market has eroded demand for move-up houses, a crucial piece of the local real estate economy.

This doesn't only trap young adults. It traps the older adults who went Ponzi and spent their equity in anticipation of ever-increasing home prices.

Andrew LePage is an analyst with DataQuick, a San Diego real estate information firm. He said the lack of move-up buyers can easily be detected by looking at what's happened to sales of homes in the $250,000-to-$600,000 range.

In 2006-07, when the local market was near its peak, that segment accounted for 70 percent to 80 percent of all sales in the Sacramento region, according to DataQuick. These days, homes in that price range account for less than 19 percent.

Part of this reduction in volume is because fewer homes are priced in that range due to the crash, but his point is well taken: there is no move up market because there are so few with any equity to make the move. This has been exacerbated by the way lenders have chosen to foreclose at the bottom of the market first. Lenders have crushed the segment of the market they needed to support in order for borrowers to have equity to afford the more expensive homes to come later. When lenders finally get around to liquidating their high-end properties, the buyers they need will be trapped in their starter homes.

Sacramento-area home sales have picked up lately, but they tend to be for rock-bottom deals in neighborhoods thoroughly scoured by foreclosures and short sales.

Traditional move-up neighborhoods, such as Sacramento's Land Park and Greenhaven-Pocket, are seeing less activity. In the ZIP code that includes Land Park and Curtis Park, for instance, sales volume today is 36 percent below the neighborhood's 10-year average, according to DataQuick. Sales in the Greenhaven-Pocket area are down 31.7 percent.

David Moultrie, 31, a painter who lives in the Pocket, said the sluggish housing market has prevented him and his wife, Emily, from moving into a bigger home. The couple paid about $350,000 six years ago for a two-bedroom, which Moultrie said is now worth about $200,000.

They looked at several homes in the $280,000-to- $325,000 range last spring, but all of them were either "backed up against a freeway or were fixer-uppers," said Moultrie, who needs the extra space for his growing business and his 2 1/2-year-old daughter.

He's now in the process of adding a bedroom and bathroom to his existing home, paying for the renovations through savings. A home equity loan, he said, is out of the question given his house's loss of value.

"It's just a bad situation," Moultrie said.

Prior to the housing bubble, people used to fund home improvements from their own savings. It's only the rampant HELOC abuse of the 00s that convinced people houses self-fund their own improvements. Many now view HELOC funding from appreciation as an entitlement.

For Julia Himovitz, the reality check came in June when she and her husband, Gregory Ries, put their two-bedroom, one-bathroom house in Tahoe Park on the market.

They listed it at $269,000, only to discover that a similar house across the street had sold for less than half of that.

LOL! I wonder if they listed it with a realtor who told them they could actually get their asking price? It should be an embarrassment to both the sellers and the realtor to put an asking price in the market so clearly delusional that buyers ask, "WTF?"

They later dropped the price to $240,000 – about what they paid eight years ago – before pulling the house off the market altogether.

Himovitz, 32, an attorney, said she and her husband have decided to rent out their Tahoe Park home and use their savings to help buy one that's big enough to accommodate their family, which now includes a 2-year-old son and a 70-pound golden retriever.

"We love our house and I love the location. It's a wonderful place," she said of her current house."But if we want to have more children, it would be hard."

Tasha McLaughlin, the South Natomas homeowner, says her situation is already hard, and she doesn't know what to do about it. The market fall has left her stuck with a house that's too small and a mortgage that's too big. She and her husband pay $2,000 on their interest-only loan; that payment will rise to $2,400 a month in 2017.

McLaughlin, who runs a small business that organizes lacrosse tournaments and clinics, said she tried to get her loan modified in recent years. The first time, she waited months before receiving preliminary approval, only to find out that her loan was sold to another bank before the modification could be completed. Earlier this year, she approached the new lender for a loan modification but was rejected because she hasn't missed a mortgage payment.

McLaughlin said she and her husband, Steve, also tried to sell their home last fall when he took a job in New Jersey as ticket sales manager for Rutgers University.

But nobody bought. Her husband opted to quit his job after nine months, and the family returned to Sacramento. He now works as an alumni director for a local high school.

How much longer will this family continue to struggle? They will not have any equity in that home in their adult working lives. How much longer will they continue to pay the price for that mistake? How long should they?

I believe they should default. Lenders created this problem, and strategic default is moral imperative to prevent future housing bubbles. The fear of strategic default is a necessary deterrent to foolish lending. Without it, lenders are emboldened to make all manner of bad loans because they believe they will get paid back. Lenders will make nearly any loan if they believe they will get their money back with interest. It's only when they feel they won't get repaid are they prompted to loan responsibly.

Irresponsible lending has trapped the generation of bubble buyers in their homes. These people will not be rescued by rising prices unless we inflate another harmful housing bubble. Lenders must pay a heavy price for the foolish lending of the 00s.

Borrowers must pay a price too or moral hazard will encourage more irresponsible borrowing. Loss of the home through foreclosure, short sale, or strategic default, and damaged credit are appropriate consequences.

Both lenders and borrowers have been soliciting government bailouts to avoid the consequences of what they have done. Moral hazard makes in imperative that politicians do not give in to either side.

How would you like to be stuck in 715 SF?

The former owner of today's featured property had a choice to make: (1) stay in her tiny debtor's prison she couldn't afford, (2) walk away from her debt and escape to renter's freedom. She walked.

This property was purchased on 6/14/2005 for $319,000. The owner used a $255,200 Option ARM with a 1% teaser rate, a $31,900 HELOC, and a $31,900 down payment. The use of the Option ARM strongly suggests she really couldn't afford the property.

On 5/19/2006 she obtained a $55,000 stand-alone second. She quit paying in May 2010 or perhaps earlier.

Foreclosure Record
Recording Date: 12/07/2010 
Document Type: Notice of Sale  

Foreclosure Record
Recording Date: 08/24/2010 
Document Type: Notice of Default

The bank didn't waste any time once they issued the NOD. This is an instance where the borrower's circumstances were improved by foreclosure. Her payments would have greatly exceeded the cost of a rental, and it would have been quite some time before the value of this property gets back above $319,000. She was spared a decade of renting from the bank.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  134 ECHO Run #48 Irvine, CA 92614
Resale House Price ......  $199,900

Beds:  1
Baths:  1
Sq. Ft.:  715
Property Type: Residential, Condominium
Style: One Level, Contemporary
Year Built:  1980
Community:  Woodbridge
County:  Orange
MLS#:  S655443
Source:  SoCalMLS
Status:  Active
On Redfin:  126 days
Desirable Woodbridge condo with Huge balcony. Nice sized 1 bed 1 bath condo with laundry hook laundry closet!! Recently painted & new carpet installed!! All you have to do is unpack your stuff!! Be in before summer and enjoy all the amenities that Park Vista HOA has to offer. Why wait on a short sale when this great condo is ready for you now!!
Proprietary IHB commentary and analysis

All you have to do is unpack your stuff!! And you better not have much if it must fit in 715 square feet.

Resale Home Price ......  $199,900
House Purchase Price … $319,000
House Purchase Date .... 6/14/2005

Net Gain (Loss) .......... ($131,094)
Percent Change .......... -41.1%
Annual Appreciation … -7.4%

Cost of Home Ownership
$199,900 .......... Asking Price
$6,997 .......... 3.5% Down FHA Financing
4.26% ............... Mortgage Interest Rate
$192,904 .......... 30-Year Mortgage
$68,045 .......... Income Requirement 

$0,950 .......... Monthly Mortgage Payment 
$173 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$42 .......... Homeowners Insurance (@ 0.25%)
$222 .......... Private Mortgage Insurance
$371 .......... Homeowners Association Fees
$1,758 .......... Monthly Cash Outlays

-$150 .......... Tax Savings (% of Interest and Property Tax)
-$265 .......... Equity Hidden in Payment (Amortization)
$11 .......... Lost Income to Down Payment (net of taxes)
$45 .......... Maintenance and Replacement Reserves
$1,398 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$1,999 .......... Furnishing and Move In @1%
$1,999 .......... Closing Costs @1%
$1,929 ............ Interest Points @1% of Loan
$6,997 .......... Down Payment
$12,924 .......... Total Cash Costs
$21,400 ............ Emergency Cash Reserves
$34,324 .......... Total Savings Needed

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