We wrap up our week of music from Children’s Christmas shows with this old favorite.

Down to the village,
With a broomstick in his hand,
Running here and there all
Around the square saying,
Catch me if you can.
He led them down the streets of town
Right to the traffic cop.
And he only paused a moment when
He heard him holler “Stop!”
For Frosty the snow man
Had to hurry on his way,
But he waved goodbye saying,
“Don’t you cry,
I’ll be back again some day.”
Thumpetty thump thump,
Thumpety thump thump,
Look at Frosty go.
Thumpetty thump thump,
Thumpety thump thump,
Over the hills of snow.

Frosty the Snowman

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This particular street in Quail Hill is showing signs of stress. We profiled two properties on this street in the post Reunion Rollback. The rollbacks are still coming. This one is from 2004.

Asking Price: $529,950

Income Requirement: $132,487

Downpayment Needed: $105,990

Purchase Price: $567,500

Purchase Date: 12/29/2004

Address: 109 Reunion, Irvine, CA 92603

1st Mortgage $564,000
HELOC $70,500
Total Debt $634,500

Beds: 2
Baths: 2
Sq. Ft.: 1,447
$/Sq. Ft.: $366
Lot Size: –
Type: Condominium
Style: Spanish
Year Built: 2005
Stories: Three or More Levels
View(s): Park or Green Belt
Area: Quail Hill
County: Orange
MLS#: P611008
Status: Active
On Redfin: 7 days

From Redfin, “Numerous amenities adorn this spacious upscale Quail Hill Condo. 2 Bedrooms, 2 full baths. A Great room design with built in desk and romantic fireplace. clean and sleek gourmet kitchen with stainless still appliances, granite countertops and custom design backslash. Ceramic tile floors and upgraded carpet. Assoc Pool, Assoc Barbeque, Assoc Gym/Exercise Room, Assoc Sport Court, and Assoc Tennis. Great Corner Location.”

What is a backslash? Sounds like a karate move in a horror film.

Do the “still” appliances work?

A “clean and sleek gourmet kitchen.” I am impressed. Since it is “clean” does that mean it comes with lifetime maid service? I would like to thank Shhhhh for our fabulous new Gourmet kitchen award. These will be prominently displayed on any listing mentioning a gourmet kitchen from this day forward

Did they really need to write “Assoc” 5 times?

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So how much will the lender lose on this one? Assuming the HELOC is fully tapped, and assuming the owners never made more than the minimum payment on their negative amortization loan with the 1.25% teaser rate, the lender will lose over $137,000.

Anybody want to invest in second mortgages in California?

This has been an eventful week at the Irvine Housing Blog. Monday’s post was linked by several national websites. That post was viewed by more than 4800 people. Our traffic was well above average for the week. Make sure you come by Monday as the post is titled “What is a Bubble?” It should help everyone fully grasp the psychological factors that drove our real estate prices into the stratosphere (and subsequently into the dirt.)

I hope you have enjoyed the past week as much as I have, and come back next week as we will have more Christmas music and we will continue to Chronicle ‘the seventh circle of real estate hell.’

Have a great weekend.

🙂

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Ho ho ho.
Ho ho ho.
We are Santa’s elves.

We are Santa’s elves,
Filling Santa’s shelves With a toy
For each girl and boy.

Oh, we are Santa’s elves.
We work hard all day,
But our work is play.
Dolls we try out,
See if they cry out.

We are Santa’s elves.
We’ve a special job each year.
We don’t like to brag.
Christmas Eve we always
Fill Santa’s bag.

Santa knows who’s good.
Do the things you should.
And we bet you,
He won’t forget you.

We are Santa’s elves.
Ho ho ho. Ho ho ho.
We are Santa’s elves.
Ho Ho!

We are Santa’s Elves — Burl Ives

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Today I want to look at a property that is both for sale and for rent to see where the gross rent multiplier in the market can be found. This was sent to me by SawItComing.

Asking Price: $589,900

Income Requirement: $168,750

Downpayment Needed: $147,475

Purchase Price: $590,000

Purchase Date: 3/22/2004

Rental Rate: $2,695

Gross Rent Multiplier: 222

Address: 145 Topaz #15, Irvine, CA 92602

1st Loan $471,900
2nd Mtg. $88,500
Downpayment $29,600

Beds: 3
Baths: 2.5
Sq. Ft.: 1,500
$/Sq. Ft.: $393
Lot Size: –
Type: Condominium
Style: Townhouse
Year Built: 2001
Stories: Two Levels
Area: West Irvine
County: Orange
MLS#: S510794
Status: Active
On Redfin: 29 days

From Redfin, “Magnificent West Irvine Townhouse boasting high ceilings, large bedrooms and custom paint. End unit with lots of upgrades and one of the best locations in the tract with a extra wide front walkway. Nice size fenced front patio with slate tiles. Great neighborhood, fabulous schools, close to Tustin Marketplace and 5/55 freeways.”

When referring to those tiny front patios, what constitutes a “nice size?”

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The purchase data on Redfin is incorrect, but my data source shows this property was purchase in 2004 for $590,000. If the seller can get their asking price, they stand to lose $35,494.

For those of you who want to better understand the gross rent multiplier concept, lets look at the math on this property:

$589,900 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$3,826 Payment
$185 HOA
$590 taxes @ 1.2%
$123 Insurance @ 0.25%
_____________________________
$4,724 Monthly Cash Expense
($830) Income Tax Savings @25%

_____________________________
$3,894 After Tax Cost
$2,695 Rent

_____________________________
$1,199 Monthly Operating Loss

A note on downpayments: I have not included a downpayment in this calculation because it does not change the math. If you take the money out of a high-interest CD to put into a downpayment, you are giving up earning 5% interest on that money. The effective, after-tax interest rate on the mortgage is about 5%. In short, it is a wash to the calculation. Whether you pay cash and give up interest income or finance the entire deal and obtain the interest deduction, the cost of money is the same.

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As you can see, a GRM of 222 makes for a significant loss when compared to renting. So how far do you have to drop the price to get to breakeven?

$399,169 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$2,589 Payment
$185 HOA
$399 taxes @ 1.2%
$83 Insurance @ 0.25%
_____________________________
$3,256 Monthly Cash Expense
($561) Income Tax Savings @25%

_____________________________
$2,695 After Tax Cost
$2,695 Rent

_____________________________
$0 Monthly Operating Loss

148 Breakeven GRM

Take $200K off the price and the property breaks even with a 148 GRM.

This is the math I would use to evaluate whether or not I will buy a home, but others may use different assumptions. I will not take out an interest-only loan, so the cash-on-cash breakeven I am looking for is actually better than breakeven because a certain amount of equity is hidden in the mortgage payment as principal. If you want to calculate the absolute breakeven, you must look at the interest-only scenario:

$589,900 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$3,318 Payment
$185 HOA
$590 taxes @ 1.2%
$123 Insurance @ 0.25%
_____________________________
$4,216 Monthly Cash Expense
($830) Income Tax Savings @25%

_____________________________
$3,386 After Tax Cost
$2,695 Rent

_____________________________
$691 Monthly Operating Loss
.

$462,495 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$2,602 Payment
$185 HOA
$462 taxes @ 1.2%
$96 Insurance @ 0.25%
_____________________________
$3,345 Monthly Cash Expense
($650) Income Tax Savings @25%

_____________________________
$2,695 After Tax Cost
$2,695 Rent

_____________________________
$0 Monthly Operating Loss

172 Breakeven GRM

As you can see, this comes out very close to the 160 GRM we have been using here at the blog. The gross rent multiplier is just a shortcut that will let you know if a property is “in the ballpark” and worthy of a more detailed analysis. Some properties with a 160 GRM may still not be at breakeven if the HOA fees or Mello Roos taxes are very high (which they are in the new neighborhoods.) The only way to know for sure is to crunch the numbers. However, if you want a convenient shortcut, the gross rent multiplier is a handy tool to use.

Have a holly, jolly Christmas;
It’s the best time of the year
I don’t know if there’ll be snow,
but have a cup of cheer.
Have a holly, jolly Christmas;
And when you walk down the street
Say Hello to friends you know
and everyone you meet.

Oh, ho, the mistletoe
hung where you can see;
Somebody waits for you;
Kiss her once for me.
Have a holly jolly Christmas,
and in case you didn’t hear,
Oh by golly, have a holly,
jolly Christmas this year.

Holly Jolly Christmas — Burl Ives

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Asking Price: $449,000

Income Requirement: $112,250

Downpayment Needed: $89,800

Purchase Price: $522,000

Purchase Date: 9/18/2006

Address: 127 Briarglen #38, Irvine, CA 92614

1st Mortgage $417,000
2nd Mortgage $105,000
Downpayment $0

Beds: 2
Baths: 2.5
Sq. Ft.: 1,055
$/Sq. Ft.: $426
Lot Size: –
Type: Condominium
Style: Townhouse
Year Built: 1986
Stories: Two Levels
Area: Woodbridge
County: Orange
MLS#: R712474
Status: Active
On Redfin: 10 days

From Redfin, “What a Charming 2 bedroom 2.5 bath Condo. Inside Loop, not near Freeway. Great location – walk to lake, schools, groceries & malls. Wrap-around Patio. It’s a must to see!”

It’s a must to see? A small condo for almost half a million dollars — hurry before they are all gone!!!

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It is different this time. At least that is what everyone thinks when there is a financial bubble. Of course, the statement is partially true because the circumstances of each bubble are unique; it is the outcome that is always the same. In prior housing bubbles, prices have been “sticky” on the way down as as bid/ask spreads widen and transaction volume withers. We have certainly been seeing this phenomenon, but prices on many properties have been showing a surprising lack of “stickiness” in the initial stages of this decline. It seems to be different this time. The reason: 100% financing.

Sellers loath to take a loss. That is the main reason prices are supposed to be sticky. Those that bought late in the rally hold to peak prices while the bids decline. However, this time around, there was a plethora of 100% financing deals like today’s property. These sellers are not going to take a loss — they are passing the loss on to the lender. In short, they don’t care what the property sells for because they no longer have a financial interest in the outcome. We have been profiling numerous rollbacks on 100% financing deals on the blog. I have not been trying to find 100% financing rollbacks, they are just what is most common in the marketplace. It is the large number of these transactions in the market that is providing the impetus for the initial 20% drop we have been witnessing across Irvine. During the last bubble, peak to trough prices in Irvine dropped less than 20%, and that drop was stretched out over 6 years. It really is different this time…

For the record, this seller lender is going to lose $100,000 assuming a 6% commission and a sale at asking price.

Last week we discussed the implication of all the second mortgage losses on the market. It was the consensus of most posters that few people have saved up the downpayments necessary to buy a home. Some suggested the need for a first-time homebuyer downpayment assistance program. Who is going to fund it? Or put another way, who wants to lose their money this way? Will this be a government subsidy program where our tax dollars fuel more speculation?

Realistically, there is no solution to the problem of the lack of savings for downpayments. Lenders are not going to provide this money, and the government will not either. The market will not recover until people start saving and accumulate enough to amount to a 20% downpayment. The time will be long, and the amount will be small meaning the bottom will be later and lower than most currently imagine.

When I was growing up, the Christmas season usually kicked off in early December with classic Christmas movies. One that I looked forward to every year was Rudolph the Red Nosed Reindeer. Burl Ives sang all the tunes from that movie. Here we go…

Rudolph, the red-nosed reindeer
had a very shiny nose.
And if you ever saw him,
you would even say it glows.

All of the other reindeer
used to laugh and call him names.
They never let poor Rudolph
join in any reindeer games.

Then one foggy Christmas Eve
Santa came to say:
“Rudolph with your nose so bright,
won’t you guide my sleigh tonight?”

Then all the reindeer loved him
as they shouted out with glee,
Rudolph the red-nosed reindeer,
you’ll go down in history!

Rudolph the Red-Nosed Reindeer — Burl Ives

.Sometimes when I see what people did and how they lived during the bubble, it fills my Reservoir of Schadenfreude. Today’s featured property has a story to tell, and I want to thank Brittney for providing me the detailed mortgage data that allows me to tell it.

Asking Price: $1,249,000

Income Requirement: $312,250

Downpayment Needed: $249,800

Purchase Price: $1,157,000

Purchase Date: 1/6/2005

Address: 24 Shady Lane, Irvine, CA 92603

Beds: 3
Baths: 3.5
Sq. Ft.: 2,629
$/Sq. Ft.: $475
Lot Size: 5,053 sq. ft.
Type: Single Family Residence
Style: Mediterranean
Year Built: 2005
Stories: Two Levels
View(s): City Lights
Area: Turtle Ridge
County: Orange
MLS#: S512996
Status: Active
On Redfin: 8 days

From Redfin, “Best deal around. Great plan 1 in private cul de sac location in the prestige Ledges at Turtle Ridge. Home shows as new very clean private location and great value for the Ledges estate. Nice rear yard area and great street appeal. Truly great deal here priced below most homes in area.”

How can any “plan 1” be worth over $1,000,000?

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This one isn’t a rollback yet, but I doubt the owners care because they have already made their money on the deal. Let’s look at the loan history on this property and see just how these people managed to live over the last 3 years.

The property was purchased in January 2005 for $1,157,000. The combined first and second mortgages totalled $1,156,730 leaving a downpayment of $270. Let’s just call it 100% financing.

By April, they owners were able to find refinancing through Countrywide with a $999,999 first mortgage. This mortgage was an Option ARM with a 1% teaser rate. The minimum payment would be $3,216 per month.

Also in April of 2005, they took out a simultaneous second mortgage for $215,000 pulling out their first $58,000.

So look at their situation: They are living in a million dollar plus home in Turtle Ridge making payments less than those renting, and they “made” $58,000 in their first 4 months of ownership.

Apparently, these owners liked how hard their house was working for them, so they opened a revolving line of credit (HELOC) in August 2005 for $293,000. Did they spend it all? I can’t be sure, but the following certainly suggests they did.

In December of 2005, they extended their HELOC to $397,990.

In June of 2006, they extended their HELOC to $485,000.

In April of 2007, the well ran dry as they did their final HELOC of $491,000. I bet they were pissed when they couldn’t get more money.

So by April 2007, they have a first mortgage (Option ARM with a 1% teaser rate) for $999,999, and a HELOC for $491,000. These owners pulled $333,000 in HELOC money to fuel consumer spending.

Assuming they spent the entire HELOC (does anyone think they didn’t?), and assuming the negative amortization on the first mortgage has increased the loan balance, the total debt on the property exceeds $1,500,000. The asking price of $1,249,000 does not look like a rollback, but if the property actually sells at this price, the lender on the HELOC (Washington Mutual) will lose over $300,000.

These owners will probably just walk away. I doubt they have any assets. They never put any money into the deal, they pulled out $333,000 in cash, and they got to live in Turtle Ridge for 3 years. Not a bad deal — for them.

Karma will not leave these people alone though. They have become accustomed to a lifestyle far beyond their means. Their house was providing them with $111,000 a year in tax-free income. When they get forced out, their credit will be ruined, and they will have to go from living the life of the nouveau riche to being a destitute renter. We can only hope this transition is painful and the memory of what they lost lingers for years.

These people likely drank the kool aid and actually believed this kind of lifestyle could be sustained. That level of ignorance makes it hard to have much sympathy for them. However, when you see the excess of this lifestyle, you can’t help but wonder if it was worth it.

If you knew prices were going to collapse, and the lifestyle was not sustainable (like many on this board did,) would you have done it anyway? When you see the lives led by people like today’s owners, it is not difficult to see why so many chose that life.