Monthly Archives: June 2008

Dodge The Bulls

The Matador — Johnny Cash

Watch out for the raging bull market! Like a matador, you will need to dodge the stampeding bulls as they put in multiple offers over the ask. The matador kills the bull in the end. The market will do the same. There is still a lot of bullishness in today’s market, despite the obvious signs of a catastrophic price collapse. The bullish behavior is a sign that we are nowhere near the bottom, for as many authors and songwriters have noted, “only fools rush in where angels fear to tread.”

Over the weekend, there was a brief discussion of contrarian thinking and investment. I will buy when market sentiment is very negative as will many who come to this blog. There is a huge difference in that kind of contrarian behavior and that being displayed by the knife catchers of today’s market. To believe that a market will suddenly change directions when fundamentals do not support prices and momentum is strongly downward is not contrarian thinking, it is just plain foolishness. When our housing market really does bottom out, market sentiment will be very bearish. Nobody will be drinking the kool aid and believe in rapid price appreciation and people who buy homes will be looked on as being foolish. Of course, when fundamentals of price and rent are in alignment, the purchase will not be foolish, it will be financially prudent not because of rapid appreciation but because it saves money versus renting. Right now, buyers really are foolish, but public opinion doesn’t realize this yet. Once public opinion embraces the foolishness of buying real estate, we will be near the bottom. Until then, expect to see each property that leads the market lower to attract multiple offers and enter escrow quickly. As Forrest Gump noted, “Stupid is as stupid does.”

94 Almador Front 94 Almador Kitchen

Asking Price: $499,000IrvineRenter

Income Requirement: $124,750

Downpayment Needed: $99,800

Monthly Equity Burn: $4,158

Purchase Price:
$262,000

Purchase Date: 4/11/2000

Address: 94 Almador, Irvine, CA 92614

Short Sale

Beds: 3
Baths: 3
Sq. Ft.: 1,407
$/Sq. Ft.: $355
Lot Size:
Property Type: Condominium
Style: Townhouse
Year Built: 1989
Stories: 2 Levels
Area: Westpark
County: Orange
MLS#: S536944
Source: SoCalMLS
Status: Backup Offers Accepted
On Redfin: 10 days

Gorgeous Townhome in West Park Las Palmas!! Quiet, peaceful and
convenient location!! Near shopping, parks and Irvine award winning
schools. Highly desirable open floor plan. Custom paint. Cozy living
room fire place. Recessed lighting in all hall way areas. Hard wood
flooring throughout. Upgraded stainless steel kitchen appliances.
Oversize Master with walk in closet. Master bath features dual sinks
and overhead skylight. Move in condition! Priced below market value!
Show and sell today! MORE PHOTOS AND VIRTUAL TOUR TO BE ADDED SHORTLY!

Notice they forgot the granite when putting in the pergraniteel.

Quiet, peaceful and
convenient location!! I call BS on that one. This property is within 100 yards of the 405.

How many exclamation points can you count?

Kool Aid ManRemember when many of the properties we profiled were 100% financing deals gone bad? Those are still out there, but I have been seeing so many HELOC abuse properties lately that I can’t help but cover them. Today is another sad story of a couple who drank the kool aid and spent their house. Perhaps they will reflect on this fact while they are in their new rental…

  • The property was purchased on 4/11/2000 for $262,000. They put 5% down ($13,100) and borrowed $248,900.
  • On 8/1/2001 they sipped the kool aid with a $255,000 refinance.
  • On 2/7/2003 they refinanced for $252,000. At this point, kool aid intoxication had not taken over.
  • On 8/15/2003 they refinanced for $308,000. Yummy kool aid…
  • On 12/18/2003 they opened a $20,000 HELOC.
  • On 11/20/2004 they refinanced for $368,000. The kool aid was free flowing.
  • On 5/3/2005 they took out a $50,000 HELOC.
  • On 11/2/2006 they opened a stand-alone second for $140,000.
  • On 10/4/2007 they refinanced for $545,000. That was only 8 months ago. Did they make any payments?
  • The total mortgage equity withdrawal is $296,100. They only put $13,100 of their own money into the deal.

One of these days, I am going to put the cash outflows and inflows into an Excel spreadsheet and calculate the internal rate of return on their “investment.” The money was stretched out over 7 years, but the amount they got relative to the amount they invested was pretty good. Of course, their credit is trashed, but they will never again in their lives find an investment that pays like that one did. The lingering memory of all that easy money is what keeps the bulls (fools) rushing in to deals like this one.

.

Johnny CashThe crowd is waiting for the bullfight Matador
My final fight the place is packed once more
But Anita won’t throw me a rose this fight
The one she wears is not for me tonight

She’s watching now with her new love I know
Walk proud and slow
Be strong and sure give the crowd a show
They want blood you know!
You’re still their idol as you were before
Kill just one more!
Remind Anita, you’re the greatest Matador

The time has come, forget Anita in the stands
Be a tall and strong and brave and noble man
Be better than you’ve never been before
Make this your greatest moment Matador

She’s watching now with her new love I know
Walk proud and slow
Be strong and sure give the crowd a show
They want blood you know!
You’re still their idol as you were before
Kill just one more!
Remind Anita, you’re the greatest Matador


The Matador
— Johnny Cash

What would it take to get you to buy a new home, Now?

The homebuilders are obviously stuck in a rut. Sales of new homes in and around Irvine have ground to virtual halt, and in response the builders have attempted one of the following remedies:

  • Suck it up and finish buildout. Communities that are more than 80% built out may find it easier to finish contruction and offer the last units for sale. Observed behavior has been to lower prices modestly and/or wait for someone to buy at a long-standing price.
  • Postpone. This can take the form of postponing the start of a community (Orchard Hills), or postponing the sales even though models are built (Woodbury East). It is theoretically possible for a partially built & sold community to suspend sales with the intent of re-opending, but I am not aware of any examples.
  • Bail out. This can take the form of abandoning plans to build, or more interestingly, actively euthanising a partially built community without any intention to return. Portola Springs’ Decada and Columbus Square’s Astoria are good examples; each shut down after one to two years of sales and not even reaching half of originally planned buildout.

Despite the fact that the market has changed so drastically from that of two years ago, I don’t sense an appropriate level of urgency on the part of homebuilders or the Irvine Company in adapting to the new downward-moving market. I’d like to offer my constructive analysis of what will and won’t work to get customers buying again. Some of these are based on what has been attempted or might be. Others are just ideas.

What Definitely Will Not Work:

  1. Sell even harder the great lifestyle that awaits. We’ve all seen a nauseating number of markeing pitches showing thirtysomethings drinking wine in a back yard or at a dining room table, sunlight trail biking/exercise pictures, and a strange emphasis on shopping that is two minutes away (as opposed to having to drive a whole six minutes to get to the on of the other dozen retail areas in Irvine).
  2. Try to make a big deal out of underwhelming discounts that are (at least) months behind reality. It is not just naive private sellers that demonstrate proclivity in chasing down the market. Despite some relatively aggresive cuts early in the slowdown, new homebuilders also participate in the “day late and dollar short” school of thought by offering $25k or $50k off of residences that were $75k-$100k overpriced when first floated and are now $125k-$150k or more overpriced because time has elasped, the market has worsened, and the prices haven’t changed.
  3. Offer ‘until close of escrow’ price protection. With virtually no sales taking place and inventory likely ready to go, anyone who does purchase probably will have a 30ish day escrow. In this slow of a market, no reductions are likely to take place in that timeframe, and if they did, the buyer can always play the game of I-won’t-close chicken to secure discounts.
  4. Lightly subsidized and/or teaser interest rates. This seems to be a favorite of Laing, and I don’t understand it on two levels. Consumers have learned they can refinance if rates fall, and they know they pay taxes forever on the sales price of the house. Also, weren’t teaser rates the huge contributing factor to the current pickle the market finds itself in? With increased consumer wariness of any “you can afford it for the first XX years” arrangement, it seems unlikely these woudl prove popular.

WOT 6-28-2008

Take It Easy — The
Eagles

Every once in a while, I stop to contemplate the unique place blogs have in
our lives. One such reflection is contained in the post Balance from
late last year. I am constantly amazed at the number of people who come to this
blog daily to read the off-the-wall rants and silly observations we make. When
I reflect on this phenomenon more deeply, I see that is exactly why people come
to blogs like this one.

Media outlets are like restaurants, newspapers are akin to the large chains,
and blogs are like the mom-and-pop restaurants of yesteryear. Large chain restaurants
have a consistent and bland menu of food in order not to offend anyone. If you
are looking for unique, tasty foods, you have to seek out the sole proprietor restaurants
where the cook might prepare something bold and special and offend some of the
general public. The sole proprietor does not need to please everyone to stay in
business. If they develop a loyal clientele that appreciates their food
quality, they will find a supportive niche.

Newspapers have become dumbed down to the point of lacking real news or
substantive analysis. Related to this phenomenon is the strict adherence to the
dictums of political correctness. A few feeble protests from some allegedly
aggrieved party are enough to cause newspapers to retract stories and censure
their output. Is it any wonder the truth has become so hard to find? Also,
newspapers are controlled by the dollars of their advertisers. I can tell the
truth about the housing debacle because I do not worry about the local realtors
pulling their ads from the blog. The fear of economic reprisal is another
factor obscuring the truth. People long for the truth. People want to know what
is really going on and why it is happening — even if this truth offends
someone or is not aligned with a powerful group’s economic interests. Blogs
have become popular because they provide this Truth. Blogs provide a unique
perspective unavailable from traditional publishing outlets.

To change the subject a bit, this week saw a large amount of really bad
news. The stock
market sold off hard
, oil
is topping $140 a barrel
, consumer
sentiment is at its lowest levels since 1980
, the
credit markets are in turmoil
, new
home sales are at their lowest levels ever
, existing
home sales are at very low levels
, and 75%
of the country blames Bush for these problems
. When all the news is that
bad, the contrarian in me thinks it might be time to short oil and buy US
equities. It is always darkest before the dawn, and right now, it is pretty
dark. The housing market will continue to decline, and the financials and
homebuilding stocks will likely continue to decline as well, but I can’t help
but wonder if the broader market is near a medium-term bottom and the economy
is near the bottom of our unofficial recession. This isn’t investment advice,
just an observation on the historic relationship between sentiment and market
activity. If our economic woes continue, the sentiment might be right; however
at some point, sentiment will reach a bearish peak, and that will be when
everything improves.

Falling Like Rain

Raindrops Keep Fallin’ On My Head — B.J. Thomas

In today’s market conditions, there are 4 types of market participants: 1. Renters, 2. Owners who bought before 2002 and did not abuse home equity lines of credit (HELOCs.) 3. Owners who bought after 2002, and 4. Owners who abused HELOCs. Obviously, when prices drop precipitously as they have over the last year, renters are the happiest of the group. Owners who bought before 2002 and did not abuse home equity lines of credit may be bummed that their illusory wealth is disappearing, but they will go on with life much as before. They have no particular reason to be stressed. Owners that bought after 2002 will probably go underwater, and the closer the purchase was to 2006, the further underwater they will fall. Owners who abused HELOCS have put themselves in the same situation as late buyers by increasing their mortgage balances mostly through foolish consumer spending. These last two groups will experience a great deal of stress once the veneer of
denial is stripped from them by the continuing decline in prices.

Stop for a moment and contemplate how large a group of people it is that purchased after 2002 and/or abused HELOCs. Given the degree of kool aid intoxication we all witnessed during the Great Housing Bubble, it is obvious that this describes many, many homeowners. The numerous posts I have done on HELOC abuse are a testament to the scope and scale of the problem. The behavior of these people is not the exception, it is the rule. How many of you know friends or family that fall in this group? Or perhaps the question should be how many of you do not know friends or family that fall into this group? I hope they are preparing themselves financially and emotionally for what is to come. It will not be a good time.

But there’s one thing I know
The blues they send to meet me won’t defeat me
It won’t be long till happiness steps up to greet me

Today’s featured property is a high-end Irvine property rolling back below its 2004 purchase price.

9 Raines Corner Front 9 Raines Corner Kitchen

Asking Price: $1,150,000IrvineRenter

Income Requirement: $287,500

Downpayment Needed: $230,000

Monthly Equity Burn: $9,583

Purchase Price:
$1,200,000

Purchase Date: 8/27/2004

Address: 9 Raines Corner, Irvine, CA 92602

Short Sale

Beds: 5
Baths: 3
Sq. Ft.: 3,374
$/Sq. Ft.: $341
Lot Size:
Property Type: Single Family Residence
Style: Mediterranean
Year Built: 2002
Stories: 2 Levels
Area: Northpark
County: Orange
MLS#: S537735
Source: SoCalMLS
Status: Active
On Redfin: 1 day

New Listing (24 hours)

EXCELLENT Corner Location**Largest Manchester Model Rarely Available**
Open Floor Plan*Travertine Flooring*Highly Upgraded Kitchen
W/Stainless, Granite, Euro-Cabinetry, Large Breakfast Bar/Island*Main
Floor Bedroom W/Full Bath*Family Room W/Media Niche, Gas
Fireplace*Upstairs Desk/Computer Area with Built-In Cabinets*Spacious
Master with Retreat/Dressing Area, Built-In Vanity, Master Bath Has
Seperate Sinks, Tub and Shower, Large Walk-In Closet*Large Upstairs
Laundry Room*Upgraded Backyard with Built-In BBQ & Bar Seating,
Fireplace and Water Fountain. *Resort Style Amenities with Low Tax
& HOA*Tustin Unified School District*

When did asterisks become periods? Is there something wrong with periods? Is the asterisk supposed to catch my attention in a positive way? I think it just makes realtors look stupid.

Why Is Every Word Capitalized? I suppose it is easier to read than ALL CAPS, but it is just as unnecessary.

There is an interesting subplot to this property. The current owner purchased the property from someone who paid $638,000 on 8/12/2002. In two years, that owner made $562,000. It is a good thing the greater fool came along because he was abusing his HELOC before the sale. I followed this owner to a property in Woodbury where he opened a HELOC for $100,000 shortly after buying a new house with a small downpayment. I don’t know what he did with the $562,000 he made, but it isn’t serving as equity in the new property. HELOC abuse is everywhere. There are so many people who are so screwed…

When this property was purchased in summer of 2004, the borrower put $60,000 down on a $1,200,000 purchase. In the summer of 2006, the borrower took out a HELOC for $90,000 and drained all his equity. The total debt on the property is $1,230,000. If this property sells for its asking price and a 6% commission is paid, the total loss on the property will be $149,000. The borrower will make $30,000 while the lender loses $149,000, assuming of course that the house sells for its asking price.

There has been much speculation about the apparent resiliency of the high end. If any of you have been going to Piggington.com, you have seen what has been going on in San Diego.
It hasn’t been pretty. I have forecast a 40% decline in prices here in
Irvine. The low end of San Diego’s market is almost there already. Ours
is not far behind. The low end of the market leads prices higher or
lower (see The Plankton Theory Meets Minsky.)
When prices are rising at the low end, sellers are flush with cash from
the sale of their property and use this money as downpayments on larger
homes which push those prices higher and so on through the housing
market. When prices are falling at the low end, sellers do not have
significant (or any) equity to move up to a larger property. This
depresses prices up the housing scale in the same way higher prices
boost them. The sharp decline of prices at the low end of the market
will act like an anvil weighing down all prices. Part of the greater resiliency of the high end is that subprime loans were not concentrated there. The Alt-A and Prime borrowers still used toxic financing, and their loans will blow up, but many will have greater holding power after their mortgage explodes, and they are not scheduled to explode until 2009-2011. In short, the high end
will fall, it will just take a bit longer.

Thus concludes another 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.

😉

.

Raindrops keep fallin’ on my head
And just like the guy whose feet are too big for his bed
Nothin’ seems to fit
Those raindrops are fallin’ on my head, they keep fallin’

So I just did me some talkin’ to the sun
And I said I didn’t like the way he got things done
Sleepin’ on the job
Those raindrops are fallin’ on my head, they keep fallin’

But there’s one thing I know
The blues they send to meet me won’t defeat me
It won’t be long till happiness steps up to greet me

Raindrops keep fallin’ on my head
But that doesn’t mean my eyes will soon be turnin’ red
Cryin’s not for me
‘Cause I’m never gonna stop the rain by complainin’
Because I’m free
Nothin’s worryin’ me

Raindrops Keep Fallin’ On My Head — B.J. Thoma

More HELOC Abuse

I Hate You — Slayer

I get surprisingly little hate mail. Some of the pieces I have received came after HELOC abuse posts. On one of them, I had several women from a support group relay a sob story to me attempting to justify the serial HELOC abuse of their friend. I replied that a group pity-party that enabled and justified their friend’s behavior was not doing her any favors. They were not impressed. So today’s featured song is dedicated to me — it comes from all the realtors, HELOC abusers, disgruntled homeowners, and anyone else who does not fully appreciate the public service we are providing here at the Irvine Housing Blog.

Today’s featured property is another pretender who made themselves look rich by spending the equity from their home in a spiral of ever-increasing debt. I wonder how much HELOC money is under that tree?

4951 Lori Ann Inside

Asking Price: $750,000IrvineRenter

Income Requirement: $187,500

Downpayment Needed: $150,000

Monthly Equity Burn: $6,250

Purchase Price:
$326,000

Purchase Date: 5/1/2001

Address: 4591 Lori Ann, Irvine, CA 92604

Short Sale

Beds: 5
Baths: 4
Sq. Ft.: 2,500
$/Sq. Ft.: $300
Lot Size: 5,594

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Year Built: 1970
Stories: 2 Levels
Area: El Camino Real
County: Orange
MLS#: P640071
Source: SoCalMLS
Status: Active
On Redfin: 23 days

This is Gorgeous home in great location!Rebuilt in 2004.Elegant dining
and living area. Fireplace is in Family room. Two masters bedrooms.
Short Sale.

Rebuilt in 2004? I suppose that is where the half million dollars went… not.

This is a classic HELOC abuse story requiring the bullet-point recap:

  • The house was purchased on 5/1/2001 for $326,000. The buyer put 20% down ($65,200) and borrowed $260,800
  • On 10/10/2001 they opened their first HELOC for $50,000.
  • On 1/29/2003 they refinanced with a $310,000 first mortgage.
  • On 4/17/2003 they opened two HELOCs for $38,000 and $82,000 respectively.
  • On 2/25/2004 they opened another HELOC for $107,000.
  • On 11/29/2004 they refinanced with a $650,000 first mortgage.
  • On 2/14/2005 they opened two HELOCs for $66,000 and $125,000 respectively.
  • On 2/15/2007 they refinanced into an Option ARM with a 1% teaser rate for $744,000
  • On 4/3/2007 they opened two HELOCs for $93,000 and $57,000 respectively.
  • Total debt on the property is $894,000.
  • Total Mortgage Equity withdrawal of $633,200 including their original downpayment.

If this property sells for its asking price and a 6% commission is paid, the total loss on the property will be $189,000. Wells Fargo will be absorbing most of that loss with its two HELOCs. Express Capital Lending originated the first mortgage and may be liable for some of the remainder.

Question of the day: Who was acting more foolishly, the lender or the borrower?

.

SlayerYou were just a waste of sperm
They way you look
Makes my stomach turn
The way you think
Is no way at all

God you really think you have balls

I hate you aint it true
I hate you and everything you do

You walk around like a f@#$ing dick
And everytime youre near
You know I get real sick

Youre so stupid
Theres nothing in your head
God how I wish that you were dead

I hate you aint it true
I hate you and everything you do


I Hate You
— Slayer