Monthly Archives: August 2008

Open Thread 8-30-2008

The End — John Clinebell

Today’s featured song was sent by a local musician who is an avid reader of the blog. I bet you can guess his name…

The crash at the end of a speculative bubble can be brutal. So far, the price decline in Irvine has been measured and orderly compared to the drops in less desirable markets. I was recently looking at properties in the Palm Springs market, and I found some of the new neighborhoods that were the carnage is simply breathtaking. Check out some of these listings at around 50% off their new home sales price of 2 years ago:

41213 Doyle St Indio,
CA 92203 — Original Price: $468,500 — Asking
Price:
$232,750

82952 Plymouth Dr Indio,
CA 92203 — Original Price: ? — Asking
Price:
$243,000

41425 Hanover St Indio,
CA 92203 — Original Price: $455,500 — Asking
Price:
$249,900

I could list more, but I think you get the point. The Palm Springs market may have some chance of recovery as baby boomers may want to go here when they begin to retire soon. If you want to see carnage in a market that is not likely to recover any time soon, take a look at Hemet/San Jacinto:

761 Salinger Pl San Jacinto,
CA 92583 — Original Price: $363,500
— Asking Price: $199,900

The interesting thing about all of these properties is that they are selling for less than replacement cost. With asking prices around $85/SF, that is the cost of construction of the box itself. Even if the lots were free, a builder could not build and sell a house on it and make any money. There will be no new construction in these markets until prices rise above replacement costs, and then it will only occur on already finished lots selling at an extreme discount. There will be no new development or construction of finished lots until prices rise back above $130/SF. That is about 50% above current values. As you can see, replacement cost does not put a floor below prices. Ultimately, the lack of new construction will create a shortage, and prices will rise due to supply constraints (assuming the financing is available). However, since we overbuilt in many of these fringe markets, it will take some time to absorb all the existing inventory.

.

stacked behind the door
are the photographs of yours.
in the basket
down the hall
there’s a soccer shirt that i borrowed.

the end isn’t the
end.
the end isn’t the end of this.

picking out the darkened hair
from
each and every happy moment.
i’ve come to terms that have been laid
bare,
quiet sleeping angels in my bed.

the end isn’t the
end.
the end isn’t the end of this.

so don’t you disappoint yourself
again,
you’ll be back home..
you disappoint yourself
again,
you’ll be back home..
you disappoint yourself
again,
you’ll be back home..
before too long..

these discussions with
myself,
the kinds of things that don’t tend to help.
pacing back and
forth with my guitar,
looking way up high on a shelf.

The End — John Clinebell

Time It Right

Time In A Bottle — Jim Croce

Some time ago, I wrote the post Timing Does Matter, to document the financial impact of properly timing the market. Today’s featured property owners show how a family should manage their mortgage, and the benefits that can be obtained in retirement if you sell near the peak of a massive speculative bubble. I commend today’s sellers. They are the role models I will emulate in my own life.

14951 Elm Kitchen

Asking Price: $649,000IrvineRenter

Income Requirement: $162,250

Downpayment Needed: $129,800

Monthly Equity Burn: $5,408

Purchase Price: $59,500

Purchase Date: 8/22/1980

Address: 14951 Elm Ave., Irvine, CA 92606

Turkey

Beds: 4
Baths: 3
Sq. Ft.: 1,873
$/Sq. Ft.: $347
Lot Size: 5,301

Sq. Ft.

Property Type: Single Family Residence
Style: Traditional
Year Built: 1973
Stories: 2 Levels
Area: Walnut
County: Orange
MLS#: S544508
Source: SoCalMLS
Status: Active
On Redfin: 10 days

lite-briteThis home shows with quiet elegance and is truly a Turnkey Home! Enjoy
living at its finest in this tri-lvel home in College Park community.
It features 4 bedrooms, 2.5 bathrooms, new beige carpet, new interior
paint, scraped ceilings, wood banisters & floors, custom entry door
and transom, new dual pane windows, recessed lighting, track lighting,
crown molding, wide baseboards, new energy efficient air conditioner,
and a cozy family room with a fireplace. The newly remodeled kitchen
features granite counter tops, new microwave, tile backsplash and
flooring, recessed lighting, and a garden window overlooking into a
neatly groomed back yard with a spa and built in barbeque. Plantation
shutters in master bedroom, study(bedroom) and master bath. Light and
bright with skylight in hall bathroom. Don’t forget room off master
bedroom allows for plenty of storage. Only walking distance to
elementary school. The HOA has 3 community pools with active swim team,
clubhouse, and parks.

Today’s sellers will have to pardon my irreverence, but “Turkey Homes” and “light and bright” are something I can’t resist.

These people bought this house almost 30 years ago and paid off their original mortgage. They have two small HELOCs which appear to have been used to redo the kitchen and the roof. This should help them sell the property. These people did not participate in the borrowing orgy while everyone around them was. The HELOCs are through a teacher’s credit union, so one or both of the owners are probably teachers. The additional $550,000+ will go a long way toward supplementing a teacher’s pension.

This is how I want to manage my house. They got to live in a nice Irvine property for many years, they paid off their housing debt, they are selling at an inflated price (relative to fundamentals,) and now they can downsize and have some significant cash to enjoy in their retirement. What a great plan!

I don’t intend to make my house my only retirement savings. I set aside money for that purpose irrespective of what might happen with housing. If kool aid intoxication takes over after I buy, I am certainly not above taking advantage of the greed and stupidity of my fellow man — I am not counting on it, but if it should occur, it would be a nice pile of cash to play with when I am ready to stop working.

I salute you Mr. and Mrs. Financially Conservative owners. You have shown the rest of us the way…

I hope you have enjoyed this 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.

.

If I could save time in a bottle
The first thing that Id like to do
Is to save every day
Till eternity passes away
Just to spend them with you

If I could make days last forever
If words could make wishes come true
Id save every day like a treasure and then,
Again, I would spend them with you

But there never seems to be enough time
To do the things you want to do
Once you find them
Ive looked around enough to know
That youre the one I want to go
Through time with

If I had a box just for wishes
And dreams that had never come true
The box would be empty
Except for the memory
Of how they were answered by you

But there never seems to be enough time
To do the things you want to do
Once you find them
Ive looked around enough to know
That youre the one I want to go
Through time with

Time In A Bottle — Jim Croce

Vintage Wine

Vintage Wine — Moody Blues

Isn't real estate supposed to be like vintage wines that get better with age? Rare vintage wines can get very expensive, and unless they turn to vinegar, their prices do always go up. Well it appears the 2006 vintage homes are all turning to vinegar now because they certainly are not appreciating in value.

Today I want to relay a story to you that was told to me by a real estate developer currently buying property in one of our most blighted California bubble markets. His company is purchasing this particular property from the bank for far less than the original loan amount. Do you remember the residual land value calculations from Land Value 101? This particular property was ready for the construction and sale of houses in 2003. The original prices were $400,000 in this particular market. By 2006, houses were selling for $700,000. When sales volumes plummeted, the builder gave up and let the property go back to the bank. The developer ran a proforma using a $275,000 house price. As you can imagine, this did not leave a large residual land value. The bank took the offer. This developer knows he can build and sell houses profitably for $275,000 in this particular market. If prices increase, he stands to reap a windfall. His only real concern is the competition from the REOs, particularly all the previously built homes in this subdivision he is undercutting by over 50%. He knows he is probably going to cause more walkaways, but prices are what they are, and as long as he can build and sell $275,000 houses, it isn't his problem.

Fortunately, for those living in Irvine, the developer is financially stable, and it is concerned about long-term house prices and probably will not cut prices over 50% to move homes. As we noted with the problems in Columbus Grove, those who are off the Ranch are not so lucky. Today's featured property is another of the bad 2006 vintage properties in Woodbury. This seller is really being hosed by his competition as he owes $184,000 more on his property than his comparable neighbor is asking for sale.

142 Vintage Kitchen

Asking Price: $489,000IrvineRenter

Income Requirement: $122,250

Downpayment Needed: $97,800

Monthly Equity Burn: $4,075

Purchase Price: $554,500

Purchase Date: 10/12/2005

Address: 142 Vintage, Irvine, CA 92620

Beds: 3
Baths: 3
Sq. Ft.: 1,526
$/Sq. Ft.: $321
Lot Size:
Property Type: Condominium
Style: Mediterranean
Year Built: 2005
Stories: 3+ Levels
Floor: 1
View: Hills, Mountain
Area: Woodbury
County: Orange
MLS#: S529072
Source: SoCalMLS
Status: Active
On Redfin: 133 days

Unsold in 90+ days

Gourmet Kitchen Award

Beautiful living space in the heart of Woodbury. Enter the outdoor living area down a walkway that opens into a private courtyard with outside fireplace where neighbors gather around patio table & chairs. Ground floor entry with bedroom converted into a home office with built-in. Go upstairs to main level with spacious living room with fireplace & custom built media center. Open plan gourmet kitchen with granite countertops & island, maple cabinets & stainless steel appliances. Top level features the master suite with walk-in closet. The master bath has dual sinks with marble countertops, tub surround and separate shower enclosure. Community amenities include 5 pools, basketball, tennis and volleyball courts. Wonderful, new shopping centers with restaurants. Convenient to 5 freeway and 241 toll road.

That is a well written description. It is so rare, I thought it necessary to comment on it.

This property was purchased on 10/12/2005 for $554,000. The owners used a $443,000 first mortgage, a $110,700 second mortgage and put $300 down. On 3/21/2007 they refinanced their second for $141,000 pulling out a quick $30,000. Now that prices are dropping and they got all they could out of the property, they see no need to keep paying the big debt, so they are walking away. Does anyone blame them? Does anyone think we won't be seeing a lot more of this?

.

I remember the taste of the vintage wine

From '63 through to '69

And I'm proud of the things we believed in then

If I had the chance I'd go around again

Oh I tell you

We were young and free

Oh I'll tell you

'Cause I was there you see

And I look to the future with open arms

And the songs that flow from my old guitar

And I want to be there when the music plays

And the lights go up on the empty stage

Oh I tell you

Music set me free

Oh I tell you

It sounds so good to me

Vintage Wine — Moody Blue

The Art of Speculation

The Art of War — Sabaton

Speculation is a battle. The forces of greed and fear drive the financial markets, and the speculator attempts to profit from these moves. Speculation is not investment, although most do not understand the distinction. Speculation is the battle of the individual against the herd. For those who understand it and have learned to move against the emotional forces of fear and greed, there is opportunity to profit. For those who follow the herd, there are brief moments when profits are available, but few have the discipline to take them. Most speculators are slain by the market.

Like many others, I have a disdain for pure speculative flips.
People who buy properties, make no improvements, and attempt to resell
it for a profit simply inflate market prices. There is no value added.
People who rehab old or run down properties do a community service, and
they earn the money they make. However, flippers are merely financial
parasites profiting by constricting supply at reasonable price points.
Of course, flipping is a dying art, and those who are attempting it now
are losing money which makes for great schadenfreude.

Flipping is much more difficult now, not just because prices are
dropping, but because the constriction of credit and the tightening of
financing terms makes it much more costly and difficult to do. The
Option ARM with 100% financing was the ideal tool for the flipper. It
allowed him to enter the market with none of his own money, it
greatly reduced the carrying cost of the property, and it gave him downside protection in the event prices fell. With these conditions in
place, it is no wonder speculative flipping became the pastime of every
would-be Donald Trump in California.

Another behavior enabled by loose credit during the bubble was
cash-out serial refinancing. With the ability to get access to cash
from the property without selling it, there was no need to sell the
property, and many speculators held their properties and withdrew their
cash as needed. Houses were treated like savings accounts earning a
very high return. Of course, they were not withdrawing free money, they
were adding huge amounts of debt, but since the debt service costs were
low, and since nobody thought they would ever have to pay this money
back out of their income, cash-out refinancing became the rule rather
than the exception.

Today’s featured property is an example of a speculative cash-out
serial refinancing flip-flop. The speculator bought the property with
100% financing using a 1-year ARM, took out some cash, refinanced with
an Option ARM, took out some more cash, and now they are walking away.

23 Muir Kitchen

Asking Price: $599,000IrvineRenter

Income Requirement: $149,750

Downpayment Needed: $119,800

Monthly Equity Burn: $4,991

Purchase Price: $740,000

Purchase Date: 7/9/2004

Address: 23 Muir, Irvine, CA 92620

Beds: 4
Baths: 3
Sq. Ft.: 2,109
$/Sq. Ft.: $284
Lot Size: 4,500

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Year Built: 1977
Stories: 2 Levels
Area: Northwood
County: Orange
MLS#: S544309
Source: SoCalMLS
Status: Active
On Redfin: 11 days

What a fantistic Value in Northwood. Very inviting front yard with nice
landscaping brings you into this 2 story 3 bedroom, 2.5 bath with
seperate family room, formal livingroom and dining room that can be
called a great room. Laminate flooring in the living areas and
staircase and ceramic tile in the kitchen/family room. There is track
lighting in the living areas and celing fans in bedrooms. The forth
bedroom is really a den and can be used as a bedroom. Guest bath has
granit countertops as does the kitchen. There is an in ground jaccuzi
in the patio/deck. Master bedroom is huge with marble floored master
suite and a great balcony and a walking closet. There are vertical
blinds in living areas and a cozy riverstone fireplace adorns the
living room.

fantistic, seperate, celing, granit?

If the “forth” bedroom is really a den, then it should be advertised as a 3/2.

This property is sporting a 20% discount off its 2004 purchase price and represents a significant discount from neighborhood comps.

  • It was purchased on July 9, 2004 for $740,000. The owner used 100% financing — kind of. She obtained a $592,000 first mortgage, when she bought the property and put down $148,000.
  • One month later on August 27, 2004, she obtained a second mortgage for $173,000 and cashed out $25,000 (I wonder how much she kicked back to the appraiser?)
  • On 5/5/2005 she opened a $58,900 HELOC and got some more cash.
  • On 9/27/2005 she refinanced with an Option ARM with a 1% teaser rate for $640,000. She opened another HELOC for $80,000 at the same time.
  • On 11/10/2005 she opened a stand-alone second for $173,000.
  • And finally on 10/27/2006 she opened another HELOC for $250,000.
  • The total of the first and second mortgages is $813,000. If the HELOC was used to pay off the second mortgage, the total debt rises to $890,000. If the HELOC was an add on, the total debt on the property is $1,063,000. I doubt Washington Mutual gave the huge HELOC without paying off the second, but you never know.
  • Total mortgage equity withdrawal was $250,000 not including the recapture of her downpayment.

When speculation pays that well, it isn’t a surprise many people were doing it. Of course, she has to deal with the consequences to her credit, but for $250,000 in free money…

.

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

I stand alone and gaze upon the battlefield
Wasteland is all that’s left after the fight
And now I’m searching a new way to defeat my enemy
Bloodshed I’ve seen enough of death and pain

I will run, they will hunt me in vain
I will hide, they’ll be searching
I’ll regroup, feign retreat they’ll pursue
Coup de grace I will win but never fight

That’s the Art of War
That’s the Art of War

Breaking the will to fight among the enemy
Force them to hunt me they will play my game
And play by my rules I will be close but still untouchable
No more will I see suffering an pain

They will find me no more Ill be gone
I will have them surrounded
They will yield without fight overrun
Coup de grace I will win but never fight

That’s the Art of War
That’s the Art of War

The Art of War — Sabaton

Columbus Lost

Columbus Stockade Blues — Brother Oswald

One of the myths about Christopher Columbus and his voyage to discover a quicker trade route to the East was that he had difficulty getting crewmen to serve because they believed the world was flat, and if they sailed far enough, they would fall off. Similarly, one of the myths about residential real estate is that prices always go up, and if they rise too high, they will not fall off. The people who bought in Columbus Grove did so right at the peak, and the continuing activities of the builders finishing off the community pushed their resale prices off the edge of the flat earth. The drop there has been remarkable.

The Columbus Grove experience shows what happens when large amounts of must-sell inventory is concentrated in one place. When prices become extremely inflated, and the market finally starts to fall, it creates a downward spiral that does not abate until prices are at fundamental valuations. However, the rate of decline is largely dependant upon the amount of must-sell inventory in specific areas. So far, the areas that have fallen the quickest have been those with large percentages of subprime loans (Santa Ana,) large numbers of new homes (Columbus Grove,) or both (Riverside County). This does not mean that the neighborhoods like those in Irvine are immune from the crash, it will just take longer here, and since it will take longer, they may not fall quite as far on a percentage basis because rents and incomes will be increasing as prices fall (we hope). Irvine and other neighborhoods will fall in time, most likely when all the Alt-A and Prime ARMS reset.

22 Honey Locust Kitchen

Asking Price: $880,000IrvineRenter

Income Requirement: $220,000

Downpayment Needed: $176,000

Monthly Equity Burn: $7,333

Purchase Price: $1,226,000

Purchase Date: 8/31/2006

Address: 22 Honey Locust, Irvine, CA 92606

Beds: 5
Baths: 4
Sq. Ft.: 3,168
$/Sq. Ft.: $278
Lot Size: 7,500

Sq. Ft.

Property Type: Single Family Residence
Style: Mediterranean
Year Built: 2007
Stories: 2 Levels
Area: Columbus Grove
County: Orange
MLS#: S537818
Source: SoCalMLS
Status: Active
On Redfin: 61 days

Great Value Columbus Grove’s Fine Home. Highly upgraded with dark wood
floors, designer carpet and travertine & tile floors throughout.
State of the art family kitchen with oversized island with
wine/beverage cooler, 6 burner stove, granite counters and stainless
steel appliances. Custom wought iron stair case, wood shutters and
custom window shades throughout. Master Suite with retreat &
romantic fireplace, spacious walk-in closet with custom organizers,
luxurious jetted bathtub. 4 Bedrooms upstairs, 1 main floor bedroom
& bath, office/den downstairs. Desirable floorplan for a growing
family with 3 car garage. Oversized Great room/Family Room with
fireplace. Corner house at the end of cul-de-sac. Great Irvine Schools
and Association Club house, pool, BBQ & Parks. Close to the
District Shops and Restaurants. So much for the value.

IMO, the front elevation is ugly and boxy.

This property is being offered for 28% off its peak purchase price. Since fundamentals have not caught up much in the two years since this was purchased, it is probably only a little more than half way to its bottom value. This property was at least 100% overvalued at the top, so a full 50% haircut is in order to get the price back to sanity. Maybe in 2 or 3 years if incomes have gone up, this property might be worth $700,000, but on a breakeven cashflow basis today, it is probably only worth $600,000.

The owner actually put some of his own money into this deal. The property has a $980,700 first mortgage and a $184,000 second mortgage leaving a 61,300 downpayment. That loss probably stings a bit, but it is the lender who is getting really hosed. If this property sells for its asking price, the total loss will be $398,800 after a 6% commission. Greenpoint Mortgage originated the loan. There is no telling who owns that toilet paper now.

In many ways, this former loanowner is one of the lucky ones, he has escaped his debtor’s prison. The rest of the neighborhood is trapped, and 15-25 years from now when values get back up to the peak prices they paid, they might be able to get out…

.

Way down in Columbus, Georgia
Want to be back in Tennessee
Way down in Columbus Stockade
Friends all turned their backs on me

Go and leave me if you wish to
Never let it cross your mind
If in your heart you love another
Leave me little darling, I don’t mind

Last night as I lay sleeping
I dreamt I held you in my arms
When I awoke I was mistaken
I was peering through the bars

Many a night with you I’ve rambled
Many an hour with you I’ve spent
Thought I had your heart forever
Now I find it’s only lent

Columbus Stockade Blues — Brother Oswald