Monthly Archives: March 2009

$16,805 Monthly Equity Burn

The North Korean Towers are still dark at night. Prices are still falling and equity is still burning. Even with the huge price reductions, asking prices are still well above fundamental valuations. These units are perhaps the most toxic assets in Orange County.

Marquee at Park Place at Night

Asking Price: $430,000

Address: 3131 Michelson #802, Irvine, CA 92612

Down In It — Nine Inch Nails

Kinda like a cloud I was up way up in the sky and I was feeling some feelings
…but I watched it way too long and that dot was pulling me Down.

I was up above it.
Now Im down in it

I last profiled a property in these towers back in May of 2008 with the post Equity Inferno. The post was very popular. At the time, a realtor who owned the unit was asking $1,080,000 for an eighth floor unit in building 3141. Today we have an eighth floor unit in 3131, the building next door, asking $430,000. That is some serious equity burn.

Just for amusement, I calculated the equity burn for our savvy realtor/investor in 3141 Michelson #808. He paid $1,035,000 three years ago in March of 2006. Over the last 36 months, this property has decline in value $605,000 based on the nearly identical unit being profiled today. That puts the monthly equity burn at $16,805 ($605,000 / 36 = $16,805).

However, you could look at it from his point of view. In May of 2008, this guy tried to sell the place for $1,080,000. Apparently, he must have felt the property was worth this much, if only in his own mind. Therefore, in his world (assuming he accepts the $430,000 comp as the true value), his property has lost $650,000 in value over the last 10 months. That translates to a $65,000 monthly equity burn.

Great investment.

Clearly this qualifies as one of the most toxic assets in Orange County.

3131 Michelson Dr view 3131 Michelson Dr inside

Asking Price: $430,000IrvineRenter

Income Requirement: $107,500

Downpayment Needed: $86,000

Monthly Equity Burn: $3,583

Purchase Price: $679,500

Purchase Date: 1/20/2006

Address: 3131 Michelson #802, Irvine, CA 92612

Beds: 2
Baths: 2
Sq. Ft.: 1,367
$/Sq. Ft.: $315
Lot Size:
Property Type: Condominium
Style: Contemporary/Modern
Year Built: 2006
Stories: 1
Floor: 8
View: City Lights, City
Area: Airport Area
County: Orange
MLS#: S568365
Source: SoCalMLS
Status: Active
On Redfin: 4 days

Enjoy this Luxury Home.. The best in convenient living in Irvine’s
first Luxury High-rise Towers. This lowest priced popular C plan at The
Marquee Park Place features a 2BR & 2BA plus a Den floor plan. Walk
to restaurants , retail and more. This unit also features GE Monogram
stainless appliances, granite countertops, rich cherrywood floors &
Cabinetry, marble finishes in the bath. Enjoy the amennities of 24 hour
concierge, guard gate, billard & meeting rooms, fitness center,
pool, spa, and BBQ’s..

amennities? billard?

For whatever reason, the database on these properties is difficult to sort through. I cannot find the mortgage information. From what we do know, this property is being offered for 37% off its purchase price. If the property sells for asking, and if a 6% commission is paid, the total loss on the property will be $275,300.

I must confess, I get a special schadenfreude from this property. The hubris of buyers there was best epitomized by the exchanged I documented in the last post on these towers. I still think of those poor souls who drank the kool aid and purchased there… and I giggle.

{book2}

Kinda like a cloud I was up way up in the sky and I was feeling some feelings
You wouldnt believe sometimes I dont believe them myself and I decided I was
Never coming down. just then a tiny little dot caught my eye it was just about
Too small to see. but I watched it way too long and that dot was pulling me
Down.

I was up above it.
I was up above it.
Now Im down in it
I was up above it.
I was up above it.
Now Im down in it

Down In It — Nine Inch Nail

Responsible Homeowners are NOT Losing Their Homes

One of the biggest myths of the real estate bubble is that responsible homeowners are losing their homes; they are not.

Today’s featured property is owned by HELOC abusers who already took out almost $900,000, and now they want $400,000 more.

6326 Sierra Elena Rd kitchen

Asking Price: $1,629,000

Address: 6326 Sierra Elena Road, Irvine, CA 92603

{book1}

Right Round — Flo Rida

I’m spendin my money
I’m out of control
Somebody help me

You spin my head right round, right round
When you go down, when you go down down

Interesting song about oral sex HELOC abuse and falling house prices.

Many of the sob stories in the mainstream media have been focused on what are characterized as “responsible homeowners” who are in danger of losing their homes. Several articles of this type have been posted here, and many commenters have noted the extravagances and poor decisions that often make these homeowners look less than completely responsible. Let’s be clear about one thing:

Responsible homeowners are NOT losing their homes.

To see the truth in this statement, one needs to have a clear definition of “responsible homeowner.”

A “responsible homeowner” is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum 28% debt-to-income ratio on the mortgage, at least a 20% downpayment and fixed-rate conventionally amortizing financing.

Few who fit this definition are going to lose their homes; although, some of them may chose to walk away from the debt because they are hopelessly underwater. The only ones who fit the above definition who are in danger of losing their homes are those who lose jobs; they are the truly sad casualties of the housing bubble. Unfortunately, this is becoming more common due to the financial crisis caused by all the homeowners who borrowed irresponsibly.

Responsible borrowers are not the ones defaulting on their mortgages; irresponsible homeowners are.

If “responsible homeowner” is defined as a buyer who believed they could manage their monthly payment and did so until the loan terms changed, then by this definition, many responsible homeowners are going to lose their homes.

Almost everyone who signed up for a toxic loan thought they could make the payment; most did for a while. Many were convinced they could make the payments by a predatory lender out to make a few bucks on the origination. Many more believed they could supplement their incomes with the rapid appreciation they would enjoy as their house values rose to infinity. Does ignorance to their inability to sustain their housing payments make them responsible?

In the political debate surrounding foreclosure moratoriums and homeowner bailouts, the politicians are using the latter definition of “responsible homeowner.” The ignorant and those who knowingly took excessive risk are being rewarded with a government bailout. The prudent are the ones paying the bill.

To see the truth in the importance of these definitions, we need to look no further than the astute observations on this blog. One of our frequent commenters is a responsible homeowner. He purchased near the peak, but he did so with terms that his family can afford. He meets the parameters in the first definition. He is in no danger of losing his house in foreclosure. Yes, he is annoyed that the values have dropped–who wouldn’t be–but he is not going to become a foreclosure statistic.

If you want to know what the lenders really worry about it is that guys like him may chose to go into foreclosure and walk away from the debt. There are already enough irresponsible homeowners on their way to the meat grinder. A wave of walkaways would make sausage of the entire banking industry.

The reality is responsible homeowners are not losing their homes; some may lose their houses because of a job loss, and some may chose to walk away, but very few truly responsible homeowners are endangered. The foreclosure crisis is caused by the irresponsible.

{book3}

Today’s featured property was emailed to me by a reader who was wondering about all the WTF prices in Turtle Rock and Turtle Ridge. This reader sent me an email asking about four properties including the one I featured today. The others I looked at had the following results:

19125 Sierra Majorca, Irvine, CA 92603
Asking: $1,526,827
Paid $1,000,000 in 2003 — No HELOC abuse, but they have a $700,000 mortgage, and a $100,000 HELOC.

11 Bethany, Irvine, CA 92603
Asking: $1,359,000
Paid $645,000 in 2004 — $750,000 first mortgage and a $250,000 HELOC

17 Sunrise, Irvine, CA 92603
Asking: $1,548,000
Paid $675,000 in 1999 — $987,000 Option ARM with 1% teaser rate and a $250,000 HELOC

Of the four properties, three of them had significant HELOC abuse. I usually find a high percentage of for-sale properties have HELOC abuse, not a good sign for the market. When HELOC abusers have to go back to conventional financing, can they afford the payments?

I want you to contemplate how much trouble our market is in. I will use the analogy of drinking and partying and compare the Irvine experience to that of Minnetonka, Minnesota (from the post Southern California’s Cultural Pathology).

Let’s say you are a Minnetonka resident. You make just as much money as residents in Irvine, but your median house price at the peak was $305,000. This is higher than historic norms, but as far as kool-aid partying goes, you had only a few social drinks. If you take an aspirin and drink a big glass of water, you will feel fine in the morning. The Federal Reserve is providing the aspirin in the form of 4.5% mortgage interest rates and the guaranteed ability to refinance your conforming mortgage. You as a Minnetonka resident did not party too hard; your hangover is manageable.

Now imagine you are an Irvine resident. You make a decent living, but instead of paying $305,000 for a median home, you paid $723,000 (or borrowed that much on your HELOC). You had a great time: you bought cars, took vacations, and impressed all your friends and neighbors with how rich you are. You did more than take a few social drinks of kool-aid. You downed the bottle; when that wasn’t enough, you found a bigger bottle, and as the party went on, you finally went intravenous. You are now dependant upon kool-aid (HELOC money), and there is no amount of medicine that can save you from a wicked hangover, delerium termens, and the worst withdrawal pains possible. The Federal Reserve’s medicine is not going to help you; your mortgage is not conforming, and you not going to be allowed to refinance. You are screwed.

People bidding on Irvine real estate in the new financing environment simply cannot bid prices as high as they used to, and they are not going to be able to raise their bids for quite some time. It is very unlikely that prices will rise enough to bail out all the homeowners facing ARM resets. There are too many people who drank too much kool aid (see examples above). All of these overextended homedebtors must be flushed from the system. Based on available data, (1) we know that refinancing is not going to be possible, (2) we know these people cannot afford the payments, and (3) we know that their are not enough buyers who really do make that much money to take over these people’s debts and bail them out. There are no other viable alternatives.

I used to think that Turtle Rock would be spared the worst of the housing correction. Most residents are long-term owners, so there is relatively little toxic financing on purchases. The only thing that could flatten Turtle Rock–other than big declines in neighboring communities–is mortgage equity withdrawal. I didn’t think it could be that bad; perhaps I was wrong.

6326 Sierra Elena Rd kitchen

Asking Price: $1,629,000IrvineRenter

Income Requirement: $407,250

Downpayment Needed: $325,800

Monthly Equity Burn: $13,575

Purchase Price: $292,500

Purchase Date: 11/23/1994

Address: 6326 Sierra Elena Road, Irvine, CA 92603

Beds: 4
Baths: 4
Sq. Ft.: 3,400
$/Sq. Ft.: $479
Lot Size: 6,120

Sq. Ft.

Property Type: Single Family Residence
Style: Craftsman
Year Built: 1972
Stories: 2
View: Hills, Panoramic, Has View
Area: Turtle Rock
County: Orange
MLS#: P680677
Source: SoCalMLS
Status: Active
On Redfin: 4 days

This is the home for you’re family. Custom Craftsman style Beauty.
Exposed beams. Spacious open great room. Kitchen area features a custom
center Island, rich wood cabinetry, and views of surrounding hillside.
This home features custom built-ins throughout. Secluded Master Suite
on first floor. Each Bedroom is extra Large. Walk to Orange County
Register’s #1 rated elementary school Bonita Canyon Elementary.

This is the home for you’re family. This is the home for you are family. That makes sense…

Sentence fragments, random Capitalization.

  • On 11/23/1994 this property was purchased for $292,500. The owners used a $263,200 first mortgage and a $29,300 downpayment. Keep in mind as you read the rest of this section that they only put $29,300 of their own money into the transaction.
  • On 7/16/1998 they refinanced with a $266,300 first mortgage.
  • On 11/12/1998 they opened a HELOC for $30,000.
  • On 11/4/2002 they opened a HELOC for $172,000.
  • On 11/4/2002 they refinanced with a $300,000 first mortgage. By 2002 they had already doubled their debt.
  • On 8/25/2004 they refinanced with a $630,000 first mortgage.
  • On 7/6/2005 they opened a HELOC for $250,000.
  • On 10/27/2005 they refinanced with a $900,000 first mortgage.
  • On 12/14/2005 they opened a HELOC for $155,000.
  • On 5/28/2008 they opened a HELOC for $250,000.
  • Total property debt is $1,150,000.
  • Total mortgage equity withdrawal is $886,800.

These people put $29,300 of their own money into a house in 1994, and they managed to take out $886,800 over the next 14 years. That averages $63,342 a year for 14 years. That is a hard working house. It explains why houses are so desirable, doesn’t it?

WTF

It gets better though, they still expect to make more when they sell it! OMG!

If this property sells for its asking price, these owners will still walk away with another $381,260. The total gain on the sale will be $1,238,760.

Does anyone think this is the way you are supposed to manage your financial life? Are you entitled to a million dollar payday just for owning California real estate? This is insane.

Does this strike you as a “responsible homeowner?”

Do you think we should bail him out? Well, perhaps we will not have to. Someone may buy this house and pay off his debt for him. After all, the house will be worth $3,000,000 15 years from now, right?

{book2}

I’m spendin my money
I’m out of control
Somebody help me
She’s takin my bank roll.
But I’m king of the club
And I’m wearin the crown
Poppin these bottles
Touching these models
Watchin they **** go down down
down down, down down [this line x4]

(Flo Rida)
You spin my head right round, right round
When you go down, when you go down down

Right Round — Flo Rida

Open Thread 3-28-2009

I would like to share with an interesting blog post I read this week at The Housing Chronicles Blog, and at the site of local realtor, Shevy Akason, who has been profiling properties at or below rental parity.

The newly immobile United States

I have asked Shevy to provide both a recently closed good deal in the area plus a property currently for sale. As he closes his deals, they will be featured as the closed deal. I have asked him for this to show (1) there are good deals happening in the market and (2) there are still properties available that make good cashflow investments. The currently available deal may not be a property he recommends for one reason or another, but it is illustrative of what can be found in the market if you look.

South Orange County

3050 S Bristol #15, Santa Ana

I was also particularly impressed by the article posted in yesterday’s comments providing some perspective on the financial mess here in the US: The Quiet Coup.

Here Comes the Sun — The Beatles

Did you know that you can find the floorplan of every new home in Southern California online? As a member of the Building Industry Association, I know about the website NewHomesMatch.com. Unfortunately, nobody else does. I have offered to help call attention the site by linking to them here on the IHB, but I have not heard back from them yet. I thought that perhaps the weekend open thread was a good opportunity to send them some traffic, so please, go check out their beta site at NewHomesMatch.com and let me know what you think. When they get back in touch with me, I will make sure they see your comments.

NewHomesMatch.com

My wife found a new realtor ad on YouTube. He appears to be trying to appeal to women…

It is a warm and sunny weekend. Get out and enjoy it 😉

Fear Is Gripping the Market

Back in September of 2007, I asked the question in a post Is Fear Gripping the Market? Fast-forward to 2009, and I think it is safe to say that fear rules the day.

Today’s featured property is REO that recently sold at auction for 36% off its peak purchase price.

3562 Myrtle kitchen

Asking Price: $593,900

Address: 3562 Myrtle, Irvine, CA 92606

{book6}

The Fear — Lily Allen

Life’s about film stars and less about mothers
It’s all about fast cars concussing each other
But it doesn’t matter cause I’m packing plastic
and that’s what makes my life so f#@$ing fantastic

Remember the good ol’ days of mindless consumerism when houses used to replenish plastic purchasing power faster than pretentious pricks could piss it away. Back then it was trendy to lease your car and own your house; a brilliant way to lose both in a financial downturn.

The people who lived the good life are facing the end of the lifestyles to which they have become accustomed. The reality of this truth is becoming apparent as they release their denial and face their fears…

OMG! NO!

NO! NO! NO!

I want to be rich and I want lots of money

MAKE HOUSE PRICES GO BACK UP! (bargaining)

[silence]

ISN’T THE GOVERNMENT OR THE FED GOING TO SAVE US? (bargaining and recalling past denial)

[silence]

THAT SUCKS! (acceptance)

[silence and a moment of peace]

The psychology of a market is the aggregate of all its participants. Most at the low end have already passed through denial, bargaining, and fear; they have capitulated and reached acceptance. Many at the high end are still in denial, but with the struggling economy, the lack of high-end sales volume and REOs popping up on every street, fear is quickly becoming the new reality.

3562 Myrtle kitchen

Asking Price: $593,900IrvineRenter

Income Requirement: $148,475

Downpayment Needed: $118,780

Monthly Equity Burn: $4,949

Purchase Price: $830,000

Purchase Date: 2/27/2006

Address: 3562 Myrtle, Irvine, CA 92606

Beds: 4
Baths: 3
Sq. Ft.: 2,300
$/Sq. Ft.: $258
Lot Size: 5,200

Sq. Ft.

Property Type: Single Family Residence
Style: Craftsman
Year Built: 1973
Stories: 2
Area: Walnut
County: Orange
MLS#: S567905
Source: SoCalMLS
Status: Active
On Redfin: 1 day

New Listing (24 hours)

Fantastic interior location less than 1 mile to schools, features a
guest suite with full bath downstairs, 3 bedrooms upstairs with master
view deck, double door entry with almost 2,400 square feet – all for
under $600,000! Enjoy community pool, tennis and recreation less than 1
mile away at Harvard Park. Easy access to Jamboree and toll roads and
less than 5 miles to The District shopping and entertainment center.

This property looks updated inside based on the photos. It is one of the less prestigious neighborhoods in Irvine, but the house is large as are the others on this street. It also has a decent sized yard by Irvine standards. It is a solid $425,000-$450,000 property.

This property was purchased on 2/27/2006 for $830,000. The owner used a $663,920 first mortgage, an $82,990 second mortgage, and an $83,090 downpayment.

The owner’s let the property go at a foreclosure auction, and the lender purchased it for $539,597–an amount almost 20% less than the outstanding amount of the first mortgage. This is revealing of where loss mitigation procedures are today. The lender was willing to take a 20% loss at the courthouse steps, and nobody stepped up to buy the property probably because it is still overpriced.

The lender has marked it up hoping to find a knife catcher. If this property sells for its asking price, the total loss on the property will be $271,734 after a 6% commission.

When do you think it will all become clear?
‘Cuz I’m being taken over by The Fear

One more item before you leave. This video was in the comments yesterday. It gives a wonderful explanation of how the Geithner plan is a complex shell game intended to steal taxpayer money. It is not a video of some raving lunatic, but rather a calm explanation of exactly how the process works. I highly recommend watching all 12:28 of it, but if you already understand the basics of the banking problem, you can skip ahead to the 6:30 mark to see how the banks will game the system.

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.

🙂

{book7}

I want to be rich and I want lots of money
I don’t care about clever I don’t care about funny
I want loads of clothes and fuckloads of diamonds
I heard people die while they are trying to find them

I’ll take my clothes off and it will be shameless
‘Cuz everyone knows that’s how you get famous
I’ll look at the sun and I’ll look in the mirror
I’m on the right track yeah I’m on to a winner

[Chorus]
I don’t know what’s right and what’s real anymore
I don’t know how I’m meant to feel anymore
When do you think it will all become clear?
‘Cuz I’m being taken over by The Fear

Life’s about film stars and less about mothers
It’s all about fast cars concussing each other
But it doesn’t matter cause I’m packing plastic
and that’s what makes my life so fucking fantastic

And I am a weapon of massive consumption
and its not my fault it’s how I’m programmed to function
I’ll look at the sun and I’ll look in the mirror
I’m on the right track yeah we’re on to a winner

The Fear — Lily Allen

Steal the Rent

Rent skimming is becoming more common in Irvine as floplords succumb to the financial pressures of crushing mortgage payments and collapsing home prices. Do we need to change our laws regarding these transactions?

Today’s featured property is a short sale that was offered for rent not long ago.

23 Muir kitchen

Asking Price: $525,000

Address: 23 Muir, Irvine, CA 92620

Steal Away — Ozzy Osborne

Steal away, steal away
Steal away–the night
You gotta steal it
C’mon baby

Floplords are flippers turned landlords; they generally fail at both. I noted this about floplords back in March of 2008:

The problems of renting were not confined to the floplords. Sometimes the renters were the ones who suffered. Many floplords collected large security deposits and monthly rent checks from tenants and failed to pay their mortgage obligations. This situation is called “rent skimming,” and it is illegal in most jurisdictions, but this crime is seldom prosecuted. Most of the time, the first indication a renter had that their rent was being skimmed was finding a foreclosure notice on their front door. By the time of notification, several months of rental payments were gone and the renters were evicted soon after the foreclosure. Renters seldom recovered their security deposits.

There is one key provision in rent skimming laws that few know about. Rent skimming only applies to properties owned less than one year. If a long-term homeowner rips you off, it is not illegal. When legislators passed this law, they never considered HELOC and refinance abuse leading owners to skim rents before going into foreclosure. If they had, the law probably would have been written differently.

Today’s featured property was for rent a few months ago. Doesn’t it make you
angry that floplords who obviously are not paying their mortgages are
looking for hapless renters to screw over while the property goes into
foreclosure? Which circle of hell do they end up in?

Now I’ve met your honesty
You are here and I am free

{book5}

23 Muir kitchen

Asking Price: $525,000IrvineRenter

Income Requirement: $131,250

Downpayment Needed: $105,000

Monthly Equity Burn: $4,375

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.: $249
Lot Size: 4,500

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Year Built: 1977
Stories: 2
Area: Northwood
County: Orange
MLS#: S544309
Source: SoCalMLS
Status: Active
On Redfin: 218 days

Unsold in 90+ days

THE HOTTEST BUY IN IRVINE******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.

HURRY!!! This hot deal has only been on the market for 200+ days!!! This deal will not last!!!

seperate? granit? celing? jaccuzi?

  • This property was purchased on 7/9/2004 for $740,000. The owner used a $592,000 first mortgage and a $148,000 downpayment.
  • On 8/7/2004 a $173,000 loan was recorded against the property. This claim appears again later. I am not sure what it is.
  • On 5/5/2005 she opened a HELOC for $58,900.
  • On 9/27/2005 she refinanced the first mortgage with an Option ARM with a 1% teaser rate for $640,000.
  • On 9/27/2005 she also opened a HELOC for $80,000.
  • On 11/10/2005 the $173,000 claim reappears.
  • On 10/27/2006 she opens a HELOC for $250,000.
  • Total property debt appears to be $890,000 ($640,000 + $250,000)
  • Total mortgage equity withdrawal is $298,000 including her $148,000 downpayment.

If the total debt on the property is $890,000, if the property sells for its $525,000 asking price, and if a 6% commission is paid, the total loss to the lender will be $396,500. The owner walks away with $150,000 of the lender’s money, and she takes a hit on her credit score; the lender loses almost $400,000. During the next bubble, I will have to remember to max out my HELOCs every couple of months while I am waiting for prices to collapse. I wouldn’t want to miss any of the free money next time around.

Speaking of Muir…

{book2}

Steal away, steal away
Steal away–the night
You gotta steal it
C’mon baby

Now I’ve met your honesty
You are here and I am free
Broken chains have fallen all around
Point my finger at the fools
Broken chains and broken rules
Let it be rebellion rules tonite

Steal Away — Ozzy Osborne