Monthly Archives: May 2009

Open Thread 5-30-2009

The big news this week was the implosion of the Treasury market for 10-year Notes. The yield on these has a strong impact on mortgage interest rates. Mr. Mortgage discussed this in his recent entry, 5-28 – Potential Consequences of 5.5% Mortgage Rates. He walks you through all the implications of the mortgage meltdown. He then followed up with 5-29 – ‘The Day After’ the Interest Rate Spike. The bond markets rallied and the spike may be reversed, or this may be the end of low interest rates. The next two weeks will be critical.

You can find IrvineRenter on Twitter. I figured out how to get the IHB posts to automatically feed into it. So if you are into Twitter, you can follow the IHB there as well.

Happy Anniversary — The Flintstones

Tomorrow is our ninth Wedding Anniversary, so I want to wish my wife a happy anniversary. I love you.

The chart below is one of the more interesting I saw this week. It is hard to deny there was a real estate bubble in Las Vegas. Look at the trajectory of the line; you have to suspect there will be some downside overshoot.

Check out the carnage in Riverside County. The median home price there is now $179,000. There is no way Orange County in general and Irvine in particular can sustain its prices when substitute housing is that much cheaper in Riverside County. The historic price differential between Riverside County and Orange County will re-establish itself, it is only a matter of time. I doubt it will happen by a large increase in prices in Riverside County.

Falling Starland

Prices are still falling, and wise owners with equity are getting out while there is still some bubble equity left. There are not many of these people, but their movement against the masses of the kool aid intoxicated will give them greater profits than those that “wait and see.”

119 Fallingstar kitchen

Asking Price: $299,567

Address: 119 Fallingstar, Irvine, CA 92614

{book2}

Afternoon Delight — The Starland Vocal Band

I admire the people who manage to sell a speculative asset for a profit. As I described in Speculation or Investment? it is a very difficult thing to do because it is at odds with your emotions. Today’s featured property owner missed the peak, and by holding on for the last two years, she has left about $100,000 sitting on the table (as evidenced by the June 2007 prices), but she is still selling when she is not financially distressed, and by doing so she will likely capture $100,000 in bubble equity before it disappears as well.

Why Speculators Fail

Despite the huge price spike in the
final two years of the bubble caused by wild speculation, most
speculators will lose a great deal of money. The causes are rooted in
basic human emotions that work against making the proper decisions to
profit in a speculative market. The moment a speculative asset is
purchased and the speculator has taken a position in the market,
emotions are immediately in play. If the potential resale price in the
market is rising, the natural reaction is to want more. Greed takes
over and the asset is strongly coveted by the speculator. If possible,
the speculator will go out and purchase more of the asset in question.
This was common in the bubble when people would take the equity from
one property and purchase even more residential real estate. The
problem with this natural emotional reaction is that it prevents the
speculator from selling the asset and taking profits when they are
available. People who make a living participating in speculative
markets have learned to override this natural instinct and sell when
their emotions are telling them to buy more. The average residential
real estate speculator does not have this discipline or awareness. They
will hold the asset through the good times.

Speculation

When prices begin to fall in a speculative market,
most speculators immediately lapse into denial. They were so
emotionally rewarded by purchasing and holding the asset, they see no
reason to believe the first signs of a declining market are anything
other than a temporary aberration. As prices continue to fall, the
emotions change: fear begins to creep in, and the battle between denial
and fear goes on well past the breakeven point where the speculator
could have closed the position without losing any money. As prices fall
further, the fear begins to take an emotional toll and the speculator
starts to feel pain. The further prices drop, the more pain is
inflicted on the speculator. What is the natural reaction to pain? Push
it away. As a speculative investment becomes painful, the natural
reaction is to want to get rid of it. This prompts the speculator to
sell the asset – only after they have lost money. A speculator’s
emotions always work against them. When the asset is rising in price
they want more of it, and when it is falling in price they want less.
This is a natural reaction, and it is the cause of all losses in
speculative markets. This is why most speculators fail.

In case any of you missed Mr. Mortgage’s recent entry, 5-28 – Potential Consequences of 5.5% Mortgage Rates, he walks you through all the implications of the little-noticed mortgage meltdown that occurred this week. Our spring rally may come to an abrupt halt and many properties may fall out of escrow unless the borrowers locked their rates in.

119 Fallingstar kitchen

Asking Price: $299,567

Income Requirement: $75,000

Downpayment Needed: $60,000

Monthly Equity Burn: $2,500

Purchase Price: $171,000

Purchase Date: 4/30/1998

Address: 119 Fallingstar, Irvine, CA 92614

Beds: 2
Baths: 2
Sq. Ft.: 1,227
$/Sq. Ft.: $244
Lot Size:
Property Type: Condominium
Style: Contemporary
Stories: 2
Floor: 1
Year Built: 1984
Community: Woodbridge
County: Orange
MLS#: P688358
Source: SoCalMLS
Status: Active
On Redfin: 3 days

This is NOT a short-sale or an REO, just a seller who wants it sold
NOW. This home has everything: Two master bedrooms each with a full
bath plus a large loft area. There are lots of windows, a skylight and
an enclosed patio, a great room, laundry room, plenty of storage and a
garage. No one is above you, no one is below you and there’s only one
shared wall on this end unit with high ceilings. You feel like you’re
in a detached house. A few steps away from the door is the
well-maintained pool area with dozens of chaise lounges, so bring
sunscreen. Enjoy your coffee in the sun-splashed kitchen in the morning
or watch the sunset from the spa. There are dozens of parks near by
with volleyball courts and bike trails, yet you’re close to the
freeway. Live in a great school district in the safest city in the
nation near hip shops and restaurants.

That description is not too bad; it is accurate, and it has a minimum of flowery adjectives, and no bizarre punctuation.

This owner lost $100,000 or more waiting for two years to sell, but there is still plenty of bubble equity available. This condos will see prices near $200,000 before this is over with.

This property was purchased on 4/30/1998 for $171,000. The owner used a $163,050 first mortgage and a $7,950 downpayment. There was a refinance in 2003 for $161,500, probably to secure a lower interest rate. This owner was very responsible.

If this property sells for its current asking price, and if a 6% commission is paid, this owner stands to make $110,592. It will be a nice return on her $7,950 initial investment.

I hope you have enjoyed this week at the Irvine Housing Blog. Be sure
to come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

house bubble

{book7}

Gonna find my baby, gonna hold her tight
gonna grab some afternoon delight.
My motto’s always been; when it’s right, it’s right.
Why wait until the middle of a cold dark night.
When everything’s a little clearer in the light of day.
And you know the night is always gonna be there any way.

Sky rockets in flight. Afternoon delight. Afternoon delight.

Afternoon Delight — The Starland Vocal Band

Pendulum

Do housing market prices in California swing like a pendulum? It appears that way, but the forces behind the movements are entirely caused by people rather than forces of nature.

Asking Price: $492,000

Address: 4 Pendelton, Irvine, CA 92620

Granite — Pendulum

Just leave this place behind,
Ill grill your place, don’t mind.

The cool we know will rise under, they are the future.
Future!

Today’s featured song is from the many readers of the IHB to the overextended homedebtors everywhere. The people who have too much debt should do themselves a favor and just leave their properties behind. No government program is going to save them, and they are just stressing themselves out waiting for a bailout that is not coming. The cool people we know who read the IHB will rise up and buy they properties for under their current fantasy prices. The readers of the IHB are the future. Future!

I was party to a recent open discussion on the housing market, and I am always struck by the idea that housing market prices cycle like the phases of the moon. Cycles of nature obey laws of physics and are not impacted by the activities of man. Economic cycles–like prices in real estate markets–are solely determined by the activities of man and do not obey any laws whatsoever. This distinction is critical because people act as if the real estate cycle is something beyond control; it isn’t. No individual can control the market, we can only react to it, but collectively with changes in incentives and education, we could change the behavior of individuals and make real estate markets considerably less volatile. The pendulum does not need to swing so violently.

As many of you have probably noted, I am an idealist at heart. I would like to see buyer’s behavior change, I would like to see the real estate sales industry change, I would like to see the lending industry change, and I would like to see all the players who inflated the housing bubble be held responsible; this probably is not going to happen. Perhaps a decade from now when we have completed our final wave of foreclosures, the pendulum might swing the other way, and we might inflate another housing bubble. People will forget the folly of The Great Housing Bubble, just like they forgot the bubble from the late 80s, and they will convince themselves “it is different this time”; it won’t be.

Asking Price: $492,000

Income Requirement: $123,000

Downpayment Needed: $98,400

Monthly Equity Burn: $4,100

Purchase Price: $375,000

Purchase Date: 9/11/2003

Address: 4 Pendelton, Irvine, CA 92620

Beds: 3
Baths: 3
Sq. Ft.: 1,805
$/Sq. Ft.: $273
Lot Size: 2,300

Sq. Ft.

Property Type: Condominium
Style: French Country
Stories: 2
Floor: 1
Year Built: 1981
Community: Northwood
County: Orange
MLS#: S573943
Source: SoCalMLS
Status: Active
On Redfin: 13 days

BANK OWNED!! Upgraded three bedroom townhome featuring newer kitchen
cabinets, granite counters, newer vanities with granite in all baths.
Fireplace in large master bedroom.

  • This property was purchased on 9/11/2003 for $375,000. The owners used a $255,000 first mortgage and a $120,000 downpayment.
  • On 5/25/2004 they opened a HELOC for $100,000.
  • On 5/10/2005 they refinanced with a $349,000 first mortgage.
  • On 8/26/2005 they opened a HELOC for $100,000.
  • On 12/15/2005 they refinanced with a $488,000 Option ARM with a 1.25% teaser rate.
  • On 6/26/2006 they opened a HELOC for $75,000.
  • Total property debt was 563,000 plus negative amortization.
  • Total mortgage equity withdrawal was $308,000 including their downpayment.

Indymac The FDIC bought the place at auction on 3/20/2009 for $459,233.

Foreclosure Record
Recording Date: 11/12/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000529916

Foreclosure Record
Recording Date: 07/18/2008
Document Type: Notice of Default
Document #: 2008000345071

Foreclosure Record
Recording Date: 07/10/2008
Document Type: Notice of Default
Document #: 2008000330939

If this property sells for its current asking price, and if a 6% commission is paid, the US taxpayer through the FDIC will lose $100,520 plus negative amortization, lost payments and other fees.

{book3}

Just leave this place behind,
Ill grill your place, don’t mind.
And you’re the only one, ‘cos you’re up on defense.
This is a new way!

We are standing by, no time to hide, no meeting half way.
You were sucking life through the needles eye, this is a new day.
They have won!

We would have reckon now, what we have done, left in the open.
The cool we know will rise under, they are the future.
Future!

Granite — Pendulum

Move-Up Housing

Move-up housing is not an equity appreciation play as most people think. True move-up housing is cashflow savings technique that will be in vogue again in a few years.

Today we have another condo in Orangtee rolling back to 2003 pricing.

294 Lemon Grv kitchen

Asking Price: $299,000

Address: 294 Lemon Grove, Irvine, CA 92618

{book1}

Did you see the weekend post, HELOC Abuse San Clemente Style? Kelli Hart has a follow up on South Coast Homes.

Move Along – The All-American Rejects

Speak to me, when all you got to keep is strong
Move along, move along like I know you do
And even when your hope is gone
Move along, move along just to make it through
Move along
Move along

Most people in California do not understand how move-up home ownership really works. Most believe you buy a relatively inexpensive property and take the appreciation from a few years of ownership and move up to a more expensive property. The craziness of this idea is obvious; the property you want to move up to has also appreciated, and it is just as far out-of-reach as it was when you bought the less expensive home.

The reason the fallacy of move-ups persists is because there are often periods where prices rise faster than incomes, and during those times, failure to buy means either you buy less later, or you wait out the real estate cycle and buy after the next crash. In short, you won’t be priced out forever, but you can be priced out for long periods of time. Failure to buy during price rallies becomes a move-down; this in turn feeds the move-up myth.

The only real move up occurs when you either (1) save money from your wage income, or (2) you get a significant pay raise and can afford a larger mortgage. Those are the only two ways to move up.

Given the importance of savings to obtain better real estate, move-up home ownership must utilize cashflow savings techniques in order to be successful. You must buy a property for less than its rental equivalence and pocket the difference. Owning small condominiums does have a legitimate place in the move-up market, not by providing savings through appreciation, but by providing an opportunity to save through a cost of housing that is less than rent. Of course, this requires the discipline of saving–a virtue in short supply in California–but if you can own a small condo and save extra money, you have taken the first step toward move-up home ownership.

Cashflow saving through ownership will become popular again once condos like today’s featured property crash all the way down to investor levels. The people who buy for move-up at those prices will be in a position to accomplish their goal or saving to buy a nicer property. That is the way the move-up market works in the rest of the country. It is coming to California again soon.

294 Lemon Grv kitchen

Asking Price: $299,000

Income Requirement: $74,750

Downpayment Needed: $59,800

Monthly Equity Burn: $2,491

Purchase Price: $300,000

Purchase Date: 8/26/2003

Address: 294 Lemon Grove, Irvine, CA 92618

Beds: 2
Baths: 2.5
Sq. Ft.: 1,154
$/Sq. Ft.: $259
Lot Size:
Property Type: Condo/Co-op
Community: IRVINE
County: Orange
MLS#: 09-350463
Source: TheMLS
Status: Active
On Redfin: 87 days

THIS SHORT SALE IS IN AN EXCELLENT COMMUNITY. ALL OFFERS CONSIDERED. *
2 MASTER SUITES * 2.5 BATHROOMS * ENCLOSED PATIO * TILE COUNTERS *
VAULTED CEILINGS * LAUNDRY CLOSET * 2 STORY * HOA INCLUDES 2 POOLS @
SPA, LIGHTED TENNIS COURTS, CLUBHOUSE & WORKOUT ROOM * HOA DUES
INCLUDE EQ INSURANCE, HAZARD INSURANCE, WATER AND TRASH PICK UP

ALL CAPS

Asterisks instead of periods

Recording Date: 04/21/2009
Document Type: Notice of Default
Document #: 2009000194237

  • Redfin did not pick up the 2003 sale of this property. It was purchased on 8/26/2003 for $300,000. The owner used a $240,000 first mortgage, a $60,000 second mortgage, and a $0 downpayment.
  • On 4/29/2003 she refinanced with a $316,000 first mortgage.
  • On 8/3/2005 she opened a HELOC for $55,000.
  • On 5/11/2006 she opened a HELOC for $55,000.
  • On 7/31/2007 she refinanced with a $385,500 Option ARM with a 2% teaser rate. The credit crunch occurred 8 days later.
  • Total debt is $385,000 plus negative amortization.
  • Total mortgage equity withdrawal is $85,000.

This owner managed to withdrawal $85,000 in four years of ownership. In all likelihood, this woman spent the money. Even if she had tried to use it to move up, the properties she would have been bidding on would have appreciated by at least $85,000 so she was no better off in 2007 than she was in 2003.

The fact that so many people spent their appreciation rather than saved it or put it into a move-up shows just how depleted our savings really are. Sure, our market is currently being supported at low volumes by a few people with large cash downpayments, but that cannot continue forever. High prices did not happen because people with cash bought properties; it happened because people with no cash were allowed to bid whatever they wanted for real estate. Once the buyers with cash have purchased their knives, the weight of supply will push prices down again.

{book4}

Move Along – The All-American Reject

Speak to me, when all you got to keep is strong
Move along, move along like I know you do
And even when your hope is gone
Move along, move along just to make it through
Move along
Move along

Subdivisions

Not every neighborhood in Irvine is well planned. In fact, the section of El Camino Real between Yale and Jeffrey is rather poorly planned, and the property values suffer there as a result.

4882 Flagstar Cir kitchen

Asking Price: $559,000

Address: 4882 Flagstar Circle, Irvine, CA 92604

Subdivisions — Rush

Sprawling on the fringes of the city
In geometric order
An insulated border
In between the bright lights
And the far unlit unknown

Most of the Villages of Irvine are very well planned. The Irvine Homes blog recently featured my Community Profile of Deerfield. It is a little known but extremely well-planned community.

Deerfield Map

Deerfield is north of Woodbridge bounded by Irvine Center Drive,
Culver Drive, Yale Avenue and the rail line which bisects Irvine.
Deerfield Avenue is the main collector street moving traffic throughout
the community. There is an apartment complex at the corner of Irvine
Center and Culver, and there is other high-density housing north of
Deerfield Avenue near the railroad tracks. The remaining housing is a
mixture of one and two story dwellings. Deerfield was one of the
earlier communities developed. It’s buildout was complete in 1976.

Deerfield Map 2

Life in Deerfield revolves around the large community park. This
park together with an elementary and middle school comprise a large
central greenspace. There are a series of pathways linking three
satellite parks to the community park. This is a great master plan
which allows children to walk or bike to school or the park without
crossing busy streets.

Another important feature of Deerfield is the way vehicular circulation is handled. There is no property in Deerfield that requires you to drive by more than 20 houses before you reach a collector street which leads you to a main arterial. Most people do not notice subtleties like that, but it is important from both a traffic standpoint and an aesthetic one. Driving past 100 or more garage doors while traveling to or from your property is often a traffic nightmare, and it is never an attractive journey.

{book2}

There are some communities in Irvine that are not very well planned. As mentioned in the introduction to this post, El Camino Real is one of them.

El Camino Real Map

Subdivisions like this are created because they are very cost efficient. Long straight double-loaded streets in a grid formation with a minimum of intersections provides the biggest lot yield with the lowest possible cost. That is why you see grids with long streets in old neighborhoods. Builders and developers could not care less about how ugly neighborhoods like this are because they want to produce houses for the lowest possible cost in order to maximize their profits. It is only in master-planned communities where developers believe they can obtain a premium for good planning where you will see layouts other than generic grids.

The map above is the section of El Camino Real between Yale and Jeffrey. At the bottom right of the subdivision, there is a street called Dahlquist. Imagine you live in the middle of that street, and you want to go somewhere. How many turns do you make and how many houses do you pass before you exit the subdivision on either Walnut or Yale? I count at least three internal intersections plus at least one 90 degree turn before coming to the intersections at either Yale or Walnut. Plus, I don’t see a route where you would pass less than 80 driveways on your way out. Scroll back up to the Deerfield map and look how much different (better) the street layout is.

When you drive around this section of El Camino Real, you also notice a lack of street trees or consistent landscape maintenance. Also, over time, residents fill up their garages with crap, and acquire vehicles for teenagers, so the driveways and streets are always full of cars. You don’t get a warm fuzzy feeling driving through neighborhoods like that. Of course, the flipside is that you have no HOA to deal with: no fees and no hassles. The lots and the houses on them are among the largest in Irvine. If you hate HOAs and you want the biggest house on the biggest lot for the least amount of money, El Camino Real is the neighborhood for you.

El Camino Real was planned and built out before Donald Bren bought the Irvine Ranch and committed to utilizing superior community planning to create the Irvine premium. Obviously Donald Bren’s plan has been very successful, and it has justified the additional expense for creative street patterns and additional acreage in parks.

4882 Flagstar Cir kitchen

Asking Price: $559,000

Income Requirement: $139,750

Downpayment Needed: $111,800

Monthly Equity Burn: $4,658

Purchase Price: $649,000

Purchase Date: 2/28/2006

Address: 4882 Flagstar Circle, Irvine, CA 92604

Beds: 4
Baths: 2
Sq. Ft.: 1,202
$/Sq. Ft.: $465
Lot Size: 5,500

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary/Modern
Stories: 1
Year Built: 1971
Community: El Camino Real
County: Orange
MLS#: S575268
Source: SoCalMLS
Status: Active
On Redfin: 1 day

Turkey You will fall in love with this home! It has a very cozy feel to it.
This is a beautiful newly remodeled property!! This home is turnkey and
ready for a great family. Seller just spent $50,000 to remodel/upgrade
inside and out. New kitchen, paint, carpet, landscape, etc etc. No one
has lived in it since the work was done. It is a very family oriented
cul-de-sac. Desirable central Irvine location in award winning Irvine
School District, near many parks, shops, library and easy freeway
access. No HOA or Mello roos and low tax rate. All appliances (brand
new stainless steel fridge) come with the home. This will be a lovely
home for a nice family.

Foreclosure Record
Recording Date: 02/11/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000063375

This property was purchased on 2/28/2006 for $649,000. The owner used a $519,200 first mortgage, a $129,800 HELOC and a $0 downpayment. If this property sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $123,540 which basically wipes out the HELOC.

{book4}

Sprawling on the fringes of the city
In geometric order
An insulated border
In between the bright lights
And the far unlit unknown

Growing up it all seems so one-sided
Opinions all provided
The future pre-decided
Detached and subdivided
In the mass production zone

Nowhere is the dreamer
Or the misfit so alone

Subdivisions —
In the high school halls
In the shopping malls
Conform or be cast out
Subdivisions —
In the basement bars
In the backs of cars
Be cool or be cast out
Any escape might help to smooth
The unattractive truth
But the suburbs have no charms to soothe
The restless dreams of youth

Subdivisions — Rush