Monthly Archives: September 2009

Good Planning

Good land planning does add value. Part of Irvine’s success is directly attributable to its superior design and lifestyle engineering.

14 Whitewood Way   Irvine, CA 92612  kitchen

Asking Price: $590,000
Address: 14 Whitewood Way Irvine, CA 92612
{book7}

I, I love the colorful clothes she wears
And the way the sunlight plays upon her hair
I hear the sound of a gentle word
On the wind that lifts her perfume through the air

Im pickin up good vibrations
Shes giving me excitations
Im pickin up good vibrations

Good Vibrations — Beach Boys

In 1968 there were few large-scale master plans, and many of the principals of urban planning were in their infancy. There were many good ideas but little empirical evidence that planned communities would be superior to their unplanned counterparts. Now that these visionary communities of the 60s and 70s are established, we can review and appraise the success of the features the planners got right. University Park was one of these planned communities.

I have lived in University Park for as long as I have been writing for the IHB. I have been able to enjoy some unique neighborhood features that came about by design.

Back when University Park was developed, the majority of housing being built was ranch-style homes from 1,200-1,800 SF. There were very few townhome projects being completed, and few of those were being developed out on the fringe — which Irvine was back in 1968. The planners made a simple supposition: if you cluster development into townhomes, you can obtain a better yield than a conventional subdivision, and you could set aside land for parks linked together by a walking trail.

It worked. University Park is a classic example of what is possible with good planning. Creating a higher quality of life for residents adds value.

University Park does not sell at a premium to other Irvine neighborhoods partly due to its age and party due to the exceptional planning in newer neighborhoods; however, University Park does trade at a premium to similar townhomes in nearby communities. Some of that premium is due to the schools, but in my opinion, most of this value is due to good land planning…. Of course, I could be biased

14 Whitewood Way   Irvine, CA 92612  kitchen

Asking Price: $590,000

Income Requirement: $111,703
Downpayment Needed: $118,000

Purchase Price: $760,000
Purchase Date: 5/3/2006

Net Gain (Loss): -$205,400
Percent Change: -22.4%
Annual Appreciation: -6.6%

Address: 14 Whitewood Way Irvine, CA 92612

Beds 3
Baths 1 full 1 part baths
Size 2,268 sq ft
($260 / sq ft)
Lot Size 2,880 sq ft
Year Built 1968
Days on Market 23
Listing Updated 9/17/2009
MLS Number P701953
Property Type Single Family, Residential
Community University Park
Tract V2

According to the listing agent, this listing is a bank owned (foreclosed) property.

Wonderful two story condo in a great location. Large open floorplan with three bedrooms plus bonus room and two baths. Spacious kitchen has tile floors and counters; open living room with fireplace; main floor bedroom and bathroom with dual sinks; two car attached garage; enclosed front courtyard and large rear patio; new upgrades include new paint and carpet.

Good planning may add value, but it does not justify a housing bubble price. The guy who bought this place for $760,000 used a $608,000 first mortgage, a $59,200 HELOC and a $92,800 downpayment. Ouch!

Irvine Master Plan

For more information, please see Good Planning Goes a Long Way.

Floppers

We now have a closed sale 56% off the peak in the North Korea towers. Armageddon is upon us…

3141 Michelson Dr

Current Asking Price: $499,900

Old Sale Price: $442,000
Address: 3141 Michelson Dr #608 Irvine, CA 92612

Flip, flop and fly
I don’t care if I die
Flip, flop and fly
I don’t care if I die
Don’t ever leave me
Don’t ever say goodbye

Flip, Flop, Fly — Blues Brothers

Fools who speculated in our housing market had no idea the risks they were taking on. To them, you simply bought property and resold it later for easy profits, or better yet, you set up an ATM machine HELOC on the property and live off the unlimited spending money.

The measure of a market’s speculative folly is the drop in prices required to restore sanity; how much lower is the market clearing price than the peak? Well, for these units, I believe we will see 75%-80% off the peak.

The remaining owners in this building have to feel like they are in free fall and they have no choice but to accept the fate that awaits them. I suspect they will not like their results…

3141 Michelson Dr

Current Asking Price: $499,900

Old Sale Price: $442,000

Income Requirement: $83,683
Downpayment Needed: $88,400

Purchase Price: $1,000,000
Purchase Date: 4/17/2006

Net Gain (Loss): -$584,520
Percent Change: -55.8%
Annual Appreciation: -16.2%

Address: 3141 Michelson Dr #608 Irvine, CA 92612

Beds: 2
Baths: 2
Sq. Ft.: 1,520
$/Sq. Ft.: $329
Lot Size: –
Property Type: Condominium
Style: Modern/Hi-Tech
Stories: 1
Floor: 6
View: City Lights
Year Built: 2006
Community: Airport Area
County: Orange
MLS#: P704475
Source: SoCalMLS
Status: Active
On Redfin: 1 day

Sixth floor of the Marquee Park Place High-rise. Granite counters,upgraded counters, high end wood floors, stainless appliance. Refrigerator included. 24 hour guarded service. Entertainers delight. Outdoor covered patio with views of pool and Laguna Mountains. Stackable Washer/dryer included. Special doors, windows & closet doors are solid wood! Check last sale on this one! This won’t last!

I cannot locate the loan information on this property to determine how the $584,520 loss was apportioned. Does it matter? This entire complex is full of $500,000+ losers.

For any of you who might enjoy hearing a lengthy radio interview with me, click here for an MP3 download, or check out the California Commerce website.

The 2011 Inflation Spike

The Federal Reserve will not be raising interest rates for quite some time. When inflation takes off, I believe they will let it go for a while.

1 Blackswan   Irvine, CA 92604  kitchen

Asking Price: $649,000
Address: 1 Blackswan Irvine, CA 92604
{book1}

Extreme ways are back again
Extreme places I didn’t know
I broke everything new again
Everything that I’d owned
I threw it out the window; came along
Extreme ways I know will part the colors of my sea
perfect colored me

Extreme ways they help me
They help me out late at night
Extreme places I had gone
That never seen any light
Dirty basements, dirty noise
Dirty places coming through
Extreme worlds alone
Did you ever like it planned?

Extreme Ways — Moby

During the Cold War, we were taught to believe that centrally-planned economies like Communist Russia or China were bad. The Cold War economy in Communist countries was certainly awful, and the Great Leap Forward did cause millions of people to die a preventable death of starvation. The toll a centrally-planned economy takes on its citizens is enormous.

We like to think our economic system is superior here in capitalist America. Capitalism is certainly superior to Communism at delivering goods and services to the populace, and it is unlikely that millions of people will die of starvation during the Great Recession; however, we have our own version of central planning with the Federal Reserve. We do not have a free market, we just have a lesser degree of central planning and regulation than Communism.

We are starting to look more Communist every day:

  • Federal Reserve is holding interest rates far below free-market levels.
  • The US Government through the GSEs and FHA are also holding down mortgage interest rates.
  • The US Government is providing tax credits to buyers to stimulate demand.
  • Private lending outside of Government insured entities has declined dramatically.

Where is the free market? Don’t expect to see its return any time soon.

US Federal Reserve 1913-Present

The Federal Reserve in the US was formed in 1913. It was thought that central control of the currency would provide greater stability to our economic system and soften the extremes of the boom and bust periods the United States endured in the 19th century. The Federal Reserve didn’t prevent the Great Depression; some would argue it didn’t even mitigate the effects and may have even made it worse.

There is one thing the Federal Reserve has accomplished that is not in dispute; since 1913 the Federal Reserve has inflated away about 95% of the value of our currency as evidenced by the Consumer Price Index. Inflation is the theft of savings; it is a stealth tax on everyone. When money loses buying power, wealth loses value.

Consumer Price Index 1913-2009

Price and Wage Inflation

When the Government measures inflation, they use the Consumer Price Index (CPI). The CPI measures the change in price of a representative basket of goods that is supposed to reflect the general level of price change in the whole economy (it isn’t very accurate). It is not measuring money supply (another measure of inflation), economic growth or anything else; the CPI measures changes in consumer prices. So what causes prices to go up?

Prices can rise for many reasons, but there are two I want to examine closely today; currency devaluation and wage increases. If the currency declines in value, foreign goods become more expensive to import, and prices rise. If wages go up, people have more money to bid on goods and services, and prices rise. A wage and price spiral coupled with a devaluation of its currency is a dangerous economic trap. Argentina, Brazil, Chile, and Mexico experienced these conditions in the 1980s, and Argentina experienced another in 1998-2002.

Devaluation of currency has the biggest impact on a population’s standard of living. A decline in foreign buying power means fewer imported goods for consumption. Without increases in wages, people learn to live with less. This is the road we are heading down.

Deflation

When the credit crunch hit in August 2007, the Federal Reserve responded by lowering the interest rate from 4.75% to 0%. When interest rates first went down, so did the value of our currency. This caused a brief episode of inflation followed by the ravages of deflation due to the losses in the lending industry from The Great Housing Bubble.

The primary cause of deflatioin is the destruction of money through bank losses. When banks lose money, it ceases to exist. Fewer dollars chasing the same amount of goods and services makes for an increase in buying power; deflation. Greater buying power sounds good, but the spectre of a deflationary spiral like the one that caused the Great Depression is very real.

Consumer Price Index September 2004 to August 2009

What Would Ben Do?

Ben Bernanke has written a number of scholarly papers in his life as an academic. He is drawing on this research to weather
this storm in our financial markets. He will likely keep the Federal
Funds Rate as low as he can for as long as he can in order to avoid repeating the mistake policymakers made back in 1937. The Federal Reserve will not raise interest rates in the face of increasing inflation — at least for a while.

If we assume the Federal Reserve will allow inflation to take off — something which it is not supposed to do — then how bad will they let inflation get, and why would they do that?

The first argument the Federal Reserve will make is that the CPI is “behind.” In other words, the deflation we experienced has left the CPI at too low a value. We need inflation to revive the economy with inflation just like we did in 1933. I think this argument is specious, but the Federal Reserve will make it anyway. It is unlikely the FED will be afraid of inflation until well after the crisis passes.

Projected Consumer Price Index 2007-2011

To “catch up” with what inflation should be — at least in the eyes of the Federal Reserve — how high might inflation get?

Projected Inflation Rate 2009-2014

The actual rate of inflation at the peak is anyone’s guess. The Federal Reserve will allow it to go up until long-term inflation expectations begin to rise significantly or until the member banks of the Federal Reserve are solvent again. Solvency should take until the first or second quarter of 2010; if banks earn $250,000,000,000 per quarter, it will take them a year to make the $1,000,000,000,000 is is speculated they lost in total.

Making Up for Deflation

I am projecting a 12% rate of inflation as measured by the CPI in the summer of 2011. It will not peak until the Federal Reserve raised the Federal Funds Rate, and I as I outlined above, that is not going to happen soon. This will lead us to the second argument I believe the Federal Reserve will make; we need to “make up” for deflation.

Since we were behind the desired rate of inflation for so long, the Federal Reserve will justify the high inflation rate by claiming we need to get back to normal levels. This argument is also ridiculous, but it is what I believe the Federal Reserve will sell to us.

The result will be medium-term price inflation.

Projected Consumer Price Index 2007-2014

Long-Term Inflation Expectations

The Federal Reserve does not want to allow the world to believe that they have lost control of inflation again. If long-term inflation expectations become elevated, interest rates will go sky high just like they did in the 1970s. Unfortunately, when Timothy Geithner went to China to make the case that we will not inflate away our debts, the Chinese actually laughed at him. Can you imagine that? A US official has to tell a lie so transparent that the audience actually laughs?

Homedebtors will like inflation because the value of the currency they will be repaying has declined in value. Lenders hate inflation, and so do the wealthy. The Federal Reserve will do everything in its power to control long-term inflation expectations.

Impact of Medium-Term Inflation Spike

High inflation will burn off the mountains of bad debt we created during the Great Housing Bubble. We have a problem of insolvency. The only ways to solve it are (1) to increase people’s ability to pay, or (2) decrease the value of the money repaid. Since wages are not going up in the Great Recession, the value of currency must decline for the insolvency problem to be solved.

The net effect will be a lowering of our standard of living. When inflation is running at 8% and you get a 3% raise at work, your buying power has actually decreased by 5%. It looks like you are getting ahead because your pay increased, but in reality, you are falling behind and your standard of living is declining. The slow erosion of US buying power will be transferred to China as the country develops and local wages move higher there.

Since home prices are linked to wages, high inflation as measured by the CPI will not cause home prices to rise.

Real Estate is not necessarily an Inflation Hedge

The old adage about real estate being a hedge against inflation needs to be refined. Real estate as an asset class is a great hedge against wage inflation but not necessarily against price inflation. Since price inflation can be caused by wage inflation, people do not see that there is a distinction between the two. It is possible to have price inflation without wage inflation — which is what we will see from 2011-2014. When there is price inflation without wage inflation, our standard of living declines.

Government Conspiracy

I find most conspiracy theories to be crazy, but there are times when our Government lies to us, and we feel good about it. Every national recession is greeted with denial until the crisis is past. As a people, we like being lied to; if we didn’t, we would stop electing politicians we know to be liars. There must be a greater good that comes from the nonsense.

For instance, the Warren Commission reported that John F. Kennedy was assassinated by a lone gunman, Lee Harvey Oswald. Many people believe this is not true. Why would the Government lie? Well, let’s assume that JFK was assassinated by a Cuban-led hit squad, and that we learned the truth almost immediately. If the government lets this information out, we would probably have invaded Cuba (rather then embargoing them for 50 years). In the wake of the Cuban Missile Crisis, this would have started World War III. Do you tell the American public a flimsy lie about a President’s death? or do you start WWIII?

When we look back on the actions of the Government and the Federal Reserve in their handling of this crisis — which has either been necessary lies or gross incompetence — some will conclude the lies told by our officials was necessary and appropriate. The general public cannot handle the Truth.

1 Blackswan   Irvine, CA 92604  kitchen

Asking Price: $649,000

Income Requirement: $122,873
Downpayment Needed: $129,800

Purchase Price: $530,100
Purchase Date: 9/4/2009

Net Gain (Loss): $79,960
Percent Change: 22.4%
Annual Appreciation: 390.1%

Address: 1 Blackswan Irvine, CA 92604

Beds 3
Baths 2 baths
Size 1,506 sq ft
($431 / sq ft)
Lot Size 5,100 sq ft
Year Built 1976
Days on Market 7
Listing Updated 9/18/2009
MLS Number P703830
Property Type Single Family, Residential
Community Woodbridge
Tract Pt

This is a beautiful 3 bdrm/2 ba home with all new interior/exterior paint, new carpet, new kitchen appliances and new landscaping. Home is ready for move-in.

Do you wonder what happened to the bigwigs from IndyMac? Some of them have gone into flipping houses…

Happy Birthday IHB!

The IHB began its life with this post: Welcome to the Irvine Housing Blog. The rest is history…

390 Quail Rdg   Irvine, CA 92603  kitchen

Asking Price: $459,900
Address: 390 Quail Rdg Irvine, CA 92603

Every time I look in the mirror
All these lines on my face getting clearer
The past is gone
It goes by, like dusk to dawn
Isn’t that the way
Everybody’s got their dues in life to pay

Yeah, I know nobody knows
where it comes and where it goes
I know it’s everybody’s sin
You got to lose to know how to win

Half my life
is in books’ written pages
Lived and learned from fools and
from sages
You know it’s true
All the things come back to you

Dream On — Aerosmith

What do you dream for?

I have known Zovall now for three years, and in all that time, he has been consistent about his dream to build a website and community. He started with a vision, and now he is enjoying watching the IHB grow and evolve.

It all started three years ago today when Zovall and IrvineSingleMom set out to write about Irvine housing. With the fascination with housing caused by The Great Housing Bubble, the Internet was fertile for growing a blog about housing. From its humble first post, the IHB enjoyed a steadily increasing readership and a greater sense of community.

Ideal Home Brokers

We have grown into something more now. It is easy to be an armchair quarterback and criticise the way real estate is bought and sold. We are taking action to do something about it with Ideal Home Brokers.

For those of you who like the IHB the way it is, nothing will change here at the blog. I will continue to write what I believe to be true about market conditions, and during the week, there will always be posts featuring properties in Irvine. Look at Ideal Home Brokers as an add-on; it is an extension to the service you receive when you come to read the IHB.

Some people will want our reports and our advice when buying and selling homes; some will not. We are here to fill what we perceive to be an unmet need. Only time will tell if that need is real or imagined. We are here to serve.

One of the first property profiles on the IHB was near today’s featured property: Olivos – Quail Hill: A Flip Disaster in the Making.

I have to admit something here. When I first read the IHB, I thought Zovall and IrvineSingleMom were tops. When they first asked me to write with them, I did not feel worthy….

390 Quail Rdg   Irvine, CA 92603  kitchen

Asking Price: $459,900

Income Requirement: $87,071
Downpayment Needed: $91,980

Purchase Price: $541,000
Purchase Date: 11/30/2004

Net Gain (Loss): -$108,694
Percent Change: -15.0%
Annual Appreciation: -3.1%

Address: 390 Quail Rdg Irvine, CA 92603

Beds: 2
Baths: 2
Sq. Ft.: 1,656
$/Sq. Ft.: $278
Lot Size: –
Property Type: Condominium
Style: Other
Stories: 1
Floor: 1
Year Built: 2005
Community: Quail Hill
County: Orange
MLS#: S589265
Source: SoCalMLS
Status: Active
On Redfin: 4 day

Highly upgraded home! Kitchen with granite countertops and back splash,oversized bar area, stainless steel appliances, 18X18 diagonal tile, walnut cabinets and more! Computer niche off kitchen. Designer paint throughout with suede finish in some areas, large crown moldings, base boards and door casings all around. Upgraded carpet, recessed lighting and fans. Balcony off the master has been transformed into a chic sitting area with white curtains all around.

This property was purchased for $541,000 on 11/30/2004. The owner used a $400,000 first mortgage, a $100,000 second mortgage, and a $41,000 downpayment. On 9/16/2005 the first mortgage was refinanced for $500,000. The records show three HELOCs for $62,500 all recorded at different times. It is unclear if this is a single HELOC reopened three times or three different HELOCs.

Foreclosure Record
Recording Date: 05/13/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000240832

Foreclosure Record
Recording Date: 02/13/2009
Document Type: Notice of Default
Document #: 2009000066139

It looks like the buyer extracted their equity plus some extra, but it is difficult to be sure.

Going, Going, Gone!

With interest rates down to 4.85% on a 30-year fixed, people’s buying power is much increased. Prices that used to be ridiculous are now financeable.

126 Arden 65 Irvine, CA 92620 kitchen

Asking Price: $648,450
Address: 126 Arden 65 Irvine, CA 92620

I’m closin’ the book
On the pages and the text
And I don’t really care
What happens next.
I’m just going,
I’m going,
I’m gone.

I been hangin’ on threads,
I been playin’ it straight,
Now, I’ve just got to cut loose
Before it gets late.
So I’m going,
I’m going,
I’m gone.

Going, Going, Gone — Bob Dylan

According to the listing agent (she has worked with the IHB before, and we trust her), this property has over 20 offers, and several of them are over the asking price. She is no longer taking bids. Let’s take a look at an IHB property valuation report and see what the fuss is all about.

126 Arden IHB Owner-Occupant Brokers Opinion of Value .pdf

126 Arden IHB Owner-Occupant Brokers Opinion of Value 06-1

126 Arden IHB Owner-Occupant Brokers Opinion of Value 06-2

126 Arden IHB Owner-Occupant Brokers Opinion of Value 06-3

126 Arden IHB Owner-Occupant Brokers Opinion of Value 06-4

I am amazed at the impact 4.85% interest rates has on affordability. The GRM is 240 at that interest rate.

Do you have the courage to buy at these interest rates? I don’t.

126 Arden 65 Irvine, CA 92620 kitchen

Asking Price: $648,450

Income Requirement: $122,769
Downpayment Needed: $129,690

Purchase Price: $890,000
Purchase Date: 8/6/2007

Net Gain (Loss): -$280,457
Percent Change: -27.1%
Annual Appreciation: -12.7%

Address: 126 Arden 65 Irvine, CA 92620

Beds 4
Baths 2 full 1 part baths
Size 2,245 sq ft
($289 / sq ft)
Lot Size n/a
Year Built 2001
Days on Market 4
Listing Updated 9/24/2009
MLS Number S590041
Property Type Condominium, Residential
Community Northwood
Tract Ard

According to the listing agent, this listing is a bank owned (foreclosed) property.

What a beauty! Shows beautifully! Laminate wood flooring, plantation shutters, granite countertops in the kitchen. Master bedroom balcony, bathtub has spa jets, tile flooring in baths and more! Separate living and dining rooms, fireplace in living room. Kitchen opens to family room. Low maintenance front and backyards. Two car garage plus a long driveway. Walking distance to the assocation pool. Be sure to see this home!

assocation?

I hope you are enjoying your weekend.