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The English Garden ** Final Update **

Dec 1st, 2007 by IrvineRenter 

This property went back to the lender on 11/9/2007 for $506,429. Apparently the seller bought the property with a $460,000 negative amortization loan with a 1% teaser rate. I don't see a second, so it appears the $125,000 downpayment was consumed by the negative amortization on the loan and the dropping property values.

The property was originally posted here: The English Garden.

Now the property is back on the market at a significant discount. If they get their asking price, they stand to lose $96,800 after commissions.

Old Asking Price: $595,000

New Asking Price: $530,000

Purchase Price: $575,000
Purchase Date: 1/30/2006

Address: 54 Paisley Place, Irvine, CA 92620

Beds: 2
Baths: 2
Sq. Ft.*: 1,050
Year Built: 1999
Stories: 2
Type: Single Family Residence
View:
Hills
Neighborhood: Northwood
$/Sq. Ft.*:
$567
MLS: S476148
Status: Active on market
On Redfin: 42 days

In my opinion one of the most notable features of this bubble has been the increase in price of entry level housing product. I suspect this is a result of sub-prime lending and/or exotic financing terms. Back when you could not afford to finance more than 3 or 4 times earnings, entry level housing was priced at $200,000 or less. During the rally when 10 to 12 times earnings could be easily borrowed, $200,000 properties where bid up to $550,000. Nobody was actually making any more money, they were just borrowing a lot more. Once the limit of borrowing was reached last year, the rally fizzled. Now that credit is tightening, those who bought at the top are having difficulty finding buyers. The result of all this borrowing is properties like the two I am featuring today.

First, I want to say this is one of my favorite neighborhoods in Irvine. It features architecture reminiscent of a small English village with quaint cottages. There are few visible garages, the sidewalks are detached from the street, and the trees make for a great street scene. It is very close to Canyon View Elementary in Northwood. If prices were not ridiculous, I would buy in this neighborhood.

These two flips are showing signs of stress. They are overpriced and hoping a greater fool comes along to save them. 206 Garden Gate Lane has been on the market nearly 100 days. If they get their asking price of $655,800 assuming a 6% commission, they will lose $8,548.

The flipper at 54 Paisley Place gets their asking price of $595,000 assuming a 6% commission, they will lose $15,700. Does anyone want to go up there and pay well over $500 per square foot for some 8 year old properties when you could buy 75 Chantilly, a nearly new, much larger 2 bedroom over in Woodbury for $370 per square foot? I think I will pass.


Posted in Price Rollback

Frosty the Snowman

Nov 30th, 2007 by IrvineRenter 

We wrap up our week of music from Children's Christmas shows with this old favorite.

Down to the village,
With a broomstick in his hand,
Running here and there all
Around the square saying,
Catch me if you can.
He led them down the streets of town
Right to the traffic cop.
And he only paused a moment when
He heard him holler "Stop!"
For Frosty the snow man
Had to hurry on his way,
But he waved goodbye saying,
"Don't you cry,
I'll be back again some day."
Thumpetty thump thump,
Thumpety thump thump,
Look at Frosty go.
Thumpetty thump thump,
Thumpety thump thump,
Over the hills of snow.

Frosty the Snowman

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This particular street in Quail Hill is showing signs of stress. We profiled two properties on this street in the post Reunion Rollback. The rollbacks are still coming. This one is from 2004.

Asking Price: $529,950

Income Requirement: $132,487

Downpayment Needed: $105,990

Purchase Price: $567,500

Purchase Date: 12/29/2004

Address: 109 Reunion, Irvine, CA 92603

1st Mortgage $564,000
HELOC $70,500
Total Debt $634,500

Beds: 2
Baths: 2
Sq. Ft.: 1,447
$/Sq. Ft.: $366
Lot Size: -
Type: Condominium
Style: Spanish
Year Built: 2005
Stories: Three or More Levels
View(s): Park or Green Belt
Area: Quail Hill
County: Orange
MLS#: P611008
Status: Active
On Redfin: 7 days

From Redfin, "Numerous amenities adorn this spacious upscale Quail Hill Condo. 2 Bedrooms, 2 full baths. A Great room design with built in desk and romantic fireplace. clean and sleek gourmet kitchen with stainless still appliances, granite countertops and custom design backslash. Ceramic tile floors and upgraded carpet. Assoc Pool, Assoc Barbeque, Assoc Gym/Exercise Room, Assoc Sport Court, and Assoc Tennis. Great Corner Location."

What is a backslash? Sounds like a karate move in a horror film.

Do the "still" appliances work?

A "clean and sleek gourmet kitchen." I am impressed. Since it is "clean" does that mean it comes with lifetime maid service? I would like to thank Shhhhh for our fabulous new Gourmet kitchen award. These will be prominently displayed on any listing mentioning a gourmet kitchen from this day forward

Did they really need to write "Assoc" 5 times?

.

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So how much will the lender lose on this one? Assuming the HELOC is fully tapped, and assuming the owners never made more than the minimum payment on their negative amortization loan with the 1.25% teaser rate, the lender will lose over $137,000.

Anybody want to invest in second mortgages in California?

This has been an eventful week at the Irvine Housing Blog. Monday's post was linked by several national websites. That post was viewed by more than 4800 people. Our traffic was well above average for the week. Make sure you come by Monday as the post is titled "What is a Bubble?" It should help everyone fully grasp the psychological factors that drove our real estate prices into the stratosphere (and subsequently into the dirt.)

I hope you have enjoyed the past week as much as I have, and come back next week as we will have more Christmas music and we will continue to Chronicle ‘the seventh circle of real estate hell.’

Have a great weekend.

.


Posted in Price Rollback

We are Santa’s Elves

Nov 29th, 2007 by IrvineRenter 

Ho ho ho.
Ho ho ho.
We are Santa's elves.

We are Santa's elves,
Filling Santa's shelves With a toy
For each girl and boy.

Oh, we are Santa's elves.
We work hard all day,
But our work is play.
Dolls we try out,
See if they cry out.

We are Santa's elves.
We've a special job each year.
We don't like to brag.
Christmas Eve we always
Fill Santa's bag.

Santa knows who's good.
Do the things you should.
And we bet you,
He won't forget you.

We are Santa's elves.
Ho ho ho. Ho ho ho.
We are Santa's elves.
Ho Ho!

We are Santa's Elves -- Burl Ives

.
Today I want to look at a property that is both for sale and for rent to see where the gross rent multiplier in the market can be found. This was sent to me by SawItComing.

Asking Price: $589,900

Income Requirement: $168,750

Downpayment Needed: $147,475

Purchase Price: $590,000

Purchase Date: 3/22/2004

Rental Rate: $2,695

Gross Rent Multiplier: 222

Address: 145 Topaz #15, Irvine, CA 92602

1st Loan $471,900
2nd Mtg. $88,500
Downpayment $29,600

Beds: 3
Baths: 2.5
Sq. Ft.: 1,500
$/Sq. Ft.: $393
Lot Size: -
Type: Condominium
Style: Townhouse
Year Built: 2001
Stories: Two Levels
Area: West Irvine
County: Orange
MLS#: S510794
Status: Active
On Redfin: 29 days

From Redfin, "Magnificent West Irvine Townhouse boasting high ceilings, large bedrooms and custom paint. End unit with lots of upgrades and one of the best locations in the tract with a extra wide front walkway. Nice size fenced front patio with slate tiles. Great neighborhood, fabulous schools, close to Tustin Marketplace and 5/55 freeways."

When referring to those tiny front patios, what constitutes a "nice size?"

.

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The purchase data on Redfin is incorrect, but my data source shows this property was purchase in 2004 for $590,000. If the seller can get their asking price, they stand to lose $35,494.

For those of you who want to better understand the gross rent multiplier concept, lets look at the math on this property:

$589,900 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$3,826 Payment
$185 HOA
$590 taxes @ 1.2%
$123 Insurance @ 0.25%
_____________________________
$4,724 Monthly Cash Expense
($830) Income Tax Savings @25%

_____________________________
$3,894 After Tax Cost
$2,695 Rent

_____________________________
$1,199 Monthly Operating Loss

A note on downpayments: I have not included a downpayment in this calculation because it does not change the math. If you take the money out of a high-interest CD to put into a downpayment, you are giving up earning 5% interest on that money. The effective, after-tax interest rate on the mortgage is about 5%. In short, it is a wash to the calculation. Whether you pay cash and give up interest income or finance the entire deal and obtain the interest deduction, the cost of money is the same.

.

.

As you can see, a GRM of 222 makes for a significant loss when compared to renting. So how far do you have to drop the price to get to breakeven?

$399,169 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$2,589 Payment
$185 HOA
$399 taxes @ 1.2%
$83 Insurance @ 0.25%
_____________________________
$3,256 Monthly Cash Expense
($561) Income Tax Savings @25%

_____________________________
$2,695 After Tax Cost
$2,695 Rent

_____________________________
$0 Monthly Operating Loss

148 Breakeven GRM

Take $200K off the price and the property breaks even with a 148 GRM.

This is the math I would use to evaluate whether or not I will buy a home, but others may use different assumptions. I will not take out an interest-only loan, so the cash-on-cash breakeven I am looking for is actually better than breakeven because a certain amount of equity is hidden in the mortgage payment as principal. If you want to calculate the absolute breakeven, you must look at the interest-only scenario:

$589,900 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$3,318 Payment
$185 HOA
$590 taxes @ 1.2%
$123 Insurance @ 0.25%
_____________________________
$4,216 Monthly Cash Expense
($830) Income Tax Savings @25%

_____________________________
$3,386 After Tax Cost
$2,695 Rent

_____________________________
$691 Monthly Operating Loss
.

$462,495 Purchase Price
6.75% Interest Rate
30 year fixed Term

_____________________________

$2,602 Payment
$185 HOA
$462 taxes @ 1.2%
$96 Insurance @ 0.25%
_____________________________
$3,345 Monthly Cash Expense
($650) Income Tax Savings @25%

_____________________________
$2,695 After Tax Cost
$2,695 Rent

_____________________________
$0 Monthly Operating Loss

172 Breakeven GRM

As you can see, this comes out very close to the 160 GRM we have been using here at the blog. The gross rent multiplier is just a shortcut that will let you know if a property is "in the ballpark" and worthy of a more detailed analysis. Some properties with a 160 GRM may still not be at breakeven if the HOA fees or Mello Roos taxes are very high (which they are in the new neighborhoods.) The only way to know for sure is to crunch the numbers. However, if you want a convenient shortcut, the gross rent multiplier is a handy tool to use.


Posted in Price Rollback

Holly Jolly Christmas

Nov 28th, 2007 by IrvineRenter 

Have a holly, jolly Christmas;
It's the best time of the year
I don't know if there'll be snow,
but have a cup of cheer.
Have a holly, jolly Christmas;
And when you walk down the street
Say Hello to friends you know
and everyone you meet.

Oh, ho, the mistletoe
hung where you can see;
Somebody waits for you;
Kiss her once for me.
Have a holly jolly Christmas,
and in case you didn't hear,
Oh by golly, have a holly,
jolly Christmas this year.

Holly Jolly Christmas -- Burl Ives

.

Asking Price: $449,000

Income Requirement: $112,250

Downpayment Needed: $89,800

Purchase Price: $522,000

Purchase Date: 9/18/2006

Address: 127 Briarglen #38, Irvine, CA 92614

1st Mortgage $417,000
2nd Mortgage $105,000
Downpayment $0

Beds: 2
Baths: 2.5
Sq. Ft.: 1,055
$/Sq. Ft.: $426
Lot Size: -
Type: Condominium
Style: Townhouse
Year Built: 1986
Stories: Two Levels
Area: Woodbridge
County: Orange
MLS#: R712474
Status: Active
On Redfin: 10 days

From Redfin, "What a Charming 2 bedroom 2.5 bath Condo. Inside Loop, not near Freeway. Great location - walk to lake, schools, groceries & malls. Wrap-around Patio. It's a must to see!"

It's a must to see? A small condo for almost half a million dollars -- hurry before they are all gone!!!

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It is different this time. At least that is what everyone thinks when there is a financial bubble. Of course, the statement is partially true because the circumstances of each bubble are unique; it is the outcome that is always the same. In prior housing bubbles, prices have been "sticky" on the way down as as bid/ask spreads widen and transaction volume withers. We have certainly been seeing this phenomenon, but prices on many properties have been showing a surprising lack of "stickiness" in the initial stages of this decline. It seems to be different this time. The reason: 100% financing.

Sellers loath to take a loss. That is the main reason prices are supposed to be sticky. Those that bought late in the rally hold to peak prices while the bids decline. However, this time around, there was a plethora of 100% financing deals like today's property. These sellers are not going to take a loss -- they are passing the loss on to the lender. In short, they don't care what the property sells for because they no longer have a financial interest in the outcome. We have been profiling numerous rollbacks on 100% financing deals on the blog. I have not been trying to find 100% financing rollbacks, they are just what is most common in the marketplace. It is the large number of these transactions in the market that is providing the impetus for the initial 20% drop we have been witnessing across Irvine. During the last bubble, peak to trough prices in Irvine dropped less than 20%, and that drop was stretched out over 6 years. It really is different this time...

For the record, this seller lender is going to lose $100,000 assuming a 6% commission and a sale at asking price.

Last week we discussed the implication of all the second mortgage losses on the market. It was the consensus of most posters that few people have saved up the downpayments necessary to buy a home. Some suggested the need for a first-time homebuyer downpayment assistance program. Who is going to fund it? Or put another way, who wants to lose their money this way? Will this be a government subsidy program where our tax dollars fuel more speculation?

Realistically, there is no solution to the problem of the lack of savings for downpayments. Lenders are not going to provide this money, and the government will not either. The market will not recover until people start saving and accumulate enough to amount to a 20% downpayment. The time will be long, and the amount will be small meaning the bottom will be later and lower than most currently imagine.


Posted in Price Rollback

Silver and Gold

Nov 27th, 2007 by IrvineRenter 

Silver and gold, silver and gold
Ev'ryone wishes for silver and gold
How do you measure its worth?
Just by the pleasure it gives here on earth

Silver and gold, silver and gold
Mean so much more when I see
Silver and gold decorations
On ev'ry Christmas tree

Silver and Gold -- Burl Ives

It has been a while since I have come across a truly jaw-dropping WTF listing price. When someone in Turtle Ridge prices that way, it can be written off as a mass delusion from the free-flowing kool aid dispensed in the area, but when someone lists at a ridiculous price in the midst of foreclosures and declining prices... well, that takes a special kind of greed and foolishness. Perhaps the silver and gold they were looking for in Rudolph the Red-Nosed Reindeer is buried in the back yard?

Asking Price: $1,059,000

Income Requirement: $264,750

Downpayment Needed: $211,800

Purchase Price: $479,000

Purchase Date: 10/16/2002

Address: 337 Tall Oak, Irvine, CA 92603

1st Loan $401,100
Downpayment $77,900

Beds: 2
Baths: 2.5
Sq. Ft.: 1,800
$/Sq. Ft.: $588
Lot Size: -
Type: Condominium
Style: Spanish
Year Built: 2003
Stories: Three or More Levels
View(s): City Lights, Hills, Mountain, Panoramic, Has View
Area: Quail Hill
County: Orange
MLS#: S512657
Status: Active
On Redfin: 6 days

From Redfin, "This superbly appointed single detached home was customized by a senior exec. w/ the homebuilder. Every detail was considered w/ the goal of making this home not just a notch above the rest, but THE BEST. An entertainer's delight, this designer-inspired home has commanding views, and an innovative flr plan that has every bldr & seller upgrade imaginable, incl. a 2nd fl. deck w/ custom blt-in furniture, stainless Viking BBQ, fully mature garden--the largest in the Ivy Wreath--spa, fountain, & fire ring! "

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So let's put this in context: Quail Hill is getting killed. We have documented REOs (here, here), a group of three bedroom condos priced $350K to $400K less racing to the bottom, and more rollbacks than I can bother to link to (look here), and yet this place has more than doubled in value. Pricing in Quail Hill is falling below the $400 / SF mark and trending lower, but this property is supposed to be worth $588 / SF?

WTF?

I can't fathom the metric they used to come up with this price. It clearly isn't based on comps. Perhaps it is an ego listing, or perhaps they commissioned their realtor for a special rectal extraction.

In fact, that is my challenge for you today: please tell me how someone could possibly arrive at this asking price.

The winner gets a free pitcher of kool aid.

Perhaps it is the $500K view of Quail Hill Boulevard and the apartment lights?


Posted in House Flips

Rudolph the Red-Nosed Reindeer

Nov 26th, 2007 by IrvineRenter 

When I was growing up, the Christmas season usually kicked off in early December with classic Christmas movies. One that I looked forward to every year was Rudolph the Red Nosed Reindeer. Burl Ives sang all the tunes from that movie. Here we go...

Rudolph, the red-nosed reindeer
had a very shiny nose.
And if you ever saw him,
you would even say it glows.

All of the other reindeer
used to laugh and call him names.
They never let poor Rudolph
join in any reindeer games.

Then one foggy Christmas Eve
Santa came to say:
"Rudolph with your nose so bright,
won't you guide my sleigh tonight?"

Then all the reindeer loved him
as they shouted out with glee,
Rudolph the red-nosed reindeer,
you'll go down in history!

Rudolph the Red-Nosed Reindeer -- Burl Ives

.Sometimes when I see what people did and how they lived during the bubble, it fills my Reservoir of Schadenfreude. Today's featured property has a story to tell, and I want to thank Brittney for providing me the detailed mortgage data that allows me to tell it.

Asking Price: $1,249,000

Income Requirement: $312,250

Downpayment Needed: $249,800

Purchase Price: $1,157,000

Purchase Date: 1/6/2005

Address: 24 Shady Lane, Irvine, CA 92603

Beds: 3
Baths: 3.5
Sq. Ft.: 2,629
$/Sq. Ft.: $475
Lot Size: 5,053 sq. ft.
Type: Single Family Residence
Style: Mediterranean
Year Built: 2005
Stories: Two Levels
View(s): City Lights
Area: Turtle Ridge
County: Orange
MLS#: S512996
Status: Active
On Redfin: 8 days

From Redfin, "Best deal around. Great plan 1 in private cul de sac location in the prestige Ledges at Turtle Ridge. Home shows as new very clean private location and great value for the Ledges estate. Nice rear yard area and great street appeal. Truly great deal here priced below most homes in area."

How can any "plan 1" be worth over $1,000,000?

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This one isn't a rollback yet, but I doubt the owners care because they have already made their money on the deal. Let's look at the loan history on this property and see just how these people managed to live over the last 3 years.

The property was purchased in January 2005 for $1,157,000. The combined first and second mortgages totalled $1,156,730 leaving a downpayment of $270. Let's just call it 100% financing.

By April, they owners were able to find refinancing through Countrywide with a $999,999 first mortgage. This mortgage was an Option ARM with a 1% teaser rate. The minimum payment would be $3,216 per month.

Also in April of 2005, they took out a simultaneous second mortgage for $215,000 pulling out their first $58,000.

So look at their situation: They are living in a million dollar plus home in Turtle Ridge making payments less than those renting, and they "made" $58,000 in their first 4 months of ownership.

Apparently, these owners liked how hard their house was working for them, so they opened a revolving line of credit (HELOC) in August 2005 for $293,000. Did they spend it all? I can't be sure, but the following certainly suggests they did.

In December of 2005, they extended their HELOC to $397,990.

In June of 2006, they extended their HELOC to $485,000.

In April of 2007, the well ran dry as they did their final HELOC of $491,000. I bet they were pissed when they couldn't get more money.

So by April 2007, they have a first mortgage (Option ARM with a 1% teaser rate) for $999,999, and a HELOC for $491,000. These owners pulled $333,000 in HELOC money to fuel consumer spending.

Assuming they spent the entire HELOC (does anyone think they didn't?), and assuming the negative amortization on the first mortgage has increased the loan balance, the total debt on the property exceeds $1,500,000. The asking price of $1,249,000 does not look like a rollback, but if the property actually sells at this price, the lender on the HELOC (Washington Mutual) will lose over $300,000.

These owners will probably just walk away. I doubt they have any assets. They never put any money into the deal, they pulled out $333,000 in cash, and they got to live in Turtle Ridge for 3 years. Not a bad deal -- for them.

Karma will not leave these people alone though. They have become accustomed to a lifestyle far beyond their means. Their house was providing them with $111,000 a year in tax-free income. When they get forced out, their credit will be ruined, and they will have to go from living the life of the nouveau riche to being a destitute renter. We can only hope this transition is painful and the memory of what they lost lingers for years.

These people likely drank the kool aid and actually believed this kind of lifestyle could be sustained. That level of ignorance makes it hard to have much sympathy for them. However, when you see the excess of this lifestyle, you can't help but wonder if it was worth it.

If you knew prices were going to collapse, and the lifestyle was not sustainable (like many on this board did,) would you have done it anyway? When you see the lives led by people like today's owners, it is not difficult to see why so many chose that life.


Posted in Price Rollback

Colors

Nov 25th, 2007 by IrvineRenter 

The video links below were disabled for direct embedding on Youtube. Just click on the links and enjoy.

Snow Version

Colors / Dance -- George Winston

Water version

Colors / Dance -- George Winston

Our contributing arithmetician, Zileas, has provided an analysis of Aliso Viejo's market for your study.

Conclusions:

- Over the last 9 months, the typical 2 or 3 bedroom condo of 1000-1400 sqft in Aliso Viejo dropped roughly $123 in value per day. I personally think that this number has gotten worse, but I can only prove $123 a day with the data I have. This comes out to about a 1% drop in value per month for the condos I looked at. This is less than half the rate of decrease in Ladera, which you would expect since Aliso is closer to the beach, is more developed, and anecdotally has fewer toxic mortgages and what not.

- For every $1 you overprice your home, you LOSE $0.81 off the final sales price… So if your home is worth $400k, two choices you might consider are (based upon the data): price at $400, sell at $400, or… Price at $425, sell at $380K. This is because buyers tend to ignore overpriced houses in this market (which has so many choices!), and move on to someone who is showing they are willing to sell. Again, sellers: Price to sell!

- If you are going to buy a 2 bedroom condo, you may as well go high on the square feet and get a bigger living room or bedroom or whatever, in my opinion. The cost of buying a condo with a bigger living space (but the same # of beds/baths/basic features) is only $88 per extra square foot in Aliso, which makes those 1400 square foot 2 bedrooms seem a lot more attractive than the 1000 sqft ones… I’d sure pay 35K for 40% more living space!

- Older condos sell for less… About $1700-$2000 less for every year older they are. Note that homes get older as you own them…

- Compared to typical AV properties similar to them, Windflower condos are worth a bit more (about 20k, which is roughly 2%). Other developments may be worth more or less than the average development, but I couldn’t prove it with the data I had.

- I’d really love wider and better data. If any Realtors want to hook me up for my benefit, and for helping you persuade your sellers to price reasonably, look me up!

What Properties Did I Look At?

I used 77 condos sold in the last 9 months in Aliso Viejo, with 2-3 beds, and 1000-1400 square feet. The properties ranged in age from 6 to 18 years old. I performed this analysis on Nov 22nd, on data that is a week old.

How Did I Value Them?

I used statistical regression, which is a fancy way of drawing a line through a bunch of points, but instead of lines which only allow you to study one thing in relation to another, it can study a lot of things in relation to one thing all together. This is the same type of technique that they use in science, pharmaceuticals, and economic models. There are math notes on the specifics for the curious or mathematical inclined at the bottom.

I valued homes using several slightly different methods and selections of properties to make sure my conclusions were robust. The key factors that went into housing value were: when it sold, when it was built, # of square feet, # of bathrooms, # of bedrooms, and how much the seller overpriced/underpriced the property (final asking price – sold price).

How do you Interpret This?

- Use it to look at properties very similar to the condos I used – it would be lousy for looking at a 5 bedroom house in Aliso Viejo, or a condo in Newport Beach.

- It is most accurate right now. This sort of analysis can get stale, things change!

- DON’T use it as investment advice, I’m not a certified professional, just a guy with advanced statistics training, an MBA, and some spare time.

- I have included some valuations of “typical” properties below. A “typical” property has average view, has average upgrades/condition, has average selling circumstances, and so on EXCEPT for the specific details I lay out. You would have to judge if a property would command an “above average” price (e.g. diamond-inlaid bathroom mirror) or a “below average” price (mold growing on walls, neighbor owns meth lab, etc) and adjust accordingly.

2 Bed, 2 Bath, 1000 sqft, built 1990, closing dec 31: $379,000 +/- 25K for relative quality of property.

2 bed, 2.5 Bath, 1400 sqft, built 1996, closing dec 31: $433,000 +/- 20K for relative quality of property

(the +/- are a “95% confidence interval” – if 20 houses sold of each of the above types, I predict only one each would fall outside that range on average)

Where are the Graphs?

Because I am plotting several things vs price, I can’t make a graph. You can graph sqft vs price, but you can’t graph beds AND baths AND year built AND sqft vs price all at once.

How NOT to Interpret this:

- Do not read too much into the $/sqft number. When you see this figure on real estate sites, you are valuing the entire property by it’s square footage. My model considers sqft to be only a part of the overall valuation (instead of 100% of it), so the number you see is smaller.

- You may be tempted to compare this to my Ladera Ranch analysis. They use slightly different methodology and data ranges. Therefore, direct comparison requires some pretty serious knowledge of how these sorts of models work, and even then you are doing a lot of hand-waving. Treat them as stand-alone unless you have deep knowledge of this stuff.

Details of Research for the Curious or Mathematical:

Basic Method;

Linear Ordinary Least Squares regression (which is indeed a BLUE regression) of various predictors on soldprice. Boxcox proved linearity with a theta of 7 (!!). VIFs, except where noted, were generally below 2 (beds and yearsagobuilt sometimes crested over it to like 2.35ish). No crazy weighting of data points or questionable pruning, no resampling my own error, no smoking crack, this is a pretty vanilla set of regressions.

All regressions were whitewashed of heteroskedasticity. And yes, there was significant heteroskedasticity because I had no 1 bedrooms and not that many 3 bedrooms in the sample.

Dataset:

This is in the basic “layman’s” posting, and trimming is described in the chart (to either 11 months (all), 9 months, or 6 months).

Predictors and Justifications Behind Using Them:

Daysago -- # of days ago the property was built, captures gradual constant pricing decreases which we know exist!

Daysagosquared – Same as above, but captures accelerating trends to a degree.

Beds – More bedrooms usually means more value, and it has regressed well in other housing studies.

Baths – Same logic as above.

Sqft – Larger houses sell for more, duh.

Yearsagobuilt – Newer homes sell for more – inherently they look better, have higher tech construction, less deferred maintenance problems, etc.

Overprice – In a buyers market, overpricing means you get less offers, which should reduce the price you get for the property… Asking too much means you artificially decrease demand away from yoru actual “willing to sell” point.

Fixed Effects – some communities are gated or have great views or better layouts or have a slightly better location or were more upgraded at initial construction by the builder. It is hard to know the specifics, but a general fixed effects model can capture some of these unobservable differences. I put condos that had 7 or more sales in the same development into a group, and all others into the omitted category. 35 out of 99 condos were in this omitted category.

Regression 1, 99 condos: In this regression, I noticed that the regression was mediocre (borderline p-values on good predictors, though same signs and all that) unless I added in daysagosquared, which crudely captured an accelerating pricing trend with time. With it, the predictor coefficients became VERY good (daysago t-stat went from 1.98 to 4.48 for example).

Unfortunately, this regression was also highly multi-collinear between daysago and daysagosquared, though they tested for P<.01% for joint significance. Nonetheless, we don’t really care what houses went for in feb and march that much, so I decided to trim the data to get around having to use daysagosquared in future regressions.

Regression 2, 99 condos: This is pretty much the same regression, but I added in fixed effects as a robustness check and also to fish and see if any developments were obviously better or worse. Not useful for answering the question we all want answered, which is, what are houses worth today, but interesting nonetheless! It seems that windflower is worth 19k more (p <.1%). Nothing else could pass the null hypothesis, so I decided that, especially since I’m cutting data which would further strain it, I may as well dump fixed effects for this regression. Alas.

Regresion 3, 77 condos (Suggested): This is the regression I’m basing the majority of my conclusions on, and I think it is the best one in terms of predicting what you’d pay RIGHT NOW. The one variable that had weaker significance, baths, is one that we know does in fact have real-world significance, so I felt comfortable leaving it in with p=10.2%. Besides, the purpose of this analysis is to track price decrease more than anything, so its not doing much harm sitting in there adding a little bit of predictive power.

Regression 4, 37 condos: I trimmed the data to the last 6 months in this regression. My model started to get unstable from lack of data at this point. Among other things, beds and baths went deep into insignificance, and their predictive power appears to have gotten sucked up by other variables, especially sqft (the strongest predictor). It’s hard to make a good comparison of this to regression 3, though the general trends predicted in 3 are also predicted here.

Regression 5, 77 condos: this is for those of you who are skeptical about the overprice variable for a variety of reasons. I encourage you to think those through carefully and consider what it would mean for the variable to have different strengths, but I included this in case you consider it invalid. The regression is reasonably useful without the variable, you just drop R^2 a lot, and reach the same conclusions on the price trend.

How ‘bout those Stata Logs

Fine fine… Here is regression #3

Linear regression Number of obs = 77

F( 6, 70) = 8.52

Prob > F = 0.0000

R-squared = 0.5250

Root MSE = 18832

------------------------------------------------------------------------------

| Robust

soldprice | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-------------+----------------------------------------------------------------

daysago | 123.4795 35.79553 3.45 0.001 52.08754 194.8714

bed | 15255.4 7203.995 2.12 0.038 887.4886 29623.32

bth | 17246.57 9697.281 1.78 0.080 -2094.052 36587.18

sqft | 88.41503 25.2406 3.50 0.001 38.07424 138.7558

yearsagobu~t | -1690.508 430.1378 -3.93 0.000 -2548.391 -832.6255

overprice | -.8145235 .2480114 -3.28 0.002 -1.309167 -.3198804

_cons | 259806.1 33764.72 7.69 0.000 192464.4 327147.7

------------------------------------------------------------------------------

Aliso Viejo Analysis -- Link to Word Document


PNG file regression analysis


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