Apr 24th, 2007
Asking Price: $280,000
Purchase Price: $265,000
Purchase Date: 10/8/2004
Address: 302 Tangelo, Irvine, CA 92618
Sq. Ft.*: 662
Year Built: 1978
$/Sq. Ft.*: $423
Status: Active on market
On Redfin: 40 days
They say a picture is worth a thousand words. The following is pure speculation based on the picture above...
Toward the end of 2004 a young family wanted to get in on the hot housing market and perhaps make some money to trade up to a larger home. They found what they could afford: a 662 SF condo in Orangetree. The family has been living in these cramped quarters for two and a half years sacrificing the much larger space they could have rented in order to build equity in a home (sounds better than flipping, doesn't it?) After all the sacrifice, they missed the peak of the housing bubble, and they need to sell now for full asking price just to get out at breakeven. It probably won't happen.
Do we feel sorry for these people? Didn't they do what you are supposed to do in Southern California? Is this the profile of a greedy flipper? Where did they go wrong?
What happens if they can't sell now and end up the bagholder? How would you like to be trapped in a 662 SF condo and be $150,000 underwater for 5 or 10 years? Do you walk away and declare bankruptcy?
Just one example of the death of the California Dream...
I walk a lonely road
The only one that I have ever known
Don't know where it goes
But it's home to me and I walk alone
I walk this empty street
On the Boulevard of Broken Dreams
Where the city sleeps
and I'm the only one and I walk alone
Green Day -- "Boulevard Of Broken Dreams"
Apr 23rd, 2007
Denial runs deep in the financial markets. The vast majority of participants either want or need prices to steadily increase. Any facts or opinions that run counter to the idea of ever increasing prices must be quelled in order to prevent a catastrophic collapse of prices due to panic selling. One of the more glaring examples of this phenomenon has been the slow leak of information regarding the upcoming debacle in our housing market.
In February and March as the sub-prime lending implosion became front page news, market bulls were presented with a major public relations problem. It was imperative for the bulls to convince buyers the damage from subprime lending was "contained" and would not "spill over" into other borrower categories and ultimately into the overall economy. The supposition is that the widespread use of exotic loans is not the problem, it is the practice of giving these loans to those with low credit scores. In other words, it is not the loans, it is the borrowers. This is wrong. It is not the borrowers; it is the loans.
As a primer, I would like to illustrate the basic distinctions made with the type of borrower and the type of loan (for a better, more detailed analysis see Calculated Risk). There are 3 main categories of borrowers: Prime, Alt-A and Sub-Prime. Prime borrowers are those with high credit scores, and Sub-Prime borrowers are those with low credit scores. The Alt-A borrowers make up the gray matter in between. Alt-A tends to be closer to Prime as these are often borrowers with high credit scores which for one or more reasons do not meet the strict standards of Prime borrowers. In recent years one of the most common non-conformities of Alt-A loans has been the lack of verifiable income. In short, "liar loans" are generally Alt-A. As the number of deviations from Prime increases, the credit scores decline until finally you are left with Sub-Prime.
There are also 3 main categories of loans: Conventional, Interest-Only, and Negative Amortization. The distinction between these loans is how the amount of principal is impacted by monthly payments. A conventional mortgage includes some amount of principal in the payment in order to repay the original loan amount. The greater the amount of principal repaid, the quicker the loan is paid off. An interest-only loan does just what it describes; it only pays the interest. This loan doesn't pay back any of the principal, but it at least "treads water" and does not fall behind. The Negative Amortization loan is one in which the full amount interest is not paid with each payment, and the unpaid interest gets added to the principal balance. Each month, the borrower is increasing the debt. One of the features of all interest-only or negative amortization loans is an interest rate reset. All these loans have provisions where the loan balance comes due either in the form of a balloon payment or an accelerated amortization schedule. Either way, the borrower must either refinance or face a major increase in their monthly loan payment. This increase in payment is what makes these loans such a problem, and this is why it isn't the borrower, it is the loan.
As you can see from the table above, the category of loan and category of borrower are independent of each other. Starting in the lower left hand corner, we have the lowest risk loan for a lender to make, a Prime Conventional mortgage. As we move up or to the right, the risk increases. The riskiest loan a lender can make is the Negative Amortization loan to a Sub-Prime borrower.
The market apologists have admitted there is risk going up the side of the chart because sub-prime borrowers are beginning to default. These same spin-doctors are denying the risk of default will spill over into Alt-A and Prime. They making this argument because these two categories have historically had low default rates. They conveniently forget all the "liar loans" taken out by those with higher credit scores and payment resets for I/O and neg am loans which were also given to the Alt-A and Prime crowd. Historically, this group has not defaulted because they have not been widely exposed to these loan types. Basically, they are ignoring the risk moving along the bottom of the chart: the risk endemic with Interest-Only and Negative Amortization loans. This is a fatal flaw in their analysis.
So why will so many Alt-A and Prime borrowers go into default? To answer that question, we need to make a more detailed analysis of the exhibit: Adjustable Rate Mortgage Reset Schedule
First, I would suggest you review Financially Conservative Home Financing. In that post I stated, "At the time of reset, if you are unable to make the new payment (your salary does not increase), or if you are unable refinance the loan (home declines in value), you will lose your home. It’s that simple." It is my contention based on the information in the above chart, we can deduce the Alt-A and Prime borrowers will face one or both of the conditions which will cause them to lose their homes.
Look at the gray bars which make up the majority of the reset amounts due over the next 24 months (2007 and 2008). These are the Sub-Prime borrowers. They are already defaulting in large numbers, and we have all witnessed the tightening of credit (or elimination of credit) being offered to these borrowers. We also know many of these borrowers were put into the dreaded 2/28 loans and they cannot afford the reset. And, as if that isn't enough, most of these borrowers were given 100% financing (if they could save up for a downpayment, they probably wouldn't be Sub-Prime.) Therefore, it is probably safe to assume many if not most of these borrowers will default. Why wouldn't they? Most haven't put any money into the transaction, they have no equity as prices are declining, and they already have bad credit. What is the worst that could happen? They will just go back to renting, big deal. Think about what that means... a large number of defaults and foreclosures will occur over the next 3 years (the time span will be spread out due to differences in borrower holding power and the time spent in the foreclosure process).
In addition to the tightening credit and worsening buyer psychology, if large numbers of sub-prime borrowers are defaulting over the next 3 years, prices will certainly fall. Therefore, it is also safe to assume that when the Alt-A and Prime borrowers who have taken out adjustable rate mortgages need to refinance starting in earnest 3 years from now (see the red and light gray bars in the Adjustable Rate Mortgage Reset Schedule), they may be underwater and unable to refinance.
Why do I think so many will be underwater? For one, prices will be significantly lower in 2010. In the forums, we have already documented price reductions by the builders of about 15%, and we also know it isn't helping sales. More builder price reductions are on the way. It isn't difficult to imagine prices being 30% or more below the peak by 2010. How many Alt-A and Prime borrowers with adjustable rate mortgages do you think have more than 30% equity in their properties?
Nationally, approximately 40% of residential real estate is owned outright; therefore, if the total equity in real estate is 55%, the remaining 60% of homeowners have a total of 15% of home equity. This is admittedly a rough calculation, but it certainly does not appear as if a great many people with mortgages have more than 30% equity in their homes to ensure they are able to refinance. Many bulls have speculated that most Irvine homeowners are sitting on mountains of equity because home prices have increased so dramatically over the last 5 years. Sounds plausible, but it isn't true. Where did this equity go?
Has anyone else noticed all the conspicuous consumption in Irvine? Every house has two luxury cars in the driveway, the Spectrum is always full of shoppers, and every homeowner is busy competing with their neighbor to see who can look richer (see Southern California’s Cultural Pathology). If you want to know where all the equity went: they spent it.
To bring us back to where we started, a great many Alt-A and Prime borrowers will lose their homes because they will be hopelessly underwater when they need to refinance 3 to 5 years from now. If they had borrowed with conventional mortgages as they did in the past, they would not be facing this mortgage reset timebomb, and they would simply ride out the Sub-Prime debacle just as many homeowners made it through the declines of the early 90's. However, it is different this time. This time, the loans they have taken out are going to ruin them. It's not the borrowers, it's the loans.
Apr 21st, 2007
The Oak Creek Community in Irvine is bounded by Jeffrey Road and Woodbridge to the northwest, the 405 and open space to the southwest, Sand Canyon Road and a commercial district dominated by hospitals to the southeast, and Barranca Parkway and Orangetree to the northeast. Alton Parkway is the main arterial moving traffic through the area. Due to its proximity to the 405, the 5 and 133, it has great access to the surrounding area. Plus, it is 5 minutes from the Irvine Spectrum. Oak Creek is a newer community built in the late 90's and early 00's.
One of the features that makes Oak Creek a successful neighborhood is the vibrant "third places" you will find there. A "third place" is a place of public gathering for social and recreational activities. This contrasts with the home and work environments and special purpose public places like grocery stores, restaurants and other businesses. Third places create the sense of place which makes a community identifiable, unique and special to the inhabitants.
The suburban plaza at the shopping complex at Alton and Jeffrey is truly a special "third place." It is one of the most functional suburban plazas I have ever encountered. It is rarely empty, and the variety of people provides a glimpse into the lives of those who call Oak Creek home.
The central feature of Oak Creek is its elementary School.
The park and ball fields are generally abuzz with activity.
One very nice feature of the Oak Creek plan is the pedestrian crossing over Alton Parkway. It provides a safe link for children walking to the elementary school in the morning.
There are several community parks in Oak Creek. They are all well designed and well maintained.
The community pools are also first rate. Unfortunately, this pool is not heated. It doesn't seem to bother the duck though (left side of picture).
The parks all have great play areas, shade structures and clean bathrooms.
One of the unique features of Oak Creek is the multi-use trails built along both sides of the large drainage feature. This trail is great for bicycling, rollerblading, jogging, or walking.
Apparently, there is some available inventory in Oak Creek
Notice the random BMW?
In many of the comments on the last community profile, people expressed concern over the lack of children in Irvine. Based on the pictures above, I think it is safe to say, Irvine is still for families.
Irvine's Oak Creek: a great place to live.
Address: 26 Perennial, Irvine, CA 92603 (Quail Hill)
Plan: 1174 sq ft - 2/2
MLS: R65314 DOM: 138
Sale History: 7/6/2005: $532,000
Price Reduced: 06/20/06 -- $648,000 to $599,000
Price Reduced: 07/26/06 -- $599,000 to $579,000
Price Reduced: 08/21/06 -- $579,000 to $575,000
Price Reduced: 09/01/06 -- $575,000 to $570,000
Price Reduced: 09/18/06 -- $570,000 to $565,000
Price Reduced: 09/22/06 -- $565,000 to $559,000
Current Price: $550,000
This Plan 3 in the Jasmine tract built by Shea Homes in 2003 is in the village of Quail Hill. In the spirit of saving money and being an efficient builder, this tract was reincarnated in Turtle Ridge as Ashton Green. This condo was purchased on 7/6/2005 and then put back on the market less than a year later on 5/26/2006. The greed is clearly evident when you realize that this flipper expected a $116,000 profit! They quickly wised up and started reducing the price. I think they may have reduced the price so many times that ZipRealty currently doesn't even display the most recent price reduction.
If they obtain their current asking price and we assume 6% in selling costs, this seller will lose $15,000.
UPDATE #1 - October 19th, 2006
This greedy pig actually raised the price $50k yesterday as evidenced by ZipRealty:
Price Increased: 10/18/06 -- $550,000 to $599,000
Current Price: $599,000
You've got to wonder what's going through this seller's mind as they keep messing with the price. LOL, Perhaps they were getting too much interest at a price of $550k? This hog will get slaughtered.
UPDATE #2 - November 4th, 2006
The last price increase lasted only two days and then the listing was taken Off Market on 10/20/2006. I'll post another update when/if it gets listed again.
UPDATE #3 - April 21st, 2007
Well, this one is back on the market with MLS #: S474139
Price Reduced: 03/07/07 -- $595,000 to $575,000
Price Reduced: 03/27/07 -- $575,000 to $549,500
Current Price: $549,500
The $550k price didn't work 6 months ago but since the market is hot now, I'm sure this home will just fly off the market now
Apr 20th, 2007
Asking Price: $547,500
Purchase Price: $542,239
Purchase Date: 12/5/2006
Address: 8 Mozzoni Aisle, Irvine, CA 92606
Sq. Ft.*: 1,676
Lot Sq. Ft.*: 1,623
Year Built: 1990
$/Sq. Ft.*: $327
Status: Active on market
On Redfin: 124 days
Categories: Unsold in 90+ days
Date -------------- Price ---------- Apprec
12/05/2006 -- $542,239 -- -10.8%/yr
08/11/2005 -- $630,000 -- 15.5%/yr
09/24/1999 -- $270,500 -- 0.8%/yr
04/04/1991 -- $252,000
When I was looking for my most recent rental, I viewed one of the units in this community. The whole place is just too dense (a 1,623 SF lot, WTF?). When your in there, the claustrophobia is inescapable. The unit I viewed was completely updated. This one doesn't look like it has been touched since 1991.
Some properties just have bad karma. This one was purchased at the peak of the last bubble for $252,000. The original homedebtor sold 8 1/2 years later and made a whopping $2,270 after a 6% sales commission. When adjusted for inflation and accounting for the stress of being underwater for 8 1/2 years, I consider this one a loss. The second buyer did well doubling their money in 6 years. The third buyer... well, they lost about $120,000 after commissions in just over a year -- a 20% loss. Here is where it gets strange; the fourth buyer appears to have put the unit up for sale almost immediately after purchase as it has been on the market for over 120 days, and the last sale was almost that long ago. If this fourth buyer sells at the current asking price, assuming a 6% commission, they will lose $27,589 in just 4 months. I would add in some carrying costs as the unit is empty, but does anyone think this flipper is actually making any payments? I doubt it.
This property has had 4 owners; 3 of them are going to lose money on it. Who says real estate always goes up?
Originally posted January 29, 2007
Address: 2363 Watermarke Place, Irvine, CA 92612 (Jamboree/Campus)
Plan: 635 sq ft - 1/1
MLS: P555645 DOM: 14
Sale History: 3/14/2006: $417,000
Price Reduced: 01/22/07 -- $439,000 to $420,000
Current Price: $420,000
This flip is located in the Watermarke condo complex located near Campus and Jamboree (right behind The Plaza Irvine high rises). The 535 units of Watermarke were built by the Sares Regis Group from 2003-2005. It was originally supposed to be a luxury apartment complex (where it would be competing with Toscana and Villa Siena/Park Place). Halfway through they decided to do a condo conversion, PISSED off some people, and started selling the units instead of leasing them out.
There are several plans and the 635 sq ft Plan A is the smallest. I believe this plan started at around $300,000 back in late 2004/early 2005. I'm not 100% sure but from the property tax records, it seems this unit was originally purchased for about $342k. It was then flipped for a quick profit to the current owner who won't be as lucky.
The current owner purchased in March 2006 for $417,000 with a 100% financed loan. Yeah, we've seen this before. But by a Real Estate Broker? WTF?! There's no way this flipper can claim ignorance. This broker knew what they were getting into with 100% financing. Why did they decide to do it? My guess is GREED! Any other opinions?
I'm not sure if they occupied it for 6 months or not but in September 2006 they rented it out (MLS S457444) for $1850/month (furnished it seems). They listed it for sale on 1/14/2007 for $439,000 and then dropped the price to $420,000 a week later. If sold at $420,000 (and assuming 3% in selling costs - they are a BROKER afterall), they are facing a loss of $9600! That doesn't take into account the money they are losing each month.
Also there's probably more money to be lost in closing costs because the private remarks state: "Tenant has a lease through September 07 $1,850/month- willing to vacate with 30 days notice. Shows great! Plasma TV, washer, dryer, fridge, and some furniture negotiable. SHOWS GREAT! Possible credit to buyer for closing costs. Thank you. Seller is licensed real estate broker."
Will they be able to sell it? It'll be tough considering the other Plan A's listed on MLS are ALL cheaper:
- 2314 Watermarke Place - Plan A - $379,000
- 3237 Watermarke Place - Plan A - $382,000
- 3337 Watermarke Place - Plan A - $384,500
- 3216 Watermarke Place - Plan A - $389,000
- 3319 Watermarke Place - Plan A - $389,900
- 2235 Watermarke Place - Plan A - $399,999
UPDATE #1 - April 19, 2007
Thanks to dayday in the forums, I've come to learn the price here has dropped quite a bit. The MLS # is now U7000785 and this latest listing has been on the market for 59 days.
Price Reduced: 03/13/07 -- $429,000 to $409,000
Price Reduced: 04/12/07 -- $409,000 to $360,000
Current Price: $360,000
If sold at the current asking price and assuming 3% in selling costs, this investor is looking at a loss of about $68,000!
Here's what the other Plan A's are at now:
- 2314 Watermarke Place - Plan A - $369,000
- 2235 Watermarke Place - Plan A - $399,999
- 3267 Watermarke Place - Plan A - $409,000
- 3237 Watermarke Place - Plan A - Sold for $367,500 on 3/28/2007
- 3337 Watermarke Place - Plan A - Rented for $1,600 on 4/1/2007
- 3216 Watermarke Place - Plan A - Expired
- 3319 Watermarke Place - Plan A - Expired
Apr 18th, 2007
Asking Price: $888,000
Purchase Price: $855,000
Purchase Date: 11/24/2004
Address: 56 Shadowplay, Irvine, CA 92620
Sq. Ft.*: 2,492
Year Built: 2004
$/Sq. Ft.*: $356
Status: Active on market
On Redfin: 6 days
When looking at the state of the Irvine residential real estate market, I am noticing two different segments of the market showing stress: small starter homes and condos, and new construction purchased since 2004. Below is a screen capture of Redfin's map of homes available for sale in Woodbury and Northwood. The area in red highlight was built after 2004, and the area to the left is older construction in Northwood. Notice the larger number of for sale homes in the newer construction areas? This is opposite of what we should be seeing.
This says something about the current market: recent home buyers are concerned. Asking prices would indicate they are not panicking yet, but the number of homes for sale are showing their concern. Each of these homeowners is hoping a greater fool buys them out at breakeven during the spring buying season. When that fails to materialize, we should begin to see panic.
Giving hope to the FBs on this street is the recent sale of 58 Shadowplay, Asking $839,000, Paid $800,000 on 4/10/2007. It looks as if the original owner paid near $800,000 for this property as the assessed value was $812,940 which represents the original purchase price with some adjustment. This original owner lost the commissions ($48,000 @ 6%) and whatever carrying costs were put into the place. I hope the new owners are happy; despite the loss, I imagine the seller is happy.
The property at 56 Shadowplay is one of 3 properties for sale on this one spot of this one street. The others are not going to be so happy with the $363 / SF sale price of 58 Shadowplay:
62 Shadowplay, Asking $849,000, $396 / SF, Paid (unknown, assessed at $800,624), DOM 236
68 Shadowplay, Asking $850,000, $396 / SF, Paid $782,000 on 6/30/2005, DOM 49
Are our featured owners quixotically jousting with windmills, engaging in their own shadow play, or are they serious about selling. Since they are looking at a loss, I would say they are serious. If 56 Shadowplay gets the full asking price of $888,000, and assuming a 6% commission, this seller stands to lose $20,280. They will not like the loss, but better a small loss than being the bagholder for the big drop to come...
P.S. Check this out Sichuan shadow play