Apr 11th, 2007
As I mentioned in my first post I am IrvineRenter (Inventory Cholesterol), I sometimes have access to information not widely known to the general public. Today I came across something I thought would be of interest to the board. In a conversation with a City Councilman from a city in Riverside County, I was told the following:
- New home permits (and associated fees) are down by 64% this year.
- Sales tax revenues are down 6% - 8% this year.
- As a result, the City is going to slash its budget by 10% which will likely result in layoffs.
It's different in Riverside County, you know. What is going on there?
IMO, the drop in new home permits is just a sign of the deepening crisis in the housing market. Where is the spring rally? What about all the foot traffic we have been hearing about? If the builders were anticipating renewed strength in the housing market, wouldn't they be starting on new homes?
IMO, the 6%-8% decline in sales tax revenue is even more alarming. If unemployment is low and everyone is working, why would consumer spending fall off so dramatically? Were the builders and sub-contractors activities accounting for that much of they local economy? What role does the decline in mortgage equity withdrawal have in this decline? Is everyone tapped out? Many of the housing bears have stated the economy is too dependent on real estate and continued Ponzi Scheme borrowing and it is due for a crash. Are they right? A 10% drop in economic activity sounds like a pretty hard landing to me.
On a related but lighter note, my bearish outlook is starting to take a toll on my spiritual life. Last night I had a dream in which I prepared my family for disaster. I outfitted everyone with lead jackets, and we hunkered down behind a thick wall of reinforced concrete. Not long thereafter a nuclear bomb detonated in our proximity. We witnessed the destruction from ground zero. We were the only survivors.
Anybody want to analyze that one? Pardon me while I refit my tin-foil hat...
Asking Price: $1,829,000
Purchase Price: $1,429,000
Purchase Date: 3/10/2006
Address: 34 Shepard, Irvine, CA 92620
Sq. Ft.*: 3,800
Lot Sq. Ft.*: 6,000
Year Built: 2005
Type: Single Family Residence
$/Sq. Ft.*: $481
Status: Active on market
On Redfin: 83 days
Here we have a shepard who needs a sheep to fleece. It seems many of the sheeple didn't get the memo about continual double digit price appreciation in Irvine. They haven't shown up for 83 days to buy our shepard's home for $400,000 more than he paid for it one year earlier. If this isn't an example of Southern California’s Cultural Pathology I don't know what is? The mentality that believes you should make $400,000 a year for simply owning your home. Unbelievable!
From Redfin "Most popular elevation in this JB plan 1. Long Driveway, porte cochere leads to rear/attached 2 car garage. Hardwood flrs down, carpet/tile, many upgrades: intercom, surround sound, security syst. , ceiling fans custom window coverings, central vaccum, sound attenuation insulation. Superb home. Completely landscaped, BBQ, lampposts in rear, attention to detail and quality. Walking distance to parks, Woodbury's Commons, Shopping center, new elementary school."
Personally, I would not like the porte cochere driveway. Every day I would be worried that either me or my wife was going to smash into the house while backing out. Although, it does make for a nicer front elevation when the house isn't rear loaded (most of Woodbury is).
It would appear the price will need to fall before it will generate any buyer interest. Another 5 bedroom in the neighborhood at 11 Ingleside is asking $427 SF or $1,325,000. A nearby 3 bedroom at 105 Mission is asking $370 SF or $724,800, and it has been on the market for 85 days, so it is probably priced too high as well. If our flipper reduces the price to $370 SF, we are back to his purchase price. Will he do it? I guess it depends on whether or not he really wants to sell it.
Apr 10th, 2007
Asking Price: $925,000
Purchase Price: $940,000
Purchase Date: 11/07/2005
Address: 4 Ticonderoga, Irvine, CA 92620
Sq. Ft.*: 3,029
Lot Sq. Ft.*: 5,300
Year Built: 1980
Type: Single Family Residence
$/Sq. Ft.*: $305
Status: Active on market
On Redfin: 52 days
We have written a great deal about the coming foreclosure tsunami which will drive prices lower. This is just the beginning. This house is going to sell for less than its 2005 purchase price because the owner has to sell. Must-sell inventory lowers the comps in the entire neighborhood. Right now, these sales are more the exception than the rule, but the stress of mortgage resets has not hit the market yet, so more of these sales are coming.
From Redfin: "SHORT SALE, PRE-FORECLOSURE, UNDERMARKET OPPORTUNITY. A bright home in desirable Northwood Village of Irvine. Walking distance to elementary & middle schools and community park. One bedroom and bath in main floor. Low maintenance backyard with fruit trees. Large 5th room may be used as library, gameroom or office. No association and No Mello Roos fees. House is sold AS-IS w/ no Warranties of any kind implied or not."
Assuming a 6% commission, and assuming this wasn't a negative amortization loan, this lender will lose $70,500 on this FB. What is worse is the impact on the neighborhood. If Zillow is any indication, this sale will reduce the property values in the entire neighborhood about 10%. So it begins...
Apr 8th, 2007
Southern California is a beautiful place. The weather is perfect, there is a lot to do, and the people are generally friendly and keep out of your business. For those reasons and many others, I have chosen to make Southern California my home. However, Southern California is not perfect. The culture is infected with pathological beliefs that have led us to the huge problem with house affordability and the impending disaster in our real estate market.
What do I mean by Cultural Pathology? There are certain beliefs if widely held and acted upon by a group of people leads inevitably to collective suffering and/or destruction. One example we all see is in the American auto industry. Before imports hit our shores the American auto industry used to believe the quality of their product did not matter, people would buy their product irrespective of quality. For many years, the industry was successful despite this pathology. This belief allowed offshore competitors to enter the market, build market share, and finally take over the industry. The American auto industry's belief system has had a pathologic effect on their business which has caused much suffering in Detroit, and it may ultimately lead to the bankruptcy and destruction of our major automakers.
The best treatise on the pathology of cultural beliefs was George Orwell's novel 1984. In Orwell's vision, a totalitarian State had convinced the populace the following:
- WAR IS PEACE
- FREEDOM IS SLAVERY
- IGNORANCE IS STRENGTH
Although these statements are clearly contradictory, in the story the slogans do make sense to the State. For example, through constant "war", the State can keep domestic peace; when the people obtain freedom, they become enslaved to it, and the ignorance of the populace is the strength of the State. Just as Orwell's Big Brother convinced the populace the above contradictions were true, Southern Californians (with a little help from their own Big Brother, David Lereah, president of the National Association of Realtors) have convinced themselves the following:
- APPRECIATION IS INCOME
- CREDIT IS SAVINGS
- DEBT IS WEALTH
Just as these statements are contradictory and ridiculous, the proof that these statements are believed is that they are reflected in the actions of Southern Californians. For example, through borrowing against one's increasing home values, appreciation is turned to income; when people obtain more credit, they spend it like available savings, and a large amount of debt used to finance a large, opulent home makes one wealthy. Ask any homedebtor in Southern California, and they will tell you that makes perfect sense.
The problem is rooted in a basic misunderstanding of what separates the rich from the poor: the habit of saving. You have heard the expression, "the rich get richer and the poor get poorer." It is more accurate to say the rich save money and the poor spend it: in the end, the rich will have money, and the poor will have none. This is not one of life's inequities, but rather of of life's simple truths.
When you hear your average Joe tell you he wants to be rich, what he is really saying is he wants unlimited spending power. He wants the ability to spend like the rich people he sees wearing Rolexes and driving BMWs to their mansions in Shady Canyon. This is why, when given the chance, poor people will emulate the rich by spending beyond their means in order to be rich. Of course, in the process, they spend themselves poor.
Appreciation is Income
Look at the difference between the behavior of rich and poor when it comes to home price appreciation. The rich view home price appreciation as adding to their net worth. If lower interest rates allow them to refinance, they will restructure their debt to pay off the loan more quickly in order to increase their wealth. Poor people view home price appreciation as income; free money for them to spend. If lower interest rates allow them to refinance, they will restructure their loan to pull as much home equity as possible and reduce their payment as much as possible so they can spend more. If any net worth happens to accumulate, they obtain a home equity line of credit and spend the appreciation as quickly as possible -- it makes them feel rich even though it really makes them poor.
Credit is Savings
So how do the rich and poor deal with credit? The rich don't carry consumer debt. Why would they pay interest on a credit balance when it almost always costs more than the income they earn on their savings? The rich will use credit sparingly and most often pay off any credit balances each month as the bill comes due. In contrast, the poor carry as much consumer debt as they can afford to service. Whenever they receive an increase in a credit line, they believe they have more money to spend, just like it was savings. In a strange way, a credit account is like a savings account, only it has a negative balance. In a savings account, the saver earns money; in a credit account, the spender loses money. Again, the rich have savings, and the poor have credit.
Debt is Wealth
There are a great many Southern California residents who live in big houses, and they believe that makes them rich. To them, the possession and use of an expensive house makes them wealthy even if they have no equity in the property. The rich buy less home than they can afford and work to pay off the debt in order to maximize their net worth. The poor stretch their finances to possess more home than they can afford with loan terms which never retire the debt, or in the case of negative amortization loans, actually increases their debt held against the property. This ensures they either never gain any equity or only gain it by appreciation, and as mentioned previously, if prices appreciate they quickly withdraw the gain to fuel more consumer spending.
It's a California Thing
So what happens when you give poor people money? They spend it. I'm sure you have all heard the stories of people who won the lottery and managed to spend themselves into bankruptcy a few years later. These stories are classic examples of the pathology of the beliefs of spenders. A great many Southern Californians are spenders. This is why I contend that Southern California has a strong cultural pathology. The reason our house prices have been bid up to such dizzying heights is because there is a high percentage of our population in Southern California that subscribes to the spending habits I have described. They went out and borrowed as much money as they could with suicide loans, bought up all the real estate they could get their hands on, and in the process drove real estate prices into the stratosphere. In other areas of the country, reckless spending is not so trendy, and home prices have not been bid up so high.
I grew up in the Upper Midwest in a rural farm community. Pretentious displays of conspicuous consumption are less common in the Midwest, and consumerism is often viewed with contempt rather than envy. In short, there is a smaller percentage of the general population in the Midwest with the aforementioned pathologic beliefs. To prove this, I would like to profile Minnetonka, Minnesota, a suburb of Minneapolis with very similar income and demographics to Irvine. According to Sperling's Best Places, the median income in Minnetonka, Minnesota is $84,024, and the median income in Irvine, California is $84,253. I think that is close enough to be a good comparable. The median home price in Minnetonka is $305,600 and the median home price in Irvine is $689,000 (92620 Zip Code). If my thesis is correct, one would expect to find a much higher percentage of home loans utilizing exotic loan terms in Irvine as compared to Minnetonka. Remember the Map of Misery?
In fact, according to the map, in 2006 the Minneapolis area had 8.7% of its loan originations were negative amortization, while Orange County had 32%. In all of California more than 80% of loan originations in 2006 were either option ARM or interest-only. Here we have two groups of people with the same median income, and with the same access to credit making very different choices. Potential homebuyers in Minnetonka and Irvine faced the same decision on taking out a suicide loan and buying more house than they can afford or chosing to live within their means. Very few in Minnetonka chose to overextend themselves, so they did not bid up the values of their houses. Orange County (and the rest of Southern California) chose to utilize exotic financing and thereby real estate prices were bid much, much higher. The high utilization of exotic financing was the cause of the price increase not the result of it. Nobody was forced to buy.
So if we accept the premise that Southern California has a high percentage of its population with the spending habits I have described, so what? Everyone here in Southern California is spending freely, feeling rich, and enjoying life. What is the problem? Where is the pathology? Isn't it true Californians are just more financially sophisticated than the rubes back on the farm in the Midwest?
It is pathologic because it is not sustainable: It is a house of cards. There is an inevitable Day of Reckoning when all debts must be paid. Charles Ponzi (see image below) was the most extreme example of the pathologies illustrated in this post. So extreme was his activities, that the term Ponzi Scheme has become synonymous with the use of ever increasing amounts of investment or debt. This scheme is also encapsulated in the expression "robbing Peter to pay Paul." At some point, the debt becomes so large that no lender is willing to loan more money and no greater fool can be found to bail them out, and the whole system comes crashing down. However, while the debt was building, the debtor became accustomed to a certain lifestyle and level of spending. When the credit is cut off, the debtor can no longer spend, and a great deal of suffering ensues (See Dr. Housing Bubble).
We are quickly approaching the Day of Reckoning in our housing market. In my view this will be Armageddon for California debtors: the spending will stop, they will lose their homes and with it their illusion of wealth, and they most definitely will not be enjoying life. The cause of all the weeping and gnashing of teeth will not be some exogenous event, but rather a direct result of the circumstances they themselves created.
For a refresher read: Financially Conservative Home Financing
P.S. Go back and click on the images.
Apr 7th, 2007
Asking Price: $739,000
Purchase Price: $605,000
Purchase Date: 1/10/2005
Address: 20 Entrada E, Irvine, CA 92620
Sq. Ft.*: 1,561
Lot Sq. Ft.*: 4,275
Year Built: 1979
Type: Single Family Residence
$/Sq. Ft.*: $473
Status: Active on market
On Redfin: 18 days
Craigslist, Redfin, Zillow
Since there is no agreed upon definition of a flip, I will profile this one anyway.
From Redfin "Lovely single level detached home at the end of cul-de-sac just steps from a park. Spacious and open floor plan with liv & fam upgraded with new pergo floors, new cabinets, new granite countertop, new sinks & faucets, new sliding doors & all new windows, new stove & microwave, new recess lights and new light fixtures. Quiet and green backyard with grass & lushes. 3-patio off of liv, kitchen and master BR. Superb amenties offered by HOA. No mello roos and low HOA fee. Great family neighborhood."
I managed to find a picture of the backyard. There seems to be only one lush passed out back there, so the description may be incorrect.
Perhaps this isn't a flip. Perhaps they needed to sell for any of the reasons people have. Since this is Irvine, they must be entitled to a greater than 20% gain simply because they owned real estate. I appears this unit is empty, so I would not be surprised to see quick price reductions to find the market and stop the financial bleeding.
Maybe they will get it, or maybe they missed the peak, and they will wait a very long time before getting their price.
Entrada, by Mary Rosenblum
A.K.A. the flipper before this house sells for asking price.
Apr 6th, 2007
Asking Price: $675,000
Purchase Price: $624,500
Purchase Date: 8/19/2005
Address: 75 Chantilly, Irvine, CA 92620
Sq. Ft.*: 1,824
Year Built: 2005
$/Sq. Ft.*: $370
Status: Active on market
On Redfin: 265 days
The word "Chantilly" brings up many historical and artistic references ranging from a picturesque region in France, to orchids, fine lace, and classic music from the Big Bopper. There is a certain "feel good" quality with Chantilly. However, I don't think our homedebtors are feeling particularly good about the dead weight they have been carrying for most of the last year: 265 days on the market. Wow!
I know this isn't rocket science, so what advice would you give someone who has been trying to sell their house for almost a year? Lower the price, perhaps?
Therein lies the problem: They are a flipper, so they have no equity. If they sell for their asking price of $675,000 assuming a 6% commission, they will make exactly $10,000. Of course, they may not be paying a 6% commission. Do you think their relative/realtor will kick back some of the commission?
From Redfin: "REDUCED, REDUCED. OWNER IS MOTIVATED WILL CONSIDER ALL OFFERS!!!!!!!Just like new. 1 year old Charming 2bd + office downstairs or possible 3rd bedroom, 2 bath condo. New paint throughout, stainless steel appliances. Spacious bedroom and master suite. Spacious floor plan with great room appeal. French doors go out from kitchen/eating area to balcony. Cozy courtyard. Best priced home in the area. Agent related to the seller. [emphasis mine] OWNER IS MOTIVATED TO SELL."
Do realtors realize how lame it is when they write in ALL CAPS and put in 7 exclamation points for emphasis? They are ANNOYING!!!!!!! OBNOXIOUS!!!!!!! IRRITATING!!!!!!! AGGRAVATING!!!!!!! Pardon my rant... It needed to be said...
This seller must be motivated. They are willing to sell real estate without making a huge profit. It has only taken them 265 days to give up their profit. How MOTIVATED!!!!!!!
Just think, for $675,000 you can live in a two bedroom condo with a great view of your neighbor's bedroom. You better hurry, at only 265 days on the market, this one is going FAST!!!!!!!
Chantilly lace and a pretty face
And a pony tail hanging down
That wiggle in the walk and giggle in the talk
Makes the world go round
Chantilly Lace (YouTube): by The Big Bopper (Wiki)
Road at Chantilly (Web Museum): by Paul Cézanne (Wiki)
Address: 71 Alevera, Irvine, CA 92618 (Oak Creek)
Plan: 1300 sq ft - 3/2.5
MLS: S472766 DOM: 72
Sale History: 6/10/2005: $621,000
Price Reduced: 02/15/07 -- $675,000 to $655,000
Price Reduced: 03/13/07 -- $655,000 to $645,000
Price Reduced: 04/01/07 -- $645,000 to $635,000
Current Price: $635,000
This home is a Plan 3 detached condo in the Aldea tract built by California Pacific Homes in the village of Oak Creek. The current owners purchased the home in June 2005 for $621,000 and listed it on the market about 18 months later for $675,000. After the reducing the price 3 times, the new asking price is $635,000. Assuming 6% in selling costs, they are looking at a $24,000 loss if they get their asking price.
Let's see how much this exact plan (Plan 3) is listing for around Irvine:
And a Brand NEW Plan 1 at Decada (similar but with more sq ft) in Portola Springs starts at $580,000!