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The $179K Bedroom

Oct 2nd, 2007 by IrvineRenter 

You're in denial, you never will believe it's you
Denial, you always hide behind the truth
You'll never believe it, you never believe it's you
You'll never believe it, you never believe it
Secrets told you, dreamland holds you, secrets told you
You wouldn't believe it, you couldn't conceive it
Secrets told you...

Denial -- Ozzy Osbourne

Link to Paranoid Video

This is a difficult time to sell a home. With some in denial and some in fear, sellers are unsure how to price their homes, so there is variety in pricing among similar products. However, there are some disparities that are so large that one has to ask, "Did you even look at the neighborhood comps?"

First our rollback...

Asking Price: $499,999

Income Requirement: $124,999

Downpayment Needed: $99,999

Purchase Price: $565,000

Purchase Date: 9/27/2005

Address: 5294 Plum Tree, Irvine, CA 92612

1st Loan $452,000
2nd Mtg. $113,000
Downpayment $0

Beds: 2
Baths: 2
Sq. Ft.: 1,224
$/Sq. Ft.: $408
Lot Size: 2,988 sq. ft.
Type: Single Family Residence
Style: Ranch
Year Built: 1973
Stories: One Level
Area: University Park
County: Orange
MLS#: S505717
Status: Active
On Redfin: 13 days

From Redfin, "Fantastic opportunity to own a distinctive home with a modern feel and a abundance of amenities. A spiraling staircase leads to a enclosed loft that could be used as a office or an extra bedroom. Contemporary lighting throughout with vaulted ceiling and skylight in the living room. Exceptional association facilities with 2 pools, clubhouse, greenbelts, spas, and BBQ. Great location with easy access to freeways and shopping."

This seller forgot to ask for the 99 and nine tenths of a cent. I guess this does put them under half a million...

Did you see the red spiral staircase? The only thing this apartment is missing is the stripper's pole.



This owner is serious about selling their property. If they get their asking price, they stand to lose $95,000 after a 6% commission -- well, actually the bank stands to lose that much.

Isn't 100% financing great? It is a free call option. There is no risk of loss to the buyer, and they get all the upside.

Asking Price: $678,000

Income Requirement: $169,500

Downpayment Needed: $135,600

Purchase Price: $582,000

Purchase Date: 5/28/2004

Address: 5341 Plum Tree, Irvine, CA 92612

1st Loan $465,600
2nd Mtg. $87,300
Downpayment $29,100

Beds: 3
Baths: 2
Sq. Ft.: 1,532
$/Sq. Ft.: $443
Lot Size: 6,600 sq. ft.
Type: Single Family Residence
Style: Contemporary, Ranch
Year Built: 1975
Stories: One Level
View(s): Hills
Area: University Park
County: Orange
MLS#: S504269
Status: Active
On Redfin: 25 days

From Redfin, "One of a kind corner location, extra long driveway and great curb appeal. Large yard with extra privacy. Remodeled kitchen, new flooring, and much more. Hard to find SINGLE level home in a move in condition. Very close to shops, schools, parks, Freeway and UCI."

One of a kind corner location? You mean one of a couple dozen similar corner locations? Plus, it is next to the collector street, so it is noisier.

This entire neighborhood is full of single story homes. They are hard to miss, not hard to find.



This seller is not serious about selling their house. It is not the best comparable to the first property as it is 300SF larger and it has one more bedroom (I suspect they are counting the loft.) However, it is the same street, the same style, the same age, etc., and the purchase prices were almost the same. Basically, this seller is asking you to pay $179,000 more for the third bedroom. I believe 3 bedrooms should carry a premium over 2/2s, but not that much.

You tell me, would you pay $179K in premium for a bedroom?

Posted in Price Rollback

What Caused the Bubble Rally?

Oct 1st, 2007 by IrvineRenter 

In an earlier post, How Sub-Prime Lending Created the Housing Bubble, I gave a brief description of the impact of adding a large number of new buyers to the market. However, the title is somewhat misleading because it does not fully explain how the bubble was inflated. In this post, I hope to provide a more detailed explanation of what factors and conditions combined to drive prices so high.

The Great Real Estate Bubble was caused by 4 interrelated factors:

  1. Separation of origination, servicing, and portfolio holding in the lending industry.
  2. Innovation in structured finance and the expansion of the secondary mortgage market.
  3. The lowering of lending standards and the growth of subprime lending.
  4. Lower FED funds rates as a catalyst (Lowering mortgage rates was not a big factor.)
  5. The negative amortization loan (Option ARM.)

The secondary mortgage market came into being in the early 1970s to provide greater liquidity to banks and other lending institutions to facilitate home mortgage lending. Freddie Mac and Sallie Mae were set up to package loans together into pools and sell them to investors as mortgage-backed securities.

As the secondary mortgage market continued to grow, lending institutions began to sell the loans they originated rather than keeping them in their own portfolio. The banks began to make money by originating and servicing loans rather than through keeping them and earning interest. This was a dramatic shift in lending practices.

With this shift came an equally dramatic shift in incentives: lending institutions stopped being concerned with the quality of the loans because they didn’t keep them, and instead they became very concerned with the volume of loan origination and the fees this generated. This fundamental change in the behavior of lenders leads inevitably to a lowering of lending standards. Lower lending standards opened the door for lenders to provide loans to those with low FICO scores: subprime borrowers.

Subprime lending as an industry barely existed prior to 1998. There were no lenders willing to loan to people with poor credit, and there was no secondary market to purchase these loans if they were originated. The growth of subprime was the direct result of the lowering of lending standards created by the change of incentives brought about the creation of the secondary market.

These factors alone were not enough to create the Great Housing Bubble, but they provided the basic infrastructure to allow house prices to take flight. The catalyst for the inflation was the Federal Reserve’s lowing of interest rates in 2001-2003.

Many mistakenly believe the lower interest rates themselves were responsible by directly lowering mortgage interest rates. This is not true. Mortgage interest rates declined during this period, and this did allow borrowers to finance somewhat larger sums with the same monthly loan payment, but this was not sufficient to inflate the housing bubble. This is also why a lowering of interest rates will not be able to save the housing market. The only thing that would do that would be another massive influx of capital.

Notice that mortgage interest rates have ranged from a high near 7% in 2001 to a low near 5.5% from 2002 to 2005. The drop from 7% to 5.5% would have supported a 15% increase in prices, not the 150% increase in prices which actually occurred.

The lower Federal Funds rate did cause an expansion of money supply, and it lowered bank savings rates to such low levels that investors sought other investments with higher yields. It was this increase in liquidity and quest for yield that drove huge sums of money into mortgage loans.

This is where another of the lending industry's innovations comes into play: structured finance. Debt is money. If you can find a way to create more debt, you create new money. The problems comes when you create more debt than there is cashflow to service it which is where we are now. There is a tipping point where the debt service exceeds the cashflow, and when this tipping point is reached, the entire debt structure collapses in a deflationary spiral. The structured finance products such as collateralized debt obligations and their derivatives are highly leveraged instruments with a very sensitive tipping point. This is why the hedge funds at Goldman Sachs imploded so quickly and so completely.

With a huge influx of capital into the secondary mortgage market, the industry was under tremendous pressure to deliver more loans to hungry investors. This caused the already-low loan standards to be all but eliminated. All of the worst “innovations” in the lending industry occurred during this period: Negative Amortization loans, Stated-Income loans (Liar Loans,) NINJA loans (no income, no job, no assets,) 100% financing, FICO scores under 500, one-day-out-of-bankruptcy loans, etc. The joke was if you could “fog a mirror” or if you “had a pulse,” you could get a loan for as much as you wanted to buy a house.

The real culprit in the housing bubble was the negative amortization loan. No other innovation or practice drove prices higher than this one because it allowed borrowers to take on so much debt.

The same monthly housing payment with an Option ARM finances double the loan balance. As I stated in, The Anatomy of a Credit Bubble, "Stop for a moment and ponder the math: the same payment now finances 100% more money. Is it any wonder the real estate market was 100% overvalued at the top? People purchasing with Option ARMs were buying at the rental equivalent value. From a financing perspective, the market was not overvalued. People were paying exactly what they should have been paying. They were just doing it with loan terms which were going to destroy them — hence the term “suicide loan.” " Now that Option ARMs are disappearing, what do you think will happen to house prices?


First, the infrastructure was built to deliver capital to the housing market, which in turn changed the incentives in the lending industry. Next, the FED created conditions where large amounts of capital was seeking a new home (pun intended.) Finally, the lending industry "innovated" and found unique -- and inherently unstable -- ways of putting this capital to work. What you get in the end is a massive asset bubble.

There is a larger issue here pertaining to the FEDs monetary policy that I hope you see. The creation of the secondary market for mortgages alone was not the problem. The change in lender incentives might have created some issues, but without a huge influx of capital to put pressure on the system, it probably would not have broken. When the FED stimulates the economy through lowering interest rates and increasing the money supply, that money will go somewhere. When it does, it creates massive distortions in asset values and with it a commensurate inefficient use of investment capital. This is not free-market capitalism, it is government welfare doled out to the investment class. Ben Bernanke is taking us down this road yet again. If he continues to lower interest rates, investment capital will flow into a new asset class (no, it will not flow into housing and save the day.) How many more bubbles must we endure before the FED stops creating them?

Home Sales Data thru 9-24-2007

Sep 30th, 2007 by IrvineRenter 

Median sale price

Sales volume



Prev. 4 weeks

% change

 from ’06

Prev. 4 weeks

% change

from ’06









































Posted in News

Shady Canyon Rollbacks

Sep 28th, 2007 by IrvineRenter 

Big money goes around the world
Big money take a cruise
Big money leave a mighty wake
Big money leave a bruise
Big money make a million dreams
Big money spin big deals
Big money make a mighty head
Big money spin big wheels

Sometimes building ivory towers
Sometimes knocking castles down
Sometimes building you a stairway

Big Money -- Rush

Link to Music Video

The high end is immune, right?

There are not many properties in Shady Canyon, and even fewer on which I can find the purchase information; however, there are three rollbacks sighted so far. Will there be more on the way?

The first of this is Mark McQuire's old place. This property is the market leader on the way to the bottom. The price was just reduced again. The flipper is looking at a loss of nearly a million dollars after commissions. That property is clearly leading in our race to the bottom, but the two properties we have today are working to catch up.

Asking Price: $3,998,000

Income Requirement: $999,500

Downpayment Needed: $799,600

Purchase Price: $4,030,000

Purchase Date: 1/6/2006

Address: 25 Golden Eagle, Irvine, CA 92603

Beds: 4
Baths: 5
Sq. Ft.: -
Lot Size: 0.59 acres
Type: Single Family Residence
Style: Mediterranean
Year Built: 2003
Stories: One Level
View(s): Hills
Area: Turtle Rock
County: Orange
MLS#: S498428
Status: Active
On Redfin: 63 days

From Redfin, "Single Story Custom Home in Shady Canyon. Great, private cul-de-sac location with only one adjoining neighbor. Unobstructed views of pastoral canyon and hills. Tuscan style home beautifully finished with Richard Marshall wood and stone. Spacious grounds with custom built fireplace, BBQ, spa and Wolf appliances throughout. Ideal for family with small child or retired couple. Blueprint and specs for the house are available. Opportunity to expand this single level house to 5900 sq ft."

What is Richard Marshall wood and stone? I guess I am I not cultured enough to know these things. I Googled them. I guess I should be impressed?

Are Wolf appliances better than Viking or Sub-Zero?

Ideal for family with small child or retired couple? I am sure there are many families with small children who want them running around in a museum with hard floors, not to mention the large numbers of families with small children who can afford this place. I don't know about you, but I will not want a 5,000+ SF McMansion when I am retired.



If this seller gets their asking price and pays a 6% commission, they stand to lose $271,880. There is no mortgage recorded on the property (at least in my database,) so this flipper can absorb the loss.

Asking Price: $4,495,000

Income Requirement: $1,123,750

Downpayment Needed: $899,000

Purchase Price: $4,550,000

Purchase Date: 8/8/2005

Previous Purchase Price: $3,553,500

Previous Purchase Date: 12/15/2004

Address: 50 Vernal Spring, Irvine, CA 92603

1st Loan $2,985,000
2nd Mtg. $200,000
Downpayment $1,365,000

Beds: 4
Baths: 4.5
Sq. Ft.: 5,000
$/Sq. Ft.: $899
Lot Size: 0.57 acres
Type: Single Family Residence
Style: Spanish
Year Built: 2005
Stories: One Level
View(s): Mountain
Area: Turtle Rock
County: Orange
MLS#: U7001638
Status: Active
On Redfin: 159 days
Unsold in 90+ days

From Redfin, "Model perfect single level Masters located in the exclusive golf community of Shady Canyon. This single level home offers three bedrooms plus bonus room and a rare four car garage at the main house and a 4th bedroom and office which is attached but functions as a separate casita! The stunning exterior landscape includes a long gated driveway, pool, spa and covered cabana with fireplace all with fantastic views!"



What I find interesting about this property is how much the previous flipper made: a hair under $1,000,000 in less than 9 months. No wonder our WTF winner from $1,000 Grand thought this was possible. Well, it looks like the supply of greater fools has run out, and this owner is now the bagholder. If they get their asking price, they stand to lose $324,700 after a 6% commission.

These losses are staggering. I don't care how rich you are, when you are losing a quarter of a million dollars or more, that is Big Money.

Time keeps on slippin' slippin', slippin', into the future... Or is that Time keeps slip sliding away... I hope you aren't Ticking away the moments that make up a dull day...

Another week has passed at the Irvine Housing Blog. Come join us next week as we continue to chronicle ‘the seventh circle of real estate hell.’ Have a great weekend.

Posted in Price Rollback

Is fear gripping the market?

Sep 27th, 2007 by IrvineRenter 

Ready for a cheap escape
On the brink of self destruction
Widespread panic
Broken glass inside my head
Bleeding down these thoughts of
Anguish... mass confusion

Panic Song -- Green Day

Link to Music Video

When I am preparing posts, I scan Redfin for properties. When I first started doing this in the spring, rollbacks were hard to find, and most sellers were still trying to make a profit or at least cover their commissions on a sale. As spring gave way to summer, I began finding more and more rollbacks, and foreclosures and short sales were becoming more common. As the summer progressed, I began finding more REOs and deeper rollbacks. It was a relatively quick (for a real estate market) transition from a bull market to a bear market. However, recently I have noticed a more significant change.

In August when the credit market seized up, sales -- which were already low -- almost completely stopped. This credit event and the problems it has created has been widely covered by the mainstream media which has brought it to full public awareness. Over the last few weeks, I have really noticed a change in the market I was not expecting until the winter: fear is gripping the market.

In the post Houses Should Not Be a Commodity I described the stages of a bubble market in great detail. IMO, the developments in the credit market have prematurely jolted the consciousness of the market from denial into fear. A change in market consciousness is a gradual transition as each of the markets participants has a different psychological makeup, but the behavior of many homeowners in the market is evidence that this transition has begun.

Back in mid-July, before the big credit market meltdown in early August, I profiled a series of properties in Oak Creek. There were a few rollbacks, but there wasn't that much inventory, and no real signs of fear or panic. In the last few weeks, there have been several listings of condos and entry-level housing appearing on the market.

Notice the density of green house symbols in certain neighborhoods. In particular the northernmost neighborhood has shown a dramatic increase in the number of listings, and many of these are rollbacks. This is fear in action.

Another neighborhood showing increased listings and more racing to find the bottom is Northwood II.

Like all the new neighborhoods in Irvine, this one is populated by specuvestors who are starting to realize they made a terrible mistake. The homes priced in the $750K to $950K range, so these are not the small condos we are seeing struggle everywhere else. This is the first sign of fear spreading from the low-end of the market to the move-up SFD market.

Another neighborhood showing and increase in listings and a decrease in pricing is Northpark.

In particular, the neighbhorhoods adjacent to the 261 are showing fear transitioning to panic. There have been a large number of foreclosures there, and new listings are popping up to try to get out before the tsunami of REOs washes away whatever equity these owners have left.

Of course, we have our neighborhoods where fear and panic have already set in...

Westpark condos above and Orangetree below...

Quail hill (not shown) is also showing distress. I invite you to go to Redfin and check out the market for yourself.

Fear in the market is not something that can be quantified; however, evidence of fear can be inferred from the behavior of market participants. An increase in listings and lower asking prices is fearful behavior. When the race to the bottom becomes more feverish and sellers start aggressively lowering prices to get out of the market, you will know fear has taken hold and capitulation is right around the corner.

Happy Birthday IHB!

by zovall 

I can't believe it has already been 1 year since we started the Irvine Housing Blog. A lot has changed in that time: lending standards have tightened, OC inventory has continued to pile up, OC builders have reduced their pricing, foreclosures have picked up, sales have slowed down, 160 major US lending operations have "imploded", and the US Dollar has set record lows.

Although not as drastic as what has happened to the housing market, IHB has gone through a number of changes as well. ISM and I began this without knowing whether anyone would be interested in what we were going to write. Lucky for us, two sites that provided our inspiration (OC Fliptrack RIP and Bubble Tracking), linked to us and that really got things moving.

Take a look at our stats:

We went from less than 50,000 pageviews in October 2006 to over 550,000 pageviews in August 2007. Do a Google search for 'housing blog' and IHB is the 5th site (6th link) listed! There are a few items on this chart I'd like to point out (1, 2, and 3):

  1. The IHB Forums were launched on January 2, 2007. What began with a slow start eventually turned into a very active and knowledgable community. We have 525+ members, 940+ threads, and 17,000+ comments and every day these numbers continue to grow. There is a wealth of information here ranging from Irvine tract and village information to discussions about architecture and design to threads devoted to wine and beer. The forums also gave rise to our IHB T-shirts (thanks Nude!). More recently, we implemented a live chat (thanks Caycifish!) that has proven to be quite popular.
  2. Irvine Renter joined the IHB team with his first post on February 27, 2007 and he's been simply incredible! Although I realized he knew his stuff, I was still surprised by the sheer volume and depth of topics that he has educated all of us on. He has taken this blog to another level and we've received tons of positive feedback from people who have enjoyed and benefited from his writings (especially his analysis posts). The community profiles that he has written clearly show his love for the City of Irvine; take a look at the beautiful pictures and you may discover a park or tract that you weren't aware of before.
  3. An article by Daniel Gross of linked to IHB on July 26, 2007. The article was syndicated in the Washington Post and Newsweek/MSNBC and brought some great national exposure to our site.

Many thanks to ISM, graphrix, and socalhousingbubble for their solid contributions. In addition to the main blog posts, there have been numerous blog comments that have provided insight into the feature properties. An interesting stat is that our spam blocker has caught 20,072 spam comments as of this moment. I also want to thank Redfin and our other site sponsors for their support!

Thanks everyone for a fantastic year! All of your contributions are what has made this site become what it is. What's next? We want to keep the momentum going and we've got some ideas for the site that we are planning to implement soon. As always, we're happy to listen to your suggestions on how to bring more value to our readers.


Posted in News

$1,000 Grand

Sep 26th, 2007 by IrvineRenter 

If I Had a Million Dollars

If I had a million dollars (If I had a million dollars)
Well I’d buy you a house (I’d buy you a house)
And if I had a million dollars (If I had a million dollars)
I’d buy you furniture for your house (maybe a nice chesterfield or an ottoman)
And if I had a million dollars (If I had a million dollars)
Well I’d buy you a K-Car (a nice reliant automobile)
And if I had a million dollars, I’d buy your love

If I had a million dollars I’d build a tree-fort in our yard
If I had a million dollars you could help, it wouldn’t be that hard

If I had a million dollars -- Barenaked Ladies

Link to Music Video

$1,000 Grand: a million dollars. Today's WTF award winner thinks his house has appreciated $1,108,000 in the last year -- a year in which we have shown rollbacks of 10%-20%. We even documented a neighbor who went into foreclosure and sold at a 20% loss, but somehow this house has appreciated 25%. WTF?

Asking Price: $4,495,000

Income Requirement: $1,123,750

Downpayment Needed: $899,000

Purchase Price: $3,387,000

Purchase Date: 5/19/2006

Address: 25 Grandview, Irvine, CA 92603

Beds: 5
Baths: 5.5
Sq. Ft.: 5,900
$/Sq. Ft.: $762
Lot Size: 0.32 acres
Type: Single Family Residence
Style: French, Traditional
Year Built: 2006
Stories: Two Levels
View(s): City Lights, Hills, Mountain, Panoramic, Trees/Woods, Valley, Has View
Area: Turtle Ridge
County: Orange
MLS#: U7003538
Status: Active
On Redfin: 37 days

From Redfin, "Beautiful La Cima estate in Turtle Ridge. 5 Bed, 5.5 bath with exceptional panoramic views of hills and city lights. Built in 2006 by Laing Luxury, enjoy an upstaris Master and a downstairs Jr Suite, downstairs playroom, and upstairs bonus room. 4-car garage, 1,200 bottle climate-controlled wine cellar, pre-wired for custom sound in and out. Approved plans for custom pool and spa."

Approved plans? You mean you want a million dollars more than you paid, and you didn't even bother building the pool? WTF?

Maybe this seller put a million dollars worth of wine in the cellar? He must have added some value...

This appears to have been purchased new from the builder. Nice to know the builder found their bagholder.



Weren't the bubble years great? You could just buy a property, hold it for a year, and make a million dollars. Isn't that the way it works? Everyone is making 25% more money each year, right?

When you see a listing like this, do you get a sense of what a Ponzi Scheme this whole bubble really was? When does it all end? Will this house be worth $6,000,000 next year, and $8,000,000 the year after that?

This seller is certifiably crazy in my opinion. Do you think kool aid intoxication a disease? I wonder if there is a treatment? I suppose this seller could be made to read the Irvine Housing Blog every day. A few weeks of reading here should cure almost anyone.


Posted in House Flips
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