Irvine Housing Blog

The Nature of Market Reversals

When I wrote Houses Should Not Be a Commodity, I wrote extensively about the psychology of the market and the dynamics which cause prices to rise and fall. Nothing I wrote was new or original.

I have been reading The Disciplined Trader by Mark Douglas. I came across the passage below on pages 199-200:

The reason why a bull market is ready to tum into a bear market when the general public gets involved is because the general public has the least tolerance for risk and consequently needs the most reassurance and confirmation that what they are doing is a sure thing. As a result, they will be the last to be convinced that the rising market represents an opportunity. If a bull market has lasted for any length of time, the general public will feel compelled to jump on the bandwagon so to speak, because of their perception that everyone else is doing it and making money. They will pick up on any reason that sounds the most rational to justify their participation, when in reality, they will know very little about what they are doing, but since everyone else is doing it, how can they go wrong.

A continuing bull market requires the continual infusion of new traders who are willing to pay higher and higher prices. The longer a bull market lasts, the greater the number of people who are already participating as buyers, leaving fewer and fewer traders who haven't already bought and fewer and fewer traders who are willing to bid the price up. These older buyers obviously want to see the market keep on going up, but they also don't want to get caught holding the bag, if the market stops going up. As their profits accumulate from the higher prices, they start to get nervous about taking their profits.

By the time the general public starts buying en masse, the professional traders knows the end is near. How does the professional know this? Because the professional knows that there is a practical limit to the number of people who will participate to bid the price up. There will come a point where everyone who is likely to be a buyer will have already bought, quite literally leaving no one else to buy. The professional trader would like the market to continue to go up indefinitely just like all the other buyers. However, he also understands the impracticality of that happening, so he starts taking his profits while there are still some buyers available to sell to. When the last buyer has bought, the market has no place to go but down.

The public gets stuck because they weren't willing to take the risk when there was still potential for the market to move. For the market to sustain itself, it needs to attract more and more people. As big as this country is or the world for that matter, there are only so many people who will buy. Eventually the supply of buyers runs out, and when it does the market falls like a rock.

The professionals have been selling out their positions before this happens, but once the supply of buyers runs out, the professionals start to compete among one another for the available supply of buyers which is dwindling fast, so they offer lower and lower prices to attract someone into the market so they can get out. At some point, instead of the lower prices being attractive to people, it panics them. The public didn't anticipate losing. Their expectations are very high with very little toleration for disappointment. The only reason they got in was because it was a sure thing. When the public starts to sell, it starts a stampede.

Again, people will ascribe their actions to some rational reason because nobody wants to be thought of as irrational and panic stricken. The real reason why people panicked and the prices fell is simply because prices didn't keep on going up.

Do you see the parallels between the behavior of our housing market and the description above?

The Sharpsburg Bloodbath - Update #2

10 Sharpsburg actually sold at the auction on 7-18-2007 for $670,114.35 a full penny over the opening bid amount. At $270 a sqft that puts an Irvine home below the $300 mark. Ouch!

(A special thanks to graphix for the update)

President Abraham Lincoln and Gen. George B. McClellan in the general's tent
Sharpsburg, Maryland|Antietam, Maryland, October 3, 1862

(Sorry, no property photos are available.)

Old Asking Price: $850,000

New Asking Price: $795,000

Purchase Price: $799,000
Purchase Date: 6/27/2005

Address: 10 Sharpsburg, Irvine, CA 92620

Beds: 4
Baths: 2.5
Sq. Ft.*: 2,710
Lot Sq. Ft.*: 5,300
Year Built: 1979
Stories: 2
Type: Single Family Residence
Neighborhood: Northwood
$/Sq. Ft.*: $314
MLS: S481159
Status: Active on market
On Redfin: 15 days

I learn something new with each of these posts. Today I learned the civil war battle most of us know as Antietam, the bloodiest single day in our nation's military history, was known in the South as the Battle of Sharpsburg. Is our flipper on Sharpsburg due for a bloodletting? Let's see.

From Redfin: "This home shows beautifully. NOW REDUCED TO THE RIDICULOUS!!!! Very light and bright with vaulted ceilings, french doors, lots of added can lights through out. Remodeled baths include new fixtures and granite counters. Great floorplan with master bedroom down, 3 bedrooms up AND pool table sized bonus room too!! Freshly painted and newer berber carpet and tile floors through out. Great cul de sac location W/ 2 car garage AND covered parking for 3rd car. BANK READY FOR OFFERS!!!!"

Another realtor who uses too many exclamation points... and the words "light and bright"...

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If this house sells for asking price and assuming a 6% commission, our seller will net exactly $0, nada, nothing. Almost two years of ownership with no appreciation. Doesn't leave them with much room to negotiate on the price, does it? I can just imagine the negotiations: you would be haggling over how much this guy was going to lose. It might actually be entertaining if you are in to inflicting pain. Are you feeling the schadenfreude?

Who was saying they wouldn't just "give it away?"

**** UPDATE #1 ****

Now the seller is looking at a $55,000 loss. Also, it appears the short sale has been cleared through the bank.

Sumac Attac

Guess what? I found another 100% financing deal where the borrower walked. What a surprise? The bulls must have a hard time ignoring the obvious with these 100% financing deals. When the going gets tough, the tough get... out. With the huge number of these deals during 2004-2006, how many of these properties will need to be absorbed by the market? How long will it take? If I were bullish, I wouldn't be holding my breath.

Asking Price: $759,900

Purchase Price: $663,147

Purchase Date: 5/22/2007

Address: 14911 Sumac Ave., Irvine, CA 92606

Pre-foreclosure data:

Purchase Date: 10/28/2005
Sale Price -- $795,000
1st Loan -- $636,000
2nd Mtg. -- $159,000

Beds: 4
Baths: 2.5
Sq. Ft.: 2,350
$/Sq. Ft.: $323
Lot Size: 5,000 sq. ft.
Year Built: 1972
Stories: 2
Type: Single Family Residence
County: Orange
Neighborhood: Walnut
MLS#: U7002468
Status: Active
On Redfin: 35 days

From Redfin, "THIS IS WHAT YOU HAVE BEEN WAITING FOR. A HUGE FAMILY HOME IN ONE OF T HE MOST SOUGHT AFTER CITIES IN ORANGE COUNTY! THIS IS THE CITY OF IRVINE, WITH THE GREAT SCHOOLS, THE GREAT PARKS, AND SO MUCH MORE. THIS IS A TWO STORY WITH FOUR BEDROOMS AND TWO AND ONE HALF BATHS. .. ASSOCIATION PARKS. WALK TO SCHOOL AND SO MUCH MORE. HOME IS BEING SOLD 'AS-IS' WITHOUT WARRANTY. "

THE ALL CAP ATTACK!!!

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If the bank can manage to get their asking price, and if they only pay a 2% commission (banks are cheap), they will lose $50,298. A few more like this, and they will stop making 100% loans to people with poor credit -- Oh wait, that has already happened. A few more like this, and they will stop making 100% loans entirely...

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Video link to Big Mac Attack Rap

Second Big Mac Attack Rap Video

What is this?

Sometimes you come across a listing where something just isn't right.

Redfin Asking Price: $999,000

Zip Realty Asking Price: $1,213,000

Purchase Price: $1,300,000

Purchase Date: 10/31/2006

Address: 11 Santa Rida, Irvine, CA 92606

Beds: 5
Baths: 3
Sq. Ft.: 2,420
$/Sq. Ft.: $413

Lot Size: -
Year Built: 1997
Stories: 2
Type: Single Family Residence
County: Orange
Neighborhood: Westpark
MLS#: P582566
Status: Active
On Redfin: 33 days

From Redfin, "Rare opportunity for those Buyers with no credit. This beautiful home on a quiet cul-de-sac shows better than a model home. Mr. clean lives here, great marble flooring, too many upgrades to mention. no need to preview. "

There are two statements in this description that are setting off alarms in my head.

1. Rare opportunity for those Buyers with no credit.
2. no need to preview.

How does someone with no credit afford a $999,999 home? My first thought is this must be a fraud scam, but when you see a $300,001 loss based on asking price, that scenario makes no sense. Perhaps the price is a teaser to generate interest and if they find a straw buyer the purchase price will suddenly be raised $500,000?

No need to preview? Is this a realtor note trying to assure another realtor of the quality? Wouldn't a realtor want to preview it anyway (or are they that lazy?) If you were the realtor, and you had this great listing, wouldn't you want everyone to see it to generate excitement and hopefully a sale? If this is a note to a potential buyer, I would be very worried. What is it they don't want me to see? Why no pictures after 30 days? Is there something to hide?

Why the quick sale? This seller just purchased the property 8 months ago. I would consider them a flipper or knife-catcher if they were trying to sell at a profit, but they are looking at a big loss. What is going on?

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Let's assume for a moment this is a legitimate listing. If so, this seller is going to lose a huge sum of money. At current asking price minus a 6% commission, this seller will lose $ 360,940. Ouch!

I guess Mr. Clean wanted to clean out his bank account. He won't be doing any favors for the other sellers in Westpark. This is another comp killer.

100% Financing Failure

Part of the bearish argument for a dramatic drop in prices is predicated on an infusion of "must sell" inventory to the housing market. Sellers won't sell at a loss unless they have no choice. This is why prices generally are sticky in a housing market decline.

Foreclosures and short sales are by their nature must-sell inventory. For this must-sell inventory to be forced onto the market people must be unable or unwilling to make the payments on their mortgage. The "unable" part will come from reseting ARMs with higher interest rates; the "unwilling" part will come from people walking away from 100% financing deals when market prices do not continue to rise.

It is this latter category of unwilling homedebtors that is unusual in this market. In previous bubbles, lenders were not so stupid as to offer 100% financing, so there were not as many people who utilized "jingle mail" as they went underwater. It is my opinion that jingle mail will be epidemic as this bubble unwinds.

Today's property is a typical short sale. The seller overpaid with 100% financing and now is going to walk away.

Asking Price: $390,000

Purchase Price: $410,000

Purchase Date: 3/20/2006

Prior Purchase or Refi: 10/17/2005 -- $405,000

Prior Purchase or Refi: 6/3/2005 -- $395,000

Address: 10 Van Buren, Irvine, CA 92620

Beds: 2
Baths: 2
Sq. Ft.: -
Lot Size: -
Year Built: 1987
Stories: 1

Type: Condominium
County: Orange
Neighborhood: Northwood
MLS#: P579283
Status: Active
On Redfin: 53 days

From Redfin, "Lower Unit w/ Front Patio. 2 Bedroom, 2 Bath CONDO. Great Opportunity for First Time Buyers. This is a SHORT-SALE. Sales Price, Terms, Conditions Subjet To Lenders approval of Short Sale. Very clean Unit includes, Range, Microwave, Dishwasher."

Did you spot the misspelled word?

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The bank is going to lose money. Depending on how much commission they pay (they don't like to pay 6%) and how much more this unit is discounted, they stand to lose between $20,000 and $80,000. I would guess it will be closer to the bigger number.

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(I GOT SPURS) JINGLE JANGLE JINGLE
Kay Kyser
- words by Frank Loesser, music by Joseph J. Lilley

I got keys that jingle, jangle, jingle
As I go ridin' merrily along
And they sing, "Oh, ain't you glad you're single"
And that song ain't so very far from wrong

Link to amateur singing Jingle Jangle Jingle