We like to start off the week with an analysis post, but those posts are time consuming, and this week I was pretty busy. If you need a fix for your analysis habit, try this link to Saturday's post: The Nature of Market Reversals.
Over the last couple of weeks, I have been featuring a great many rollbacks because I wanted to give you a feel for the deterioration of the market. I have several more coming this week. However, I would like to start the week with a taste of kool aid.
Asking Price: $799,000
Purchase Price: $595,000
Purchase Date: 12/17/2004
Address: 5242 Burgundy Circle, Irvine, CA 92604
Beds: 3
Baths: 2
Sq. Ft.: 1,237
$/Sq. Ft.: $646
Lot Size: 6,000 sq. ft.
Year Built: 1970
Stories: 1
Type: Single Family Residence
County: Orange
Neighborhood: The Ranch
MLS#: S492007
Status: Active
On Redfin: 37 days
Sale Price $595,000
1st Loan $476,000
2nd Mtg. $119,000
From Redfin, "Beautiful, well-maintained 3 bedroom, 2 bath family home in The Ranch with very rare private pool and spa! Located on a small cul-de-sac, it backs up to a greenbelt with no neighbors behind. This one has had it all done! Remodeled kitchen and updated bathrooms. Fresh paint, tiled flooring and mirrored wardrobe doors. Double paned windows and exterior doors throughout and a new roof. No Mello-Roos or mandatory HOA dues. Great location! Close to parks, schools, freeways and shopping."
Notice the sparing but regular use of exclamation points...
"This one has had it all done!" Sounds like the description of a Coto De Caza gold digger...
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$646 per square foot in The Ranch. WTF?
I consider this in the lesser category of WTF homes as I merely laughed when I saw it. I wasn't left completely dumbfounded. It is still absolutely ridiculous, and I can't figure out what metric the seller might have used to come up with their asking price, but there probably is some rationale for it -- irrational though it may be.
Here is my guess:
I suspect they pissed away $80,000 on improvements, took a few trips and bought a few cars on their HELOC, and the negative amortization built up. Further, they have to pay a sales commission, and they have to make a profit, so add it all up, and they need $205,000 more than they paid. I guess it is perfectly rational after all.
Isn't that the way real estate is supposed to work? Isn't every form of irresponsible financial behavior supposed to be cured by never-ending house price appreciation? I imagine they were assured it worked that way when they bought the place.
Is the insanity of this mindset apparent to you? If not, you need to stop drinking the kool aid and join us in the reality-based community.
Just in case you don't think this price is obscene, let's look at some properties in the neighborhood.
Price: $775,000
15385 NANTES CIR
Irvine, CA 92604
Beds: 4
Baths: 2
Sq. Ft.: 2,125
$/Sq. Ft.: $365
Lot Size: 0.28 acres
Year Built: 1971
Stories: 1
Type: Single Family Residence
County: Orange
Neighborhood: The Ranch
MLS#: S470252
Status: Active
On Redfin: 198 days
Unsold in 90+ days
Rare one story home with four bedroom in Irvine school District. Back to Yale with orange, lemon, grape fruit trees in the yard. Perfect for retirement. Remodeled kitchen and bathrooms with granite counter tops, new electric build in range, travertine and light hardwood flooring. Two fire places with glacier glass deco in Living and family room. New roof, new slate patio, with storage shack and RV parking. No association due and low tax. Large master bath has both shower and tub. New exterior paint
Nice pictures...
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This property is almost twice as large, it has another bedroom, and it costs $20,000 less. Hmmm...
It has also been on the market forever, and it is in danger of becoming a 2005 rollback. I imagine the price is at the breakeven level once a commission is figured in, and it is not selling which says the price is too high. If this property is priced too high, where does that leave our seller on Burgundy?
How about this one...
Price: $699,000
15232 NORMANDIE AVE
Irvine, CA 92604
Beds: 4
Baths: 2
Sq. Ft.: 1,620
$/Sq. Ft.: $431
Lot Size: 6,511 sq. ft.
Year Built: 1971
Stories: 1
Type: Single Family Residence
County: Orange
Neighborhood: The Ranch
MLS#: S484138
Status: Active
On Redfin: 94 days
Unsold in 90+ days
Cute single story with lots of potential. Great opportunity to move in to the Ranch at this price!!Owner added square footage (all Permitted) buyer to verify. Now currently 4 Bedrooms plus a Den.
Compared to our seller on Burgundy, this home is 40% larger, has an additional bedroom, and is $100,000 cheaper. All that, and it has been on the market over 90 days without selling, so it is overpriced as well.
Perhaps I am piling on, but here is another...
Price: $769,000
5232 SKINNER ST
Irvine, CA 92604
Beds: 4
Baths: 2.5
Sq. Ft.: 2,167
$/Sq. Ft.: $355
Lot Size: 6,240 sq. ft.
Year Built: 1972
Stories: 2
Type: Single Family Residence
County: Orange
Neighborhood: The Ranch
MLS#: P585401
Status: Active
On Redfin: 24 days
Beautiful home in Ranch. Mirrored family room wall, oversized backyard and giant family room. No mello roos, no association dues, low taxes. Walking distance to school, close to freeways. Must must see!!!
The exclamation points are back. Hurray!!!
This house is twice as large, has an additional bedroom, and it costs $30,000 less.
In short, our seller on Burgundy is not going to get $799,000. I would speculate they would be lucky to get $599,000 based on the comparables above and how long they have been sitting on the market.
For being completely clueless in their pricing, the sellers at 5242 Burgundy Circle win our WTF Award!
I have been kindly asked by the OC Register to stop posting the scanned image of the DataQuick information from their newspaper. So from now on, you will get the data in a non-scanned format.
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Median sale price
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Sales volume
|
|
ZIP
code
|
Prev. 4 weeks
|
% change
from ’06
|
Prev. 4 weeks
|
% change
from ’06
|
|
92602
|
$751,500
|
-0.4%
|
24
|
-42.9%
|
|
92603
|
$960,000
|
-4.0%
|
38
|
-34.5%
|
|
92604
|
$565,000
|
-5.8%
|
22
|
-18.5%
|
|
92606
|
$679,000
|
-11.2%
|
23
|
228.6%
|
|
92612
|
$634,000
|
-9.3%
|
35
|
52.2%
|
|
92614
|
$567,000
|
-12.1%
|
24
|
-33.3%
|
|
92618
|
$682,000
|
35.7%
|
21
|
10.5%
|
|
92620
|
$790,000
|
-9.7%
|
34
|
-57.5%
|
It looks like we have a continuation of our rally in Oak Creek (92618) from last week, and it appears we have the continuation of the complete market implosion everywhere else.
Just a reminder of why we have had the dramatic decline in sales volume...
Credit Suisse saw this coming months ago. Credit tightening has eliminated many prospective buyers from the market. Plus, the unusually high sales volumes of the rally years has seriously depleted the buyer pool.
The reason the median has not declined much to date is because those people who still qualify, are able to obtain financing just like the bubble years. That too is about to change. Below is a chart of the AAA rated ABX index. AAA is the highest rating. It is composed of the highest level of prime borrowers.
This is the cost of insuring a loan against default. As you can see, the meme of "subprime containment" is no longer believed by the insurers of debt. This will cause a further tightening of credit.
- Look for the volume to decline even further in the coming months as this makes its way through the system.
- Also, look for a dramatic drop in prices this fall and winter as the banks liquidate their REO inventory at a time when there are no buyers.
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?
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.
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
