I am going to make a bold prediction: sales will improve in 92602, 92606 and 92620. After an 80% decline in sales, some improvement is nearly certain. Then again, sales could drop off to zero if sellers don't reduce their prices more...
Just in case you wanted to see just how crazy everyone got with interest-only and negative amortization loans.
One of the cornerstones of my analysis of the housing market is the relationship between income, rent and house prices. When prices rise to where it is less expensive to rent, people who do not get caught up in the irrational exuberance of rising prices chose to rent rather than buy. From the graph above you can clearly see the last two bubbles: one in the late seventies caused by rampant inflation, and one in the late 80s caused by a booming economy and simple irrational exuberance. Our bubble is obvious.
We see "napkin" calculations on posts on this blog all the time. Someone will pick a somewhat arbitrary year when prices were "normal" and proceed to calculate how much it should be worth today based on inflation, etc. It is clear from the graph above that prices were too high back in 2000. By 2002, we were at the top of a minor bubble. By 2004 we were at the top of what would have been an unprecedented real estate bubble. Then, the Option ARM came along and sent prices even higher.
My premise is simple: prices will fall back to the historical relationship between prices and rents. It will because it must. Unless people suddenly start wanting to stretch to by depreciating assets, there won't be very many buyers until we get back to rental equivalent value...
Well, way up North where the air gets cold
There's a tale about Christmas that you've all been told
A real famous cat all dressed up in red
And he spends the whole year workin' out on his sled.
It's the little Saint Nick
little Saint Nick
It's the little Saint Nick
little Saint Nick
Just a little bobsled, we call it Old Saint Nick
But she'll walk a tobogan with a four speed stick
She's candy apple red with a ski for a wheel
And when Santa hits the gas, man, just watch her peel.
Today's property was purchased on 10/16/2006 for $869,000 and sold at auction on 9/27/2007 for $682,763. These are not asking prices, these are actual transaction amounts. That is a 21.4% loss in less than one year, and that is not including any transaction costs.
Beds: 4
Baths: 3
Sq. Ft.: 2,150
$/Sq. Ft.: $344
Lot Size: -
Type: Single Family Residence
Style: Other
Year Built: 2000
Stories: Two Levels
Area: Northpark
County: Orange
MLS#: S514361
Status: Active
On Redfin: 9 days
From Redfin, "Charming home in guard gated community of Northpark!! Main floor master suite with large oval tub, enclosed shower, and dual sinks. Upstairs bedrooms with walk-in closets. Kitchen with breakfast bar plus seperate dining room. Spacious laundry room with deep sink and cabinets. Nice patio in side yard. The many association amenities iclude pool, spa, barbeque, sport court, tennis and more. Close to parks, golf, dining, and shopping at The Market Place"
Only two exclamation points? The realtor must not be excited enough about this listing for the standard three exclamation points.
seperate, iclude... I routinely misspell separate, but then again, I take the time to use a spell checker...
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From the ownership records, it is not clear if this is an REO or a flip. The new owner is an LLC suggesting it might be a flip attempt, but the low asking price relative to the purchase price suggests this LLC may have been formed as the REO holding entity. In either case, the 21.4% loss may actually get larger. In a normal foreclosure situation, the first mortgage holder, who usually has an 80% loan against the property, will go to auction and bid the loan amount. If they are the highest bidder (lately they have been the only bidders,) they end up with the property. The price may need to fall further to find the real market. If this property sells for less than its purchase price, it really reflects a larger loss on the original sale.
In a small market correction, a property such as this one that comes up for sale at an auction generally does not go back to the bank. Since the bank is only going to bid 80% of the original purchase price (the amount of the first mortgage,) there is usually someone who thinks the property is worth more than what the bank is willing to bid and buys the property. The bank does not care because they got their loan money back, and if the speculator is correct, they can make a few dollars in the deal. You know the market is in bad shape when banks bid 80% of original purchase price and get the property. You know the market is in really bad shape when nobody even bids against the bank (which has been happening regularly.)
So where is the Irvine market right now? 15% to 20% off the peak. We have documented numerous cases of properties with asking prices 15% -20% off the peak, and today's property is a recorded sale at 21% off the peak. It is hard to argue with the data.
This has been another eventful week at the Irvine Housing Blog. We had two days of well over 100 comments in a lively conversation. Come back again next week as we continue to Chronicle ‘the seventh circle of real estate hell.’
I want to leave you this week with a picture of me -- at least how some of the bitter homedebtors see me.
So this is Christmas
And what have you done
Another year over
And a new one just begun
Ans so this is Christmas
I hope you have fun
The near and the dear one
The old and the young
A very merry Christmas
And a happy New Year
Let's hope it's a good one
Without any fear
And so this is Christmas
For weak and for strong
For rich and the poor ones
The world is so wrong
And so happy Christmas
For black and for white
For yellow and red ones
Let's stop all the fight
A very merry Christmas
And a happy New Year
Let's hope it's a good one
Without any fear
First Mortgage $435,750
Second Mortgage $109,150
Downpayment $0
Beds: 2
Baths: 2
Sq. Ft.: 1,341
$/Sq. Ft.: $373
Lot Size: -
Type: Condominium
Style: Other
Year Built: 2002
Stories: Two Levels
Area: Northpark
County: Orange
MLS#: P609749
Status: Active
On Redfin: 28 days
From Redfin, "Beautiful Tuscan Village architech with desireable front entrance with small balcony. 2 bedroom 2 1/2 baths with a living area of 1341 Sq. Ft. in an incredibly well kept gated community with guard. Association Pool and spa with very low association fee. Ceramic tile and carpet flooring throughout. In very good condition with breakfast counter/bar and very spacious floor plan. Master bedroom with dressing area and walk in closet. Central A/C and Heating. And so much more!"
desireable? architech?
incredibly well kept? Is it really?
Shouldn't the asking price be $499,999.99 and 9/10?
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Since this is another 100% financing deal, the lender will eat this one. Assuming a 6% commission, they will lose $76,047.
These sellers will probably not pay the bank back the $76,047, and they will just walk away. They probably could afford to repay the debt as it isn't that large, but in many instances, the debt is overwhelming. Those are the circumstances I would like to discuss today.
There is a "strictly business" aspect to the decision that most often points to walking away, and there is a moral aspect that never points to walking away. This is a complex dilemma, and it is easy to moralize when one is not in the dire financial straits a massive home debt can bring about. However, people often find it far too easy to just walk away and justify their immorality.
IMO, walking away and declaring bankruptcy probably go together. There is probably not much distinction between the two as it impacts one's credit score (perhaps some, I don't know, but they are both bad.) Bankruptcy law was put in place to give people a fresh start when life's circumstances create a debt that could not be repaid in any reasonable amount of time (7-10 years.) We can debate whether or not these circumstances were self created, and we can debate the morality of bankruptcy law, but these laws are on the books because debtor's prisons were not serving the greater good (we can debate that too if you want.) Therefore, it can be argued that society has determined it is desirable -- and thereby moral -- to wipe the slate clean and give people a second chance. Lenders knew what the bankruptcy laws were when they chose to make the loan. If they chose to extend the credit, do they bear any moral responsibility to the outcome?
IMO, when faced with a debt that cannot reasonably be paid off in 7-10 years (which will be very common in the aftermath of the housing crash,) it is the right financial decision to walk away from the debts. It is in society's best interest to have a productive citizen whose income is going toward restrained (due to lack of credit) consumer spending rather than unrelenting debt service. Is this moral? You tell me.
Beds: 2
Baths: 2
Sq. Ft.: 900
$/Sq. Ft.: $411
Lot Size: -
Type: Condominium
Style: Other
Year Built: 1987
Stories: One Level
View(s): Park or Green Belt
Area: Westpark
County: Orange
MLS#: P610348
Status: Active
On Redfin: 24 days
From Redfin, "Welcome Home! Nobody above or below! Peaceful interior location above the garage. Two balconies, cathedral ceilings, pergo flooring throughout this home, cedar-lined closets, mirrored wardrobes, two full baths, two master suites. Nice, clean, and bright home. One of the nicest units in the entire complex! New interior paint, kitchen light fixture, and cabinet makeover. New bathroom floor and mirror. "
That first picture is my nomination for the worst, most useless photo on the MLS.
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I have stated on this blog that the leading edge of the decline is 15% to 20% off the peak. Here is more proof. The property above is priced 14% off the July 2006 purchase price. If they get their asking price, they stand to lose $82,294 -- a little over 20% in about a year and a half.
Beds: 2
Baths: 2
Sq. Ft.: 871
$/Sq. Ft.: $431
Lot Size: -
Property Type: Condominium, Attached
Year Built: 1989
Stories: One Level
Area: Out Of Area
County: Orange
MLS#: C07174665
Status: Active
On Redfin: 1 day
New Listing (24 hours)
From Redfin, "Short Sale, Indymac Bank has to approve sale amount. Seller is highly motivated. 2bed 2bath."
Short but sweet.
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Indymac bank stands to lose $78,500, just slightly under 20%. Have you seen the new Indymac bank branch in the Oak Creek plaza. Perhaps it will help them process all the Alt-A REOs they have in Irvine?
This short sale is providing some competition to the first property. Since it is a new listing, the race has just begun.
First Mortgage $750,000
1% Neg Am
Downpayment $250,000
HELOC $150,000
Beds: 4
Baths: 2.5
Sq. Ft.: 2,500
$/Sq. Ft.: $360
Lot Size: 7,000 sq. ft.
Type: Single Family Residence
Style: Contemporary
Year Built: 2002
Stories: Two Levels
View(s): Pool, Trees/Woods
Area: West Irvine
County: Orange
MLS#: S491800
Status: Active
On Redfin: 181 days
Unsold in 90+ days
From Redfin, "HUGE PRICE REDUCTION: Absolutely one-of-a-kind home on cul-d-sac. ONE OF THE LARGEST Back Yards you have seen in IRVINE. Beautifully hardscaped with Salt-water Solar heated POOL AND SPA, Built-in bar-B-Q and outdoor kitchen. .. .beautifully landscaped yard beyond!! Inside this home has all the bells and whistles. .. .granite, stainless, stone, crown moulding, large bedrooms, balcony, Family room, family eating area off kitchen, formal Dining room, BUT only one lucky family gets this GREAT home!"
HUGE PRICE REDUCTION -- from WTF to LOL...
"BUT only one lucky family gets this GREAT home!" Even though it takes two to afford it.
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Asking Price History
07/07/2007 $1,112,000 to $1,069,000
unknown $1,069,000 to $999,900
10/19/2007 $999,900 to $949,900
11/19/2007 $949,900 to $899,900
You can see the psychology at work with these asking prices. First, they want the profit they deserve, so they list it for a couple of months at a wishing price. Then reality starts to set in, and they give up their fantasies and start lowering the price to sell. The first reduction would get them out at breakeven with a 6% commission. When the house doesn't sell, they start methodically chasing the market down in $50,000 increments getting more frustrated and desperate with each reduction. Unfortunately, the are still one or two reductions away from finding the market, and the market keeps moving lower with their asking price. I find it amusing they think this is a huge price reduction. It is huge -- only in their minds. They are still over the market. If they had priced it appropriately from the beginning, the price reductions leading them to this temporary milestone wouldn't seems so drastic.
If the owners manage to get this asking price, they stand to lose $154,094 after a 6% commission. I suspect their loss will be closer to $200,000 before they find a knife-catcher willing to lose the next $200K.
This property is still on the market, and they are still chasing the market down. The price now stands at $559,900. The losses now exceed $120,000...
First Update September 3, 2007
Originally published July 13, 2007.
The price has been reduced to $599,900. Assuming this seller gets their asking price, they stand to lose $86,094 after a 6% commission.
Today's property is nothing unusual or unique, and that is what makes it so special. It is extraordinary in its ordinariness. This is a nice, Irvine property typical of many nice, Irvine properties, and it is selling for a loss. Do you get the sense this is becoming the rule rather than the exception?
Beds: 3 Baths: 2.75 Sq. Ft.: 1,525 $/Sq. Ft.: $410 Lot Size: - Year Built: 2000 Stories: 2 Type: Condominium View: Park or Green Belt, Peek-A-Boo County: Orange Neighborhood: Oak Creek MLS#: S493537 Status: Active On Redfin: 20 days
From Redfin, "Beautiful Oak Creek Townhome! New Plush Carpet! Popular Floorplan Features Gourmet Kitchen/Center Island! Dual Master Suites plus Mainfloor Bdrm/Den/Office w/ Bath! Quality Custom Upgrades inc/ Granite Counters/Maple Cabinets/20'' Neutral Floor Tiles/Recessed Lighting/Plantation Shutters/Designer Paint/Media Entertainment Center/Etc! Convenient Indoor Laundry Room! Spacious Patio Backs to Greenbelt! Oversized Garage w/ Cabinets! Fabulous Resort-Style Recreation Complex! Award-Winning Schools!"
Did you see the realtor got excited about a "Bath!" What is the deal with all the slashes and Title Case? I can't decide which is more annoying: Title Case or ALL CAPS? What/Do/You/Think?
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Assuming this seller gets their asking price, they stand to lose $62,594 after a 6% commission.
I can remember earlier this year when I first started blogging, it was hard to find a house with a loss. You could demonstrate a loss when you factor in commissions, and that is still a real loss, but it doesn't have the same emotional impact as when you see a true equity crushing loser. Now finding real losses are like seeing implants at Fashion Island Mall: there is no novelty because they are so common.
I hope you have enjoyed Oak Creek week here at the Irvine Housing Blog. On Monday, I have a new analysis post ready -- Land Value 101, and there are a number of rollbacks to show you.
Get this party started on a Saturday night Everybody’s waiting for me to arrive Sending out the message to all of my friends We’ll be looking flashy in my Mercedes Benz
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“In the jungle of Orange County real estate, Shevy Akason is Tarzan.” Gerard B. (Irvine)
“Without his understanding of what my needs and goals were, I'm not sure that I could have purchased such a great home.” Beverly K. (Irvine)
“Shevy and Rana are a winning team - I'm a first time home buyer buying a short sale propety and they made it look easy. ” Lindsey E. (Santa Ana)
“Shevy & Rana are the best! We could not have hoped for better agents to work with!” Ed H. (Crystal Cove)
“The qualities personal and professional that you have are genuine and a rare currency in todays world. so keep up the good work ” Tamer K (Laguna Niguel)
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“It's rare and refreshing to work with an agent like Shevy, we would recommend him to anyone.” Jill and Erik (Ladera Ranch)
“Your knowledge of the short sale process was comforting. We would recommend you to anyone.” Hong (Corona)
