Well, I heard some people talkin’ just the other day
And they said you were gonna put me on a shelf
But let me tell you I got some news for you
And you’ll soon find out it’s true
And then you’ll have to eat your lunch all by yourself
’cause I’m already gone
And I’m feelin’ strong
I will sing this vict’ry song, woo, hoo,hoo,woo,hoo,hoo
The letter that you wrote me made me stop and wonder why
But I guess you felt like you had to set things right
Just remember this, my girl, when you look up in the sky
You can see the stars and still not see the light (that’s right)
And I’m already gone
And I’m feelin’ strong
I will sing this vict’ry song, woo, hoo,hoo,woo, hoo,hoo
Well I know it wasn’t you who held me down
Heaven knows it wasn’t you who set me free
So often times it happens that we live our lives in chains
And we never even know we have the key
Today's post is another in a series of properties where the owners refinanced at the peak taking all their equity and now they are short selling and walking away. In a sense, it has already been sold to the bank. It was sold the day they refinanced, the bank just didn't realize it at the time. I had the Eagles's song above pop into my head when I was researching the property. It is an ode to the lenders out there from all their short-selling borrowers. They don't care anymore. They are already gone...
First Mortgage $651,000
Second Mortgage $279,000
Total Debt $930,000
Beds: 5
Baths: 3
Sq. Ft.: 2,240
$/Sq. Ft.: $357
Lot Size: 4,200 sq. ft.
Type: Single Family Residence
Style: Contemporary
Year Built: 1999
Stories: Two Levels
Area: Walnut
County: Orange
MLS#: P614401
Status: Active
On Redfin: 14 days
From Redfin, "Beautiful Newer Home At Cul-De-Sec Location W/ Friendly Neighbors. Tons Of Upgrades, plantation Shutters, window Frame, crown Molding, security System, Custom Painting, 2.5 Car Garagew/ Blt In Storage Rack, huge Master W/ Walk In Closet, main Fl. Bedroom Can Be Used As Office Home does need a carpet cleaning."
Can anyone figure out what rule or rules guided the realtor's use of capital letters? Perhaps the random cap approach?
Do you like the new short sale graphic?
I don't know where the refinance money went, but it doesn't appear to have been spent on the property. The white tile and cheap cabinetry might be original construction.
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If the short sale goes through at the asking price, and the lender pays a 6% commission, they stand to lose $178,940.
Is this where I launch into a diatribe on why downpayments are going back to 20% because no lender will issue a second mortgage? Total losses on second mortgage loans like this one will have that effect.
Is this where I rant on the foolishness of lenders doing 100% CLTV cash-out refinancing? I must admit, after watching the S&L disaster, I never thought I would see equity requirements eliminated again. Back then it was commercial properties getting the wacky financing, but the lessons learned were universal. I guess each generation of lenders must make the same mistakes in the name of "innovation."
(Note to self: refinance at peak of next bubble and rip off the lender...) Isn't it just a bit too easy? Aren't the consequences just a bit too light? (If there are any consequences at all.) It doesn't keep the honest man honest when the lenders are just giving it away.
I would like to finish this week with a laugh (Warning four letter word ahead.) Does everyone remember David Lereah, the former economist for the National Association of Realtors? He wrote a book at the height of the bubble claiming there wasn't one.
He came out with a new book now that the bubble has burst.
Thank you for joining us this week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
She's a brick----house
Mighty mighty, just lettin' it all hang out
She's a brick----house
The lady's stacked and that's a fact,
ain't holding nothing back.
She's a brick----house
She's the one, the only one,
who's built like a amazon
We're together everybody knows,
and here's how the story goes.
You don't see much brick in Irvine. This property has a brick facade on part of the structure, a brick wall and a brick walkway. I think the architecture is rather attractive... She's a brick----house...
Beds: 3
Baths: 3.5
Sq. Ft.: 1,887
$/Sq. Ft.: $379
Lot Size: 4,848 sq. ft.
Type: Single Family Residence
Style: Contemporary
Year Built: 1983
Stories: Two Levels
Area: Woodbridge
County: Orange
MLS#: U7005149
Status: Active
On Redfin: 5 days
From Redfin, "WOW, THIS IS THE CITY OF IRVINE! ENJOY THE OUTSTANDING SCHOOLS, THE BEST PARKS AND THE BEST LOCATION IN ORANGE COUNTY. THE HOME FEATURES THREE BEDROOMS AND TWO AND ONE HALF BATHROOMS, DESIGNER TOUCHES THROUGHOUT. A PRIVATE POOL AND SPA, AND PLENTY OF ROOM FOR ENTERRTAINING. .. COME HOME TO IRVINE AND START LIVING THE ORANGE COUNTY LIFESTYLE TODAY. "
WOW, THE CAPS LOCK IS STUCK.
ENTERRTAINING?
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If the bank has to cut their price $15,000 to sell this property, it will be a summer 2003 rollback. Welcome to 2008 where 5 years of appreciation has now been wiped clean...
This is a nice property. It is in Woodbridge, on a corner adjacent to a park. It is not too small, and it has a yard large enough for its own swimming pool. I don't see many negatives here, and I certainly don't see any reason this should be a 2003 rollback, other than the conditions of the market. I can't help thinking the original buyer overpaid in 2003, but real estate always goes up, right? We will keep an eye on this one and see if a knife catcher gets it below its 2003 price.
Its rainin but there aint a cloud in the sky
Must of been a tear from your eye
Everythingll be okay
Funny, thought I felt a sweet summer breeze
Must of been you sighin so deep
Dont worry were gonna find a way
Im waitin, waitin on a sunny day
Gonna chase the clouds away
Waitin on a sunny day
Over the holidays, I had time to contemplate the content on the blog, and I realized we have not spent enough time and effort examining the rental market. Considering 40% or more of Irvine households are renters, it seems appropriate for the Irvine Housing Blog to pay more attention to what is going on in the rental market. Plus, much of our discussion on valuations and projections for the market bottom depend on rental rates, so it is important to know where rental rates are to gain a feel for where prices are in the marketplace.
Examining prices for rentals is fraught with the same problems as examining prices of for-sale properties with one exception: there are good deals in the rental market. I will generally profile those I consider good deals or those that are simultaneously offered for sale. Occasionally, I do find WTF rental asking prices from floplords trying to cover their payments. I will profile these too. I will not examine any rentals owned by the Irvine Company. If you want to see their offerings, I suggest you go to Rental-Living.com. Instead, I will focus on private rentals offered on the MLS and Craigslist. I do not know any of the landlords, and we are not going to accept money from landlords to feature their properties. My opinion of the quality of the rental and the deal it represents is based solely on the information from the internet, and it could be entirely incorrect.
With all our explanations and disclaimers in place, let's examine a property offered for rent and for sale to see what it tells us about the market. Today's seller can't decide if they should rent or sell. They are waitin' on a sunny day...
Beds: 3
Baths: 2
Sq. Ft.: 1,144
$/Sq. Ft.: $497
Lot Size: -
Type: Condominium
Style: Contemporary
Year Built: 1986
Stories: One Level
Area: Woodbridge
County: Orange
MLS#: P585566
Status: Active
On Redfin: 188 days
Unsold in 90+ days
From Redfin, "single story detached condo house, 3BR, 2BA (3rd BR could be used as den or office), corner lot location, walking distance to sch, park, pool, lakes, shopping, newer carpet, baseboard, paint, scrapped ceiling, woodblind window coverings, show very clean and bright, move-in condition. No Mello-Roos, low tax rate"
Do you sense a lack of enthusiasm in the description? I don't need three exclamation points, but that description reads like a medicine bottle.
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First, I would like to introduce a new concept: the rent finance value. Since the payment is the most important determinant of value, the rent finance value looks at the maximum value that could be financed with a 30-year fixed mortgage at todays interest rates (I used 6.5% above.) In today's example, a payment of $2,350 would finance a payment on a loan of $371,795 at 6.5%. It is not as handy as the gross rent multiplier because you need either a financial calculator or a spreadsheet, but IMO it provides a good method for estimating value because it comes closest to simulating a buyer's mentality without crunching too many numbers. As you may have noticed, it comes out pretty close to the 160 GRM value of $376,000.
So what can we observe with this property. IMO, this asking rent is near market for this unit. Further, this unit is what I would consider a "median" house product in Irvine: small 3/2s or large 2/2s. Obviously, the asking sales price is too high or it wouldn't be languishing on the market for over 180 days. Gross rent multipliers were near 300 at the peak, and with our 20% drop, they are under 240 now. This unit confirms that GRMs are falling below 240. A knife catcher may pick this up for $525,000 and watch it drop another $150,000 in value over the next few years. If the property data I have is correct, there is no urgency for this seller to sell, but also no need to be stubborn about the asking price. They really have two options: rent this out and be the bagholder, or lower their price and let someone else be the bagholder. What do you think they will do?
When I started writing for this blog, I wrote a series of posts culminating in Predictions for the Irvine Housing Market published on March 11, 2007. It seems only fitting to take this opportunity to take a look ahead at 2008 and make some predictions for 2008 based on the events we have witnessed in 2007.
The first stages of a decline are are always slow to register on the median home price because the low end of the market collapses first leaving only the more desirable, high-end property transactions in the market. We have documented on this blog numerous individual properties sporting 15% to 20% declines, and housingtracker.net has documented a drop in asking prices in Orange County from $651,225 to $569,900 (12.5%). Foreclosures are up almost five-fold since April of 2007. With the ongoing tightening of credit, there are no signs that any of these trends are reversing or will reverse any time soon. In fact, foreclosures are likely to continue to pile up dramatically as adjustable rate mortgages continue to reset and more homeowners are underwater and unable to refinance.
In short, 2008 will likely see more declines. I will make the not-very-bold prediction that 2008 will see the worst single-year decline in the median house price ever recorded, and quite possibly the largest single-year decline we will witness in our lifetimes (although 2009 could be even worse.) My original prediction was for a 12% decline in 2008, I will stand by that number, although it could be even greater. Between 2008 and 2009, I believe we will see a 28% decline in the median home price. Am I crazy to think such a thing? Not if you ask Christopher Thornberg formerly of UCLA and now with Beacon Economics.
The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.
Now I will give a caveat. The FED will likely continue to pursue its wreckless course of lowering interest rates causing rampant consumer price inflation in an attempt to provide enough liquidity to the financial markets to stop a string of catastrophic failures of several of our large financial institutions. If this liquidity somehow finds its way into residential mortgages (something I doubt,) then house prices may not drop in nominal terms as far as I have predicted. In inflation adjusted (real) terms, the drop will still be large and unprecedented. This caveat leads to another not-very-bold prediction for 2008: one or more of our major financial institutions and one or more of our major homebuilders will fail as a result of the collapse of housing prices.
BTW, if you want to see why the credit crunch is so serious, and why it is likely to push the economy into recession (and why the FED is so aggressively lowering rates,) examine the chart below I copied from Calculated Risk. Banks are not willing to loan money: period. They have lost all confidence in the ability of borrowers to repay loans. Is this throwing the baby out with the bathwater? Sure it is, but that is what happens when you have a credit crunch. The ratings agencies gave AAA ratings to a steaming pile of mortgage manure, and banks have lost all confidence in everyone's credit worthiness as a result. This is what the FED is trying to combat by providing as much credit as they possibly can. Of course, it isn't just lender psychology at work here. They are also hording cash to prepare themselves for the onslaught of bad loans and write-downs they are going to experience as house prices continue to fall. The combination of fear of the unknown and fear of the known is causing a dramatic decline in lending: a credit crunch.
Am I being an alarmist and a worry-wort? If so, I am not alone. Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years. If you need a refresher on what happened to Japan and what Ben Bernanke would have done about it, click on this PDF link to Bernanke's writing on the subject. You can see the current course of FED action outlined in this paper.
So what does all this add up to? My next not-so-bold prediction: a severe local recession. Huge amounts of money used to flow into our local economy through the subprime mortgage business. This business model is dead. It is not going to return. Yes, it may still survive, but it will shrink down to the 2% of the market is used to have rather than the 20% it enjoyed at the peak. This is a huge loss to our local economy. Also, the decline in house prices is going to shut off the housing ATM another huge source of unsustainable local spending. Then of course, there are the realtors who used to feast on all this borrowed money that is no longer flowing into residential housing transactions and the local homebuilders who are no longer building and selling many houses. Basically, our heavily real estated dependent economy is going to tank -- badly.
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For my final not-so-bold prediction for 2008, I predict we will see many more angry homedebtor's troll the blog. As denial turns to fear and acceptance, it often detours through periods of anger. It will be extremely embarrassing for the many sheeple who got caught up in the financial mania to admit they made a huge mistake, particularly the most arrogant and willful of the the bunch. Since people generally do not want to take personal responsibility for their mistakes, many will come here and blame the "negative media" for the decline. We may report on the market, but we don't influence it, and we certainly don't control it. We will be a convenient place for many to vent their frustrations.
Financial manias have a way of deluding even the most intelligent of people. Sir Issac Newton was rumored to have lost £20,000 of public funds in the market -- a substantial sum of money at the time. He is quoted as saying "I can calculate the motion of heavenly bodies, but not the madness of people." This financial mania infected many intelligent and successful people, and it will be the ruin of many of them.
Remember, housing markets do not move quickly. It is going to be a slow ride, so take it easy...
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Well, I heard some people talkin’ just the other day
