I want a new drug
One that wont make me sick
One that wont make me crash my car
Or make me feel three feet thick
I want a new drug
One that wont hurt my head
One that wont make my mouth too dry
Or make my eyes too red
One that wont make me nervous
Wondering what to do
One that makes me feel like I feel when Im with you
When I'm alone with you I want a new drug
One that wont spill
One that dont cost too much
Or come in a pill
I want a new drug
One that wont go away
One that wont keep me up all night
One that wont make me sleep all day
Right when I start to think sellers are accepting the reality of the new market, I come across a listing that makes my jaw drop at the greed and clueless irrationality of my fellow man. Today's seller needs a new drug because they have clearly overdosed on the kool aid...
One of largest entertaining back yards in community. Low HOA fee. Highly artistic customized upgrades with oak wood cabinets and granite counter tops through out, stainless steel appliances, cove & recessed lighting in the kitchen & 1st floor BR, wine rack in kitchen. 18'X18' travertine flooring, wood & carpet flooring, Granite shower walls, frameless glass cover enclosure of master BR shower, 3 French door openings in Living room & 1st floor Br, 2 French doors in family & living Rooms, Granite counter top with top grade grill for built in private B. B. Q. Built in out door granite bar. Professional Landscaping.
How many times does the word "granite" appear in this listing?
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It has been demonstrated on the blog over and over again with listings all across the spectrum of housing that we are in a market decline, and pricing is back at 2004 levels for those few properties that are actually selling. But no, this property is different, this property has increased in value over 60% during the last 4 years. Forget the fact prices have dropped almost 20% from the peak; it is as if that never occurred. This property has been appreciating at 15% a year just like it did during the height of the bubble when they bought it. Do these sellers have their heads in the sand, or is it somewhere else? The cognitive dissonance is truly remarkable. It takes courage to put a listing price out there like this. This price clearly insults the intelligence of every buyer in the marketplace. Aren’t they worried about insulting potential buyers? No wait, I suppose potential buyers should be worried about insulting them with a lowball offer, right? This property would be fortunate to sell for what they paid for it. Can you imagine their reaction if they got an offer for what it is worth in today’s market? What would happen if they got a real lowball offer for perhaps what this place will be worth at the bottom -- I'm guessing 50% off their asking price? Anyone want to go mess with them? It is the only buyer interest they are likely to see at this listing price.
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That concludes another 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.
Affordability is a measure of people's ability to raise money to obtain real estate. It is often represented as an index that compares the cost to finance a median house price (50% above and 50% below) to the percentage of the general population with the income to support this house price. For instance, in Orange County California in 2006, only 2.4% of the population earned enough money to afford a median priced home. When affordability drops below 50%, there is a problem in housing; when it drops to 2.4% there is either a severe shortage of housing, or a housing price bubble; most often, it is the latter.
The simplest way to envision affordability is through simple supply and demand diagrams like those found in introductory economics textbooks. Affordability is the the demand curve. There are a small number of buyers who can afford very high prices, and many buyers who can afford very low prices. There is a limit to how high buyers can push prices. This limit is usually determined by lenders who provide the bulk of the money for a real estate transaction. During the Great Housing Bubble, these limits were nearly eliminated. In terms of the demand curve, the loose credit standards and low interest rates shifted the demand curve dramatically to the right. Thus many more people were enabled to buy and they were able to do so at much higher prices. Once prices started to rise, they were bid up to levels were affordability was at record lows by historical measures.
The supply curve is the opposite of the demand curve: sellers will make very few units available at low prices, and sellers will make a great many available at higher prices. Wherever these two curves meet is where supply and demand are in balance and market transactions are taking place. In the initial stages of a market rally both transaction volumes and prices are increasing rapidly. In the Great Housing Bubble, this was caused by a dramatic expansion of lending and credit. As a price rally matures sellers become reluctant to sell because the asset they own is going up in value quickly, and they don't want to miss the opportunity to profit. This limits the supply on the market. In terms of the supply and demand diagram, this shifts the supply curve to the left which pushes the balance between supply and demand to a higher price point. The combination of the demand curve shifting to the right from the increased liquidity of the lending environment coupled with the supply curve shifting to the left because of seller reluctance, the intersection of these two lines moves prices dramatically higher. However, once these two forces come into balance, their intersection is at a point of low transaction volume. There are fewer buyers who can afford the higher prices, so transaction volumes begin to fall.
The first sign of a troubled real estate market is a dramatic reduction in volume known as buyer exhaustion. There are simply not enough buyers able or willing to push prices any higher even at the lower transaction volumes. In a residential real estate market, this phenomenon is particularly pronounced at the entry level. The imbalance between supply and demand first becomes apparent at the bottom of the affordability scale with entry-level buyers because these buyers are not bringing the profits from a previous sale with them to the next property. Affordability is less of a problem for existing homeowners in the move-up market due to this equity transfer.
The real estate market can be visualized as a massive pyramid. There are very few multi-million dollar properties at the top of the pyramid, and a large number of relatively inexpensive entry-level properties forming the base. Like any structure, if the foundation is weakened, the structure may collapse. In the same way, housing markets collapse from the bottom up due to problems with affordability.
The foundation of a residential real estate market is the entry-level buyer. Entry-level buyers are generally young people starting to form new households. When a homeowner wants to sell their house and move up to a nicer one, someone needs to buy their house. If you follow this chain of move-ups backward, eventually you come to an entry level buyer. If there are no entry level buyers pushing the sequence of move ups, the entire real estate market ceases to function. The entry level market was initially boosted the moment 100% financing became available because many more people were enabled to purchase; however, it was imperiled at the same time because of the change in savings incentives. This market was subsequently destroyed the moment 100% financing was eliminated because few entry-level buyers had a downpayment and very few people were in the process of saving to get one. In the past, people would rent and save money until they had the requisite downpayment to acquire a house. The barrier to home ownership was not the ability to make payments; it was having the necessary downpayment money. When downpayment requirements go up, the number of people capable of buying a house declines dramatically, particularly for entry-level buyers who must save this money rather than transfer it from a previous sale. Since few potential entry-level buyers were saving money during the rally, sales volumes suffered dramatically in the wake of the bursting real estate bubble.
The way real estate markets collapse from the bottom up due to affordability has some unique issues for reporting on the declines. The most widely reported measure for real estate prices is the median sales price. This is the price level where 50% of the transactions occurred above and 50% occurred below. This measure has weaknesses, but over time it does a reasonable job of documenting overall prices and trends in the marketplace. One of the problems with a median as a measure of house prices is a lag between when a top or a bottom actually occurs and when this top or bottom is reflected in the index. During the beginning of a market decline, the lower end of the market has a more dramatic drop in volume than the top of the market. This causes the median to stay at artificially high levels not reflective of pricing of individual properties in the market. In other words, for a time things look better than they are. At the beginning of a market rally, transaction volume picks up at the bottom of the market at first restarting the chain of move ups. During this time, the prices of individual properties can be moving higher, but since the heavy transaction volume is at the low end, the median will actually move lower.
Affordability is the ultimate limit of any asset bubble. If prices are so high that no buyer can afford them, there are no transactions and thereby no market. The fear of many buyers in a financial mania is that prices will remain elevated to the absolute limit of affordability permanently. People who have this fear will put every available resource into getting a house before this happens. This becomes a self-fulfilling prophecy as prices get bid higher and higher by fearful buyers. If prices were to remain at the upper limit of affordability for a long period of time, the rate of price increase would slow dramatically until it only matched the rate of wage growth and inflation. If prices are not rising in excess of inflation, there is little financial incentive to buy because when affordability is very low, it is much less expensive to rent, and the extra money going toward a housing payment is not generating a financial return. If there is no financial incentive to pay more than the cost of rent, people stop buying, and prices fall back to levels where they are affordable again.
You dress me up, I'm your puppet
You buy me things, I love it
You bring me food, I need it
You give me love, I feed it
And look at the two of us in sympathy
With everything we see
I never want anything, it's easy
You buy whatever I need
But look at my hopes, look at my dreams
The currency we've spent
I love you, you pay my rent
I love you, you pay my rent
That is the question today's seller needs to answer. Today's featured property is being offered at $1,120,000. If you divide by 160, you arrive at the monthly cost of ownership of $7,000 a month. There is a house in the same neighborhood that is a very similar comparable for rent at $4,500 a month -- which I suspect is negotiable. So why would I spend $2,500 a month extra for today's featured property? I can't think of a good reason, but then again, I could not understand why people were willing to pay a 100% premium for ownership during the bubble either.
This Great Home Located in Prestigious Gated Harvard Square Is The End Unit and Has a Great Lot Size. Spacious Living W/ 5 Beds Plus Open Bonus Room and 3 Full Baths w/ New Travertine Floors. Main Floor Bedroom and Full Bathroom. Large Family Room and Breakfast Nook, Light and Bright. Open Kitchen w/ Granite Countertop/Backsplash, Oversize Pantry. Hardwood & New Polished Travertine Floors Thru Downstairs. Designer New Paint and New Berber Carpet. New Baseboard Thru the House. Jacuzzi-Like Bathtub in Master Room. Large Size Backyard w/ Covered Patio, Fruit Trees, Vegetables and Stone Water Falls. 3 1/2 Acre Community Park In The Center of The Community w/ Pool, Children's Play Area & Much More. Enjoy This Community's Amenities.
Why Is This Written In Title Case?
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Here is a seller betting on the high-end-is-immune theory. As I look at listings around town, I am noticing a great deal of this. The people who own the largest homes in the neighborhood are clinging to their $1,000,000+ asking prices while properties all around them are dropping like bombs. Good luck with that asking price.
If we assume the above comparable is market rent, then the featured property is worth $720,000. Given that they paid $451,000 back in 1999, $720,000 seems about right.
Theres a brand new day on the horizon
Everythings gonna be just fine
Theres a brand new day on the horizon
And the whole worlds gonna be mine
Im gonna tell old trouble,
hed better be moving on
Happiness is going to take his place
around here from now on
The old dark clouds are gonna roll away
The sun is gonna shine
And the whole worlds gonna be mine
Im gonna tell old heartaches,
pack his bags and go
Ive decided that I dont want him
hanging around no more
Dont you know I said everythings
gonna be just fine
cause the whole worlds gonna be mine
What a wonderful, upbeat song. A new day is dawning; a new market is coming; life is grand... Ahhh, isn't denial a wonderful thing?
Today's featured property would like to see a new market because the current market is taking all their equity. These are the listings that really grab me because these people are actually losing their own money rather than the lender's. Every penny of the first $200,000 lost on this property comes out of their pocket.
Turnkey home!!! Highly desirable townhome by builder William Lyon. This is Andover's largest model, and shares only one wall as an end-unit! Immaculate 3bed/2.5bath/1500sqft. with a loft. Upgraded carpets, hardwood floors, appliances, central heat and A/C. Prewired with Cat-5 throughout the home and loft for a functional home office. Custom drapes, in-ceiling surround sound, and epoxy flooring in garage. Master bedroom has walk-in closet, and custom privacy door. Professionally landscaped patio. Steps to Pool-Spa-Tennis amenities. .. and of course the unparalleled West Irvine Schools: Myford Elementary, Pioneer Middle School, and Beckman High! A very SMART choice. Act now.
It only shares one wall? Now the degree of attachment is becoming a selling point?
unparalleled West Irvine Schools? You mean the ones in Tustin's school district? Perhaps a bit misleading? Perhaps intentional?
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If this seller gets their asking price, they will lose $63,000 after a 6% commission. It will be all their equity that is lost.
Think back to October 2004 when the rally was seeing some of its steepest price increases. Did anyone who bought then think there was even the slightest chance of losing money on the deal?
I don't care what the median shows, when you look at individual properties reselling in the market (like Case-Shiller does) we are clearly passing through 2004 prices. The bubble built on the bubble created by negative amortization loans and the complete breakdown of lending standards has been deflated. Now we are approaching the bubbly prices of 2004 when our 90s-type bubble would have popped. If the 90s are any guide, we are due for another 20%-25% decline from here over the next 5-7 years. Although, with the tsunami of foreclosures about to hit the market, I would not be surprised to see a 30%-35% further decline in 2-4 years. I really is different this time: it is much worse...
In 2007, the financial markets were abuzz with talk of a “credit crunch.” It was portrayed as some unusual and unpredictable outside force like an asteroid impact or a cold winter storm. However, it was not unexpected, and it was not caused by any outside force. The credit crunch began because borrowers were unable to make payments on the loans they were given. When lenders started losing money, they stopped lending: a credit crunch.
New Century Financial is the poster child for The Great Housing Bubble. New Century Financial was founded in 1995 and headquartered in Irvine, California. New Century Financial Corporation was a real estate investment trust (REIT), providing first and second mortgage products to borrowers nationwide through its operating subsidiaries, New Century Mortgage Corporation and Home123 Corporation. The company was the second largest subprime loan originator by dollar volume in 2006. April 2, 2007, the company filed for chapter 11 bankruptcy protection. The date of their financial implosion will be regarded as the day the bubble popped. The death of New Century Financial has come to represent to death of loose lending standards and the beginning of the credit crunch. Subprime lending was widely regarded as the culprit in starting the cycle of credit tightening, and New Century has been linked to this problem, but the scale and scope of the disaster was much larger than subprime.
The massive credit crunch that facilitated the decline of The Great Housing Bubble was a crisis of cashflow insolvency. Basically, people did not have the income to consistently make their mortgage payment. This was caused by a combination of exotic loan programs with increasing payments, a deterioration of credit standards allowing debt-to-income ratios well above historic norms, and the systematic practice of fabricating loan applications with phantom income (stated-income or "liar" loans.) The problem of cashflow insolvency was very difficult to overcome as borrowing more money would not solve the problem. People needed greater incomes not greater debt loads.
When more money and debt was created than incomes could support, one of two things needed to happen: either the sum of money needed to shrink to supportable levels (A shrinking money supply is a condition known as deflation,) or the amount of money supported by the available cashflow needed to increase through lower interest rates. Given these two alternatives, the Federal Reserve chose to lower interest rates. The lower interest rates had two effects; first, it did help support the created debt, and second it created inflationary pressures which further counteracted the deflationary pressures of disappearing debt and declining collateral assets. None of this saved the housing market.
Credit availability moves in cycles of tightening and loosening. Lenders tend to loosen credit guidelines when times are good, and they tend to tighten them when times are bad. This tendency of lenders often exacerbates the growth and contraction of the business cycle. In the decline of The Great Housing Bubble, the contraction of credit certainly played a major role in the decline of house prices. Lenders continued to tighten their standards for extending credit for fear of losing even more money. This meant fewer and fewer people qualified for smaller and smaller loans. This crushed demand for housing and made home prices fall even further.
One of the biggest problems for the housing market was caused by tighter lending standards was the reinstatement of downpayment requirements. During the bubble rally, 100% financing was made widely available. This made it unnecessary for people to save money to get a house. People respond to incentives. This is basic economic theory. The availability of 100% financing removed the incentive to save for a downpayment. People responded; our national savings rate went negative. Potential homebuyers who ordinarily would have been saving money for a downpayment to get a house, stopped saving, borrowed money and went on a consumer spending spree. This created a situation in the aftermath of the bubble crash where very few potential entry-level buyers had any saved money for the newly required downpayments. This created very serious problems for a market already reeling from low affordability, excess inventory, and a large number of foreclosures.
100% Financing
Once 100% financing became widely available, it was enthusiastically embraced by all parties: the lenders suddenly had a huge source of new customers to generate high fees, the realtors and builders now had plenty of new customers to buy more homes, and many potential buyers who did not have savings were now able to enter the market. It seemed like a panacea; for two or three years, it was. There was a problem with 100% financing (which was masked by the rampant appreciation brought about by its introduction): high default rates. The more money people had to put in to the transaction, the less likely they were to default. It was that simple. The borrowers probably intended to repay the loan when they got it, they just did not feel much of a sense of responsibility to the loan when the going got tough. High loan-to-value loans had high default rates causing 100% financing to all but disappear, and it made other high LTV loans much more expensive, so much so as to render them practically useless. It was all part of the credit tightening cycle.
Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. There is usually a steady stream of first-time buyers that enters the market each year as they saved enough for their downpayment. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayments came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for their downpayment. What was worse was those late buyers who were "borrowed" from the future buyer pool overpaid and many lost their homes. This eliminated them from the buyer pool due to poor credit for several years. Everyone who thought 100% financing was a dream come true found it to be a nightmare instead.
Conclusion
Credit availability moves in cycles. During the Great Housing Bubble, credit was loosened to a degree not seen before, and it facilitated a price bubble of epic proportions. During periods of credit contraction, lenders seek to avoid risk and they make fewer loans. This causes inflated asset prices to drop precipitously. The last period of stability at the bottom of the credit cycle saw 20% downpayments, 28% DTI requirements, and high FICO scores. Is there any reason to believe credit will not tighten to those levels again given the losses the lenders are experiencing? This cycle of credit contraction leading to asset deflation feeds on itself until lending standards become too tight and overly cautious when asset prices are their lowest. Of course, this is when credit should be made available to purchase assets at bargain prices. As safety and sanity returns to a financial market, lenders see they became too conservative and loosen their standards allowing more money to flow into capital markets: the whole process starts all over again...
There was a discussion this week over at Calculated Risk on the Bailout Plan du jour (BTW, has anyone else noticed the pattern of periodically introducing a bailout plan that fails? Denial reinforcement?) I was writing about this possibility last April in the post How Homedebtors Could Avoid Foreclosure. Below the Calculated Risk post is a repost of that April writing.
The Office of Thrift Supervision is preparing a plan to help mortgage borrowers who owe more than their homes are worth and to discourage them from abandoning those properties, agency officials said yesterday.
Under the regulatory agency's proposal, still in its early stages, these borrowers would refinance into government-insured loans that cover the current value of their homes. The refinancing would pay part of what's owed to the original lender. For the remainder, the lender would get what the plan's backers call a "negative equity certificate." The lender could redeem the certificate if the home is eventually sold at a higher price. . . .
The proposal was briefly mentioned at a regular quarterly news briefing. More details should emerge over coming weeks, Petrasic said. The plan has been extensively analyzed internally and is now being discussed with policymakers and industry officials, he said.
The plan would separate a troubled mortgage into two parts. The first would cover the current fair-market value of the home and would be refinanced by the Federal Housing Administration. The remainder would be issued to the original lender as a certificate.
If the borrower eventually sells the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower.
If there's not enough profit to pay off the certificate, the original lender would take a loss, which makes this proposal a gamble. However, the plan anticipates that there would be a market where these certificates are traded. That means the lenders could sell them immediately to offset some of the loss or hold them with the hope that they will appreciate, said Jaret Seiberg, an analyst at Stanford Policy Research.
The certificates would likely trade for small amounts, maybe $2 for every $100 in home value, and the amounts would increase as the housing market strengthens, Seiberg said.
But there are still many political and logistical hurdles.
This plan has not been vetted by the White House, Congress or other policymakers. The FHA declined to comment on the specifics except to say it is "regularly looking at new ideas and actively exploring ways to expand the eligible pool of creditworthy borrowers FHA can serve."
Whether investors will embrace the idea depends on many details that aren't resolved, Seiberg said. But it could be a way for lenders to cut their losses. "It beats foreclosure," Seiberg said. "These certificates enable [investors] to share in the upside if the housing market recovers."
For borrowers, avoiding foreclosure means they get to keep their homes and reduce damage to their credit.
"What we tried to do is figure out the best way to create market incentives for all the parties involved," Petrasic said.
That's a real twist on the idea of taking back a lien on a property to recapture any future equity. Apparently, only the FHA mortgage would be a lien against the property, with the certificate being an obligation of FHA? It certainly surprises me that the OTS feels confident it can work out the legal kinks with that quickly enough to make a difference.
There was a recent article posted on MSN about mortgage companies working with FB’s to save their homes from foreclosure. This particular article is most likely part of a public relations campaign from the lending industry to show they are working on the problem. They are bracing themselves for the inevitable congressional hearings which will happen next year. There is nothing quite like an election year crisis to bring out congressional grandstanding by our leading politicians. But I digress… the MSN article got me thinking about what really could be done about the foreclosure problem.
I have written in several posts about the serious foreclosure problem looming as several trillion dollars of mortgages reset to higher payments over the next 5 years. There is no way to effectively restructure payments when a borrower cannot even afford to pay the interest on the debt. Lenders cannot lower interest rates to near zero because then they will lose money on the loan. Any borrower who thinks the lender is actually going to forgive the debt and allow them to keep their home is really living in a fantasy world (I would wager many FBs believe this). Lenders will not take a loss on a property loan and allow borrowers to keep the home: it’s as simple as that.
As much as it pains me to write this, there is a short to medium term solution to the foreclosure problem: convert part of the mortgage to a zero coupon bond. For those of you not steeped in finance, a zero coupon bond is a bond which does not make periodic interest payments. Think of it a zero amortization loan. You don’t pay either the interest or the principal, and both accumulate for the life of the loan. The loan would be due upon the sale of the house.
Here is how it would work for our typical homedebtor: Assume our financial genius utilized 100% financing and took out a $500,000 interest-only mortgage with a 2% teaser rate that is due to adjust to 6%. Let’s further assume his real income (not what he reported on his liar loan) could support a $1,500 payment on a $250,000 conventional 30-year mortgage at 6%. The bank could convert $250,000 to a conventional mortgage, and convert the other $250,000 to a zero coupon bond at 6% due on sale. The homedebtor can now make their payment, and they get to keep their house. But here is the catch: when they sell their house, they will owe the bank a lot of money. If they sell the house in 20 years, they will owe $800,000 on the zero coupon bond note. In other words, all the equity gain on the value of the home will go to the bank.
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This would solve a multitude of problems: First, it would provide a mechanism whereby people who were victims of predatory lending could keep their homes. This would make the homedebtor happy, and it would get government regulators out of the bank’s business. Second, it would make the banks more money in the long run because they are still making their interest profit even if they don’t see it until the homedebtor sells the home (many may not be aware of it, but lenders book income on the increase in principal on a negative amortization loan). Third, since foreclosures would be the primary mechanism facilitating the crash, it would keep home prices from crashing by reducing the number of foreclosures.
Sounds like a panacea, doesn’t it? There are some problems.
The first problem will become apparent when people start selling their houses. People are greedy. They won’t want to give the bank all their equity when they sell. They will conveniently forget the debt relief and avoiding foreclosure and all the problems they had earlier. All they will see is that they sold the house for a lot more than they paid for it, and they did not make any money. And what happens when the appreciation does not match the term of the note? Do they do a short-sale 20 years down the line? This will cause a huge uproar and more calls for congressional intervention. In other words, for everyone involved the day of reckoning is merely delayed, not avoided.
Second, it does nothing for the affordability problem. If prices do not crash, a great many people really will be priced out forever. To solve this problem, banks will make zero coupon bonds available to everyone, and eventually everyone will have them. Think about where we will be then: we will be a society of homedebtors who have collectively agreed to give all our equity to the bank for the pride of ownership. Starts to sound a bit like Pottersville from It’s a Wonderful Life. Is that the way we all want to live?
Third, The zero coupon bond solution would effectively eliminate the move-up market because you won’t have any equity to take with you from house to house. Unless you save money or get a big raise so you can afford a larger payment, you can’t buy a more expensive home. This would result in a dramatic flattening of prices. In other words, the low end would be supported at inflated levels while the high end would stagnate or decline.
Fourth, Based on the problems above, it will be difficult to find a new equilibrium in prices. How would people figure out how much anything is worth? How would all price ranges be supported equally? Small changes in the interest rate on the zero coupon bond can make the difference between hundreds of thousands of dollars at the time of sale, particularly on a long-term hold. Does anyone think this will turn out in favor of the borrower? I suspect we would see a lot of short-sales as the banks graciously agree to take all the gains and forgive the rest of the debt. This takes us back to our first problem with angry, greedy sellers.
Finally, I think this is only a short to medium term solution to the foreclosure problem. For as much as we are addicted to credit in this country, there is a point where people will say “enough is enough.” When a house fails to have any investment value, people will not be so excited about home ownership. People can blather on about pride of ownership all they want, but people want to make money on selling their houses. Inflated valuations are only supported by greed. If home ownership becomes less desirable, prices will end up falling back to their rental equivalent value because the demand will not be there. In the long run, we would end up with prices where they should be anyway, it would just be a much more prolonged and painful journey. Does anyone want to experience what the Japanese went through?
When faced with the prospect of more than a million foreclosures, some Wall Street genius (I am being facetious) is going to come up with a solution very similar to what I just presented. To be honest, zero coupon bond structures and other exotic financing terms are quite common in complex real estate deals like the ones I see on a daily basis in my line of work. Exotic loan terms are the exclusive purview of sophisticated investors who understand what they are doing. They are not intended for consumption by the general public. Given the profusion of interest-only, and negative amortization loans in the market today, is it any surprise we have such a big mess now?
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BTW, what do you think of this flyer that was sent to me?
Darling you gotta let me know
Should I stay or should I go?
If you say that you are mine
I'll be here 'til the end of time
So you got to let me know
Should I stay or should I go?
Always tease tease tease
This is the question every underwater, subprime borrower is asking right now. Most of these people just wanted a home, and if they could afford the payments, they would probably stay in them 'til the end of time. They were enticed with the teaser rate on their Option ARM, and if they can't serial refinance (tease tease tease,) then they would like this teaser rate made permanent. Unfortunately, it is not going to happen.
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Remember the Adjustable Rate Mortgage Reset Schedule?
The gray lines making up the majority of these loans reseting in 2007 and 2008 are subprime. This is what is causing prices in areas like Santa Ana or the Inland Empire where subprime was concentrated to fall precipitously. The big price drop caused by the collapse of subprime will put many homeowners in a weakened position where they may be underwater or have a very high loan-to-value ratio. When the next wave of resets hits the market (the Alt-A and Prime crowd that makes up most of Irvine) prices will be lower because of all the subprime defaults. The Alt-A and prime borrowers in Irvine may face difficulty with refinancing because they will not have enough equity to fall within the tighter lending standards necessitated by the subprime collapse. The subprime fiasco may not hit Irvine directly, but it has created the conditions that will poison Irvine's market when its toxic loans ripen in 2009 and 2010.
They say all real estate is local, but this isn't true. All real estate markets within driving distance are linked together by commuters. If prices in Corona drop to the low $100,000s, prices in Irvine will certainly fall. There is a price differential that will entice people to fringe markets. This creates price drag on the primary markets as some potential buyers are siphoned off by the fringe markets. Eventually this effect will work its way to the most desirable markets on the coast. The collapse of the real estate market is like a land tsunami: it starts inland and makes it way overland to the coast leveling everything in its path. The markets in Coastal California will not be spared, particularly with as extremely overvalued as they currently are. If GRMs fall to 160 in Irvine, they will not stay at 400 in Corona Del Mar.
Today's sellers have earned my admiration. Once they decided it was time to go, they stopped messing around and priced their home to move.
Highly & professionally upgraded. Most desirable home in Westpark2. Granite counter tops, High grade wood flooring through out the house, Italian pavers in kitchen, Crown molding & 5inch base boards, Custom Paint, Tumbled Travertine back splash in kitchen, Built in cabinets & high grade flooring in garage, Stainless steel appliances w/ Refrigerator, Automatic fireplace remote igniter, rolling garage door, Home media center with speakers throughout house5th BR does not have closet (Den/Office).
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This house was orginally listed for the WTF price of $1,150,000 on Oct 24, 2007. It is not a big surprise it did not sell. What is surprising (and admirable) is the $300,000 price drop they made a few weeks ago. As was discussed in Selling for Less, a property needs to be listed for some period of time at a sales price which would result in sufficient funds to pay off the loan before a short sale would be approved. Do you think they arrived at an asking price of $869,453 by randomly picking numbers? It is probably the exact payoff figure for the loan on their property after commissions. In today's market, this house is a good deal, but with no room to negotiate on price, it may not be good enough until it is eligible to become a short sale.
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That concludes another 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.
This is the story of many homeowners now that the market has started its downward spiral -- hung upside down. Trapped in a property they cannot sell and cannot afford, they count the days until their mortgage resets and they face foreclosure. It is a bit like death row when you think about it. You know your sentence, it has a feeling of dread and finality, and you know the date when judgment will be rendered. You have your false hopes for a government reprieve, but after a time you become resigned to your fate.
Seller super motivated. Make an offer, ANY offer on this Charming light and bright home located in a quite Cul-de-sac. Newer Kitchen cabinets and appliances. Large ceramic tiles in main areas. Above ground spa, Covered patio with skylight. Remodelled bathroom in master berdroom. Many nicely upgraded features thoughout this home. Interior and exterior painted a year ago. No mello roos or HOA. Low Property Taxes.
Make an offer, ANY offer. Do you smell blood in the water?
light and bright -- This is nails on a chalkboard to me. Pet peeve, I guess.
Seller super motivated. If so, where are the obligatory three exclamation points?
berdroom? Is that like a birdroom?
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This seller (or the lender if they maxed out the HELOC) is going to lose $46,000 after a 6% commission assuming they get their asking price. As you can see, we are moving past 2004 prices and heading downward.
These are the properties that are going to drive prices lower in Irvine. This isn't subprime, this is just an ordinary buyer who bought too late, paid too much and cannot afford the home. There are many of these people in Irvine. We have profiled many here, and we will profile many more. The ones we have seen to date are the most distressed sellers with the shortest fuses on their time bomb loans, but there are many, many more of these people hoping and praying the market will come back to save them. Unfortunately, all the people with shorter fuses on their bombs are going to explode first and keep prices depressed in the process. This is the nature of "overhead supply," and it is why a market needs capitulatory selling to clear it out before any appreciation can take place.
Take or leave it or just don't even bother.
Caught in a craze it's just a phase
or will this be around forever.
Don't you know it's going too fast
Racing so hard you know it won't last.
Don't you know what can't you see,
Slow it sown, read the sign so you know just where you're going.
Stop right now, thank you very much,
Stop -- Spice Girls
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Another song about the housing bubble... or is it romance... or was there a difference? Everyone got crazy about real estate thinking the rally would last forever. Prices were going up so fast people ignored the signs, and now the music has stopped. Do you have a chair?
Finding comparable properties for sale and for rent provides a good way to check neighborhood fundamental values. Today, I am featuring a for sale property a few doors down from a rental of similar size and configuration.
Spacious Julliard Model. Wow!3 Bedrooms each with its own bathroom. One bedroom and bathroom downstairs. This home boasts a sunroom, cozy fireplace, catherdral ceilings, skylight and track lights in Living Room. 2 Large private enclosed patios to entertain your guests. Newer windows in all the rooms. Recessed lighting in Kitchen. Cook to your hearts delight on the 5 plate range. Tile entry way and formal dining room. One wall fully mirrored. Near acclaimed schools, shopping, University and excellent community amenities. Very QUIET! NO MELLO ROOS! LOW TAX RATE! This home is built for entaining. A Must see! Bonus Room was converted to master bedroom
How many people would remember a model design from 1968?
entaining? catherdral?
No pictures of the kitchen, so I am suspect of its quality.
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So how much would a property like this rent for? Try $2,500.
IMO, this rental is a very good deal. It is just over $1 / SF per month. If this is a valid market rent, then how much is the featured listing really worth?
$2,500 * 160 = $400,000. Hmmm...
Should I pay $735,000, or should I wait for the price to drop to $400,000? That is a tough one. I think I will wait...
Somewhere in a roadside motel room
Alone in the silence she wakes up too soon
And reaches for his arm
But she'll just keep reachin' on
For the cold hard truth revealed what it had known
That boy's just
A walkaway Joe
Born to be a leaver
Tell you from the word go, destined to deceive her
He's a wrong kinda paradise
She's gonna know it in a matter of time
That boy's just a walkaway Joe
A Stunning Home! So many upgrades!Gourmet Kitchen with VENETIAN GOLD Granite Counters and Sit-Up Bar * Stainless Appliances, * Stunning Fireplace * Extensive Dark Maple Wood Floors (see pic's) * Dark Wood Built-ins * Master Suite w/ Spacious Walk-in Closet and Hugh Master Bath w/ Custom Tumbled Turco Stone Tile * Dual Sinks * Separate Soaking Tub /Shower * Open Spacious Floorplan. Great Living Area With Nice Formal Dinning Room * Deluxe Garage * Recessed Lights * Gorgeous Upgrades * This Home Is SPOTLESS * * * * * SHOW LIKE A BRAND NEW HOME * * * * * A MUST SEE! Tax rate 1.4% including Mello Roos!
ALL CAPS
******** Asterisks **********
! exclamation points !
"SHOW LIKE A BRAND NEW HOME * * * * * A MUST SEE!"
This listing manages to encapsulate every cliché known to realtors.
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The carnage in Quail Hell continues. I don't have an accurate purchase price and date, but inferring from the tax records, it appears this seller paid around $580,000. If he gets his asking price and pays a 6% commission, the loss will be around $160,000. I would imagine the lender will eat this one, but I can't be sure. Notice the price on a per square foot basis: $300. This is a very low price for a small unit. It wasn't long ago we were blogging about breaking the $500,000 barrier in Quail Hill, now we are about to break the $300 / SF barrier as well.
I want a new drug
Do these sellers have their heads in the sand, or is it somewhere else? The cognitive dissonance is truly remarkable. It takes courage to put a listing price out there like this. This price clearly insults the intelligence of every buyer in the marketplace. Aren’t they worried about insulting potential buyers? No wait, I suppose potential buyers should be worried about insulting them with a lowball offer, right? This property would be fortunate to sell for what they paid for it. Can you imagine their reaction if they got an offer for what it is worth in today’s market? What would happen if they got a real lowball offer for perhaps what this place will be worth at the bottom -- I'm guessing 50% off their asking price? Anyone want to go mess with them? It is the only buyer interest they are likely to see at this listing price.
Unsold in 90+ days
