I'm a loser, I'm a loser
And I'm not what I appear to be
What have I done to deserve such a fate
I realize I have left it too late
And so its true pride comes before a fall
I'm telling you so that you wont lose all
I'm a loser and I lost someone who's near to me
I'm a loser and I'm not what I appear to be
During the bubble price rally, sellers and realtors, the agents of sellers, had everything going their way. It was easy to price and sell a house. A realtor would look at recent comparable sales, and set an asking price 5% to 10% higher and wait for multiple bids on the property — some of which would come in over asking. The quality of the property did not matter, and the techniques used to market and sell the property did not matter either. As far as buyers and sellers were concerned house prices always went up, so the sellers were thought to be giving away free money; obviously, the product was in high demand. As the financial mania ran its course, buyers became scarcer; all the ones who could buy did buy. The buyer pool was seriously depleted leaving prices at artificially high levels. When the abundance of sellers became greater than the number of available buyers, prices began to fall.
Residential real estate markets generally move very slowly and trend in a single direction for long periods of time. Once these markets reach an inflection point, the direction of price movement changes, and the balance of negotiating power shifts from an advantage to one side to an advantage for the other. However, most market participants do not recognize this change for some time. Sellers continue to price and attempt to sell using tactics that worked during the rally, and they find they are unable to sell their properties. It often takes two years or more before sellers accept the reality of the new market and adjust their attitudes and behaviors to the new dynamics of a buyer’s market.
In a buyer’s market, buyers have the upper hand, and sellers need to adjust their pricing tactics to reflect this fact. During a rally, many buyers must compete with each other for the property of a few sellers. In a price decline, many sellers must compete with each other for the money of a few available buyers. It is common for sellers to ask their realtor to find a buyer who will appreciate the "unique qualities" of their property. Every seller thinks their property is the finest in the neighborhood and certainly commands a premium 5% to 10% more than their neighbors. These fantasies are reinforced by the behavior of buyers during the rally. At the risk of losing the listing, the realtor must find a diplomatic way to convince a would-be seller their property is average at best and needs to be priced accordingly. It is a difficult challenge for an experienced realtor to persuade an owner their castle is a cottage. Failure to educate the sellers to the reality of the market wastes the seller’s time and the realtor’s resources. Experienced realtors who thrive in bear markets earn their commissions.
Sellers in declining markets must compete on price. Only the best properties can command prices equal to recent comps. In a buyer’s market, there are no premiums: getting the price of recent comps reflects a premium because prices are declining. Properties with negatives must price 10% or more below recent comps to attract the attention of buyers. There are many books and articles written about staging a property and various little things a seller should do to sell their home. Most of these writings pander to the ego and false hopes of sellers who refuse to compete on price. No amount of sales and marketing is going to convince a buyer to overpay in a buyer's market. Price is the ultimate amenity.
Paying off the Mortgage Note
Once a price decline gets underway many buyers who were late to the price rally find they are in a property worth less than they paid for it. As prices continue to fall, many find themselves "underwater" owing more on their mortgage note than their property is worth. When these late buyers want to become sellers, they cannot sell and pay off the mortgage note balance with the proceeds from the sale. Then they have a real problem. It is a problem with only 4 solutions:
The borrower can keep making the mortgage payments until prices go back up. This is the "hold and hope" strategy. If the borrower uses exotic financing — which most buyers did in the later stages of the Great Housing Bubble — it may be difficult to continue making mortgage payments because these payments are likely to increase substantially. If the property is not owner occupied, the borrower may try to rent it out to cover expenses; however, this is generally not feasible. Buyers who purchased during the mania paid too much money relative to prevailing rents and available income. If this were not the case, it would not have been a financial mania. Since the payments are too high, renting the property does not cover the expenses. Renting out the property lessens the pain, but it does not make it go away. Also, since housing market corrections often last 5 years or more, it may be a very long time before prices recover to peak bubble levels. Keeping the property is a “death by a thousand cuts,” or perhaps a death by a thousand payments.
The borrower can write a check at the closing to pay off the portion of the mortgage not covered by the proceeds from the sale. Many people do not have the amount necessary in savings, as few thought such a loss was even possible, and even fewer are willing to go through with the sale knowing they will have to pay for the loss. The unpalatability of this option usually forces the borrower to keep the property and try to endure the pain, or let it go up for auction at a foreclosure.
The borrower can try to convince the lender to agree to a short sale. A short sale is a closing where the lender accepts less than the full mortgage amount at the closing.
The borrower can simply stop making payments and allow the property to go to public auction in foreclosure. Both short sales and foreclosures have strongly negative impacts on credit scores and the availability of credit in the future.
In the price declines of the early 90s, most people opted to keep making their payments and stay in their homes. Downpayment requirements were high, and the use of exotic loan programs was less common in the rally which preceded, so many homeowners had equity and were able to make their payments. They accepted debt servitude as part of the price of home ownership. When faced with the four options presented to them, most chose to stay in their homes and keep making payments. As the slowdown in the housing market helped facilitate a recession in the early 90s, a recession compounded in California with defense industry layoffs, many people lost their jobs and as a result, lost their ability to make high mortgage payments. This created a problem with foreclosures that pushed prices lower. The decline in prices in the early 90s, though extreme in certain fringe markets, was not so deep to cause many people to voluntarily walk away from their mortgages. Most buyers during this period were required to put 20% down. This represented years of savings and sacrifice for many, so they were not willing to lose it. Since the total peak to trough correction was a bit less than 20% statewide in California and even less in other states, many homeowners still had some equity in their homes. The combination of high equity requirements and a relatively shallow correction made staying in the home the best choice for many. This kept foreclosures to high but manageable levels. The Great Housing Bubble was characterized by low or non-existent equity requirements, and a very steep initial drop in house prices. These conditions made foreclosures, both voluntary and involuntary, a tremendous problem.
Much of the purchase money in the bubble rally was debt. As 100% financing became common, the average combined loan-to-value on purchase money mortgages climbed to more than 90%. With so many people with so little in the transaction, it did not take much of a price decline to cause people to give up. By late 2007 prices had already fallen 10% or more in many markets, and there was no sign this would change any time soon. It was becoming obvious that those with little at risk were well underwater and they were going to be that way for the foreseeable future. This inevitably lead to one of the unique phenomenons of the Great Housing Bubble — Predatory Borrowing. Many simply stopped making payments they could afford because the value of their property had declined significantly. Nowhere in the terms of the mortgage did it state the payments would be made if, and only if, resale values increased, but many borrowers acted as if it did. When borrowers quit making payments they were capable of making simply because they were not going to make money on the deal, their behavior was predatory to the lender who ultimately had to absorb the loss. These borrowers often had so little of their own money invested in the form of a downpayment they felt little actual damage from just walking away from the property and mailing the lender the keys. Many borrowers simply stopped making payments, did not respond to letters or phone calls from the lender, and moved out. Short sales and foreclosures were not the end of the nightmare for sellers. It is the last contact they had with the property, but in many circumstances the debt — and debt collectors — followed them until the debt was repaid or discharged in bankruptcy.
Short Sale
A short sale is a property closing where the proceeds from the closing do not satisfy the outstanding debt on the property. The lender must agree to accept less money at the closing table for the closing to occur. From a credit perspective, there is little or no difference between a short sale and a foreclosure. Both a short sale and a foreclosure will show a series of missed payments and a secured credit line (or multiple credit lines) with a permanent delinquency and discharge for what is generally a very large sum of money. Both will have a strong, negative impact on the borrower’s FICO credit score that will persist for many years.
Because of the potential for fraud and the bureaucratic tangle of various parties involved, it is very difficult to get a short sale approved. If a lender is going to lose money, they are going to want to be sure the borrower is not selling the property to a friend or relative or engaging in some other kind of fraudulent conveyance. Also, the lender will want to be sure the borrower cannot pay back the money. This will require additional financial information like updated W-2s, 1040 tax returns, and a statement of assets certified by an accountant. In most cases, the borrower will have to stop making payments as evidence of their inability to do so in the future. Further, the property will also need to be listed for some period of time at a sales price which would result in sufficient funds to pay off the loan. Once it is demonstrated to the lender that the borrower has stopped making payments, cannot reasonably make future payments, and the property cannot be sold for a breakeven amount, then the lender may grant a short sale request. None of this happens quickly. If a buyer is found who is willing to purchase the property, the process of approving a short sale is so long and cumbersome, most buyers will move on to one of several other available properties on the market.
In the end, a short sale is only in the best interest of the borrower if they believe the bank will try to collect on the shortfall from the property sale. If a borrower is in a position where they will have to pay back any losses, a short sale may result in a smaller loss than a foreclosure and subsequent auction. If the borrower is not in a position where the lender either can or will go after the deficiency, there is little incentive for the borrower to even attempt a short sale. In these instances, the borrowers generally let the property go into foreclosure.
Foreclosure
Foreclosure is the forced sale of a property owned by the borrower in order to satisfy the debt(s) secured by the property. Foreclosure laws are complex, and they vary from state to state. There are no federal laws governing foreclosures. The borrower is the legal owner of the property who has entered into a mortgage agreement with a lender to pay back all borrowed money, fees and interest due. The Mortgage is a security instrument that pledges the property as the security for the loan. This document provides the lender the ability to force the sale of property to satisfy the debt if the borrower fails to pay in accordance with the terms of the agreement. The lender does not own the property, they merely own a lien on the property which can be exercised to force a sale to satisfy the debt. At the time of a sale, all proceeds first go to settling this indebtedness before any residual “equity” goes to the seller. Foreclosures are always public auctions where the lender must notify the general public in advance, and the general public must be allowed to bid on the property. This public auction is necessary to prevent the lender from forcing the borrower to sell the property at a below market price to the lender who could then resell it for a profit on the open market.
Lenders do not want to own real estate. Lenders are in the business of loaning money and collecting fees and interest. At a foreclosure auction the lender will bid on the property up to the value of the loan. This ensures auction bids will be high enough to satisfy the outstanding loan amount. The lenders do not want to be the highest bidder. They would rather someone else bid over the loan amount and make them whole. If they end up being the highest bidder, then they must manage the property and ultimately arrange for its sale in the non-auction real estate market. There are costs and fees associated with this endeavor which eats in to the final disposition amount garnered from the final sale of the property. These fees generally increase the loss for the lender.
Recourse vs. Non-Recourse Loans
Loans used to purchase real estate assets can be either recourse loans or non-recourse loans. A recourse loan is one where the lender can sue the borrower for any amount owed in the terms of the loan contract. As with foreclosure laws, whether a loan is recourse or non-recourse varies from state to state. In California, all purchase money mortgages are non-recourse loans. In most states, including California, all refinances, home equity lines of credit or other loans not used to purchase the property will be recourse loans. This distinction becomes very important in a foreclosure or short sale. If a loan is non-recourse, the lender cannot collect from the borrower for deficiency under any circumstances. The sale and closing of the property is the end of the matter: the debt does not survive. If the loan is a recourse loan the lender may have the right under certain circumstances to go after the borrowers assets after a foreclosure. This depends on whether the foreclosure was judicial or non-judicial.
Judicial vs. Non-Judicial Foreclosure
Foreclosure proceedings in most states can be either judicial or non-judicial at the lenders discretion. The lender has the right to sue the borrower in a court of law for repayment of the debt on the property. This legal action is a judicial foreclosure. A judicial foreclosure is slower and costlier than a non-judicial foreclosure. The mortgage agreement has a provision where the borrower authorizes the lender to sell the property at a public auction if the borrower fails to pay the debt. A lender can exercise this right without a court order, and therefore it is considered a non-judicial foreclosure. It is faster and less expensive to perform a non-judicial foreclosure because no attorneys are involved and there is no waiting for a case to come up on a court’s schedule; however, there is a problem with non-judicial foreclosure, in most states the lender waives their rights to obtain money in a deficiency situation because no deficiency judgment is entered in the court record. When faced with deciding between a judicial or non-judicial foreclosure, the lender must weigh the cost and time of a judicial foreclosure against the probability of actually collecting any deficiency judgment. If a borrower is insolvent, which they often are if they are going through a foreclosure, they may not have enough money or other assets for the lender to collect on the deficiency judgment. In these circumstances, the lender will foreclose with a non-judicial procedure to minimize their losses. In these circumstances the borrower is not liable for repayment on the deficiency.
Tax Implications
Prior to the Great Housing Bubble, if a mortgage debt was forgiven, the amount of forgiven debt was subject to taxation as ordinary income. Since people who lost their house under these circumstances were already financially ruined, this tax provision was seen as unduly burdensome to those it was levied against. The President signed into law the Mortgage Forgiveness Debt Relief Act of 2007 to relieve the federal income tax burden on debt forgiven in a short sale, foreclosure, dead in lieu of foreclosure, or a loan restructuring where the principal amount was reduced. This tax relief is only given to an owner's principal residence and only for debt used to acquire the property. Speculative properties purchased as second or third homes are not covered, and debt incurred after the purchase through refinancing or opening new credit lines is not covered. This tax change made it easier for some borrowers to make the decision to go through a foreclosure because it removed one of the negative consequences of the decision.
Conclusion
Many would-be sellers failed to sell their homes at inflated bubble prices. This might not have be a financial burden depending on how they managed their mortgage debt. They may have regretted missing the windfall they could have received by selling at the peak, but they stayed comfortably in their homes and forgot about the excitement of the real estate bubble. The sellers who missed the peak sales prices and fell underwater on their mortgage, they faced more difficult choices. Many borrowers concluded a foreclosure was the best course of action because they owed more on their loan than their property was worth. Also, due to the exotic loan terms utilized by many borrowers, they were experiencing increasing loan payments and decreasing property values. With the prospect for recovery bleak, many decided to give up paying their mortgages and allowed the lender to foreclose. One can argue the morality of this decision, but financially, it was the best course of action given the conditions.
Address: 1124 Scholarship, Irvine, CA 92612 Plan: 1A 725 sq ft - 1/1 MLS: P609516 DOM: 46 Sale History: none Current Price: $334,990
See our previousposts on Avenue One. This brand new home is for sale by the builder, K Hovnanian. The builder listed a similar property in October 2006 for $396,990 which translates to about a 15% drop in asking price in the past 14 months.
Here are the private remarks on the property:
BROKERS AND REALTORS, DOUBLE YOUR COMMISSION TO 6% ON SELECT UNITS. Contracts must be written by 12-31-07 and COE by 1-31-08. MOVE-IN-READY. $10,000 Deposit required. Agents must bring Buyers to the Sales Office and register them during their very first visit to Avenue One. Our Sales Office ( 2100 Scholarship ) is open Mo. 1p.m. - 5p.m. and Tue. - Sun. 9a.m. - 5p.m. Please call a Sales Consultant at 949-975-8545 and ask about our current specials , incentives and upcoming events.
The builder has priced this well below other units with the same plan. It's putting this seller (a RE Broker who has the highest asking price for this plan) in a tough spot:
Address: 1138 Scholarship, Irvine, CA 92612 Plan: 1A 725 sq ft - 1/1 MLS: P584759 DOM: 123 Sale History: About $409k on 8/2006? Current Price: $420,000
These 725 sq ft units can bring in a rent of $1400-$1600/month. What's the unit worth to you?
UPDATE #1 - February 13, 2008
Recently, I noticed that several units in this complex were labeled as 'Sold' in MLS. What's interesting is the price listed in MLS as the Sold Price. These units were all sold by the builder:
1164 Scholarship - Plan 1B - 1/1 - 602 sq ft - Sold for $323,990 on 1/10/2008
1124 Scholarship - Plan 1A - 1/1 - 725 sq ft - Sold for $253,492 on 1/30/2008
1327 Scholarship - Plan 1A - 1/1 - 725 sq ft - Sold for $280,591 on 1/29/2008
1434 Scholarship - Plan 2AL - 2/2 - 1213 sq ft - Sold for $445,042 on 1/25/2008
And here's what is pending from the builder:
2138 Scholarship - Plan 2A - 2/2 - 1037 sq ft - $474,990
2434 Scholarship - Plan 2AL - 2/2 - 1213 sq ft - $556,990
1446 Scholarship - Plan 3AL - 2?/2 - 1538 sq ft - $674,990
The Sold prices are significantly lower than anything we've seen in this tract. I haven't been able to confirm this information with the Title info. If anyone can confirm, please post. As I've mentioned on other Avenue One posts, the builder is going to sell these units one way or another.
The 1124 Scholarship unit is the one that started the this post on Dec 27, 2007. If it can be rented for $1600/month, then it is at just under the 160 multiple.
· Schadenfreude – Feeling joy in the misfortune of another. The introduction is an examination of this phenomenon in bubble blogs.
· Real-Estate-Industrial-Complex (REIC): Variant of Eisenhower’s Military-Industrial Complex, referring to the collection of related industries dependent upon residential real estate transactions such as building, lending and sales.
· Homedebtor – A homeowner who is overextended with a mortgage they cannot afford often due to their own desires for more home or more spending money.
· Serial Refinancer – A Homedebtor relying on mortgage refinancing to maintain artificially low debt service payments or fuel a lifestyle of consumption.
· Loanowner or Loanership – Terms used to convey the reality of home ownership for overextended homedebtors who are in essence renting from the lender. A related expression is “Equity is fantasy and debt is real.”
· NEOs – Negative Equity “Owners” – Homedebtors who owe the bank more than what their property is worth. It is similar to REO or Real Estate Owned, the acronym used by lenders to describe a property they have acquired through foreclosure.
· Sheeple/Sheople – Derogatory term for the vast, clueless, herd-following instincts of the general public. Sheeple are easily manipulated by the fallacies promoted by the real estate industrial complex and often end up slaughtered by the market.
· Knife Catcher – A buyer during the decline attempting to time the bottom and catch a price reversal. Since prices generally decline for long periods in a real estate slump, there are many buyers who buy too early and pay too much thus causing financial injury.
· Alligator: Term popularized by Robert Kiyosaki. Refers to any unsuccessful investment that “eats” far more income than it generates. During the bubble the cost of ownership for residential real estate far exceeded any income or savings from rent making all bubble purchases alligators.
· Flip – a Property purchased to resell quickly for a profit. Flippers are derided for bidding up house prices and preventing normal families from purchasing houses for reasonable prices while often adding no value to the property.
· Pergraniteel™: Pergo fake wood floors, granite countertops, and steel appliances. It is an amalgamation of flipper’s most popular home improvements when improvements were made at all.
· Wishing price – An unrealistic price a seller establishes for their property on the market due to need or greed. A house for sale at a wishing price does not sell, and it often results in the seller chasing the market down and selling for far less than they would have if they had priced the house properly initially.
· Floplord – A speculator who cannot sell his flip for either the wishing-price (greed,) or enough to cover the existing mortgage (need,) so finds himself in the position of becoming an unintentional landlord.
· Bagholder – A homeowner unable or unwilling to sell a property that is declining in value.
· Jingle Mail – Term coined by early bubble prognosticator Bill Fleckenstein, referring to homeowners who have “mailed in the keys because they can’t make the payments and no longer have any equity in their homes.”
· Liar Loans – Also known as stated-income loans. A type of loan used when a borrower could not qualify for a loan based on their real income.
· Suicide loan – Also known as Option ARM or Negative Amortization loan. A type of loan where the principal grows with each payment.
· MEW – Mortgage Equity Withdrawal – Any form of increased property debt. This can result from direct cash borrowing through refinancing or home equity lines of credit (HELOC,) or it can result from loan terms with negative amortization. MEW fueled a great deal of consumer spending during the housing bubble.
· Liberated Equity – An Orwellian industry-friendly euphemism for MEW originally coined by CAR Vice President and Chief Economist, Leslie Appleton-Young.
· Kool Aid – A reference to the pathological beliefs of people who believed the rally in house prices would continue forever.
· MIRAGE (Moneyed Immigrants, Rich Ancestors, Generous Expatriates): Acronym to lampoon the bulls’ argument that housing demand is being supported by cash-rich immigrants, wealthy parents and transplants from other states.
· ILLUSION (Irrational Lending Lax Underwriting Speculative Investing Ownership Nonsense): Acronym to describe what drove housing demand during the bubble rally.
· CHUMPS (Cunning Hard-eyed Ultra-savvy Market ProfessionalS): Acronym to lampoon the bulls’ argument that most recent buyers who used exotic loan products are market-savvy professionals who fully understand the downside risks and are financially prepared for them.
Well I was drinkin last night with a biker
And I showed him a picture of you
I said, pal get to know her, youll like her
Seemed like the least I could do.
Cause when hes chargin his chopper
Up and down your carpeted halls
You will think I am dressed up quite proper
Never mind how I stumble and fall.
You imagine me sipping champagne from your boot
For taste of your elegant pride
I may be going to hell in a bucket, babe
But at least Im enjoying the ride, at least Ill enjoy the ride.
I have to wonder if today's flipper decided to buy after a night of drinking. He certainly had more kool aid than common sense. Today's property was purchased for peak pricing a year after the peak in May 2007. This property was purchased despite the news of the subprime blow up 3 months earlier. Perhaps this flipper really believed the "subprime containment" meme? It is easy to ridicule a bad investment after the fact, but we at the IHB would have ridiculed it before the fact, and we would have been right. Enjoy the schadenfreude at this flipper's expense, with the damage to his credit this fiasco will entail, he won't be doing it again any time soon.
Rarely on the market, Largest floorplan in The Legacy Tract. Spacious West Irvine Home features a Gourmet Cook's Kitchen with Granite Counter tops. Large Family Room With Fireplace. Beautiful tile floors throughout family room. Extra large Loft. Guest Bedroom on First Floor with full Bath. Three car garage with large driveway. Top Award winning schools: MYFORD Elementary, PIONEER Jr High and BECKMAN HIGH. Wonderful neighborhood with no association dues. Views of the Park and trees.
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This large, single-family detached property is selling in Irvine for $231 / SF. This is not a bad property in a bad neighborhood, it is a beautifully updated property with a large yard backing onto a park. It is selling at such a low price for a couple of reasons. First, the market is declining precipitously, and there are few buyers around. Second, this seller used 100% financing (I guess you could still get that in May 2007,) so he doesn't have any reason to keep up payments. This was purchased as a speculative flip, and the lender was taking all the risk. It didn't work out, so the flipper gets bad credit, and the lender gets a huge loss. If this property sells for asking price, the lender (JP Morgan) stands to lose $251,005 after a 6% commission. That is a sizable loss considering this loan was made about 9 months ago. I wonder if the flipper has even made any payments? This could be fraud, but the owner is a real person and not some fictitious business entity, so I think this was a real flip attempt -- a very foolish one.
That concludes another week at the Irvine Housing Blog. I hope you have enjoyed the Grateful Dead. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
As part of my Valentine's gift to my wife, I have asked her to show me her favorite house available for sale in Irvine. I told her it did not have to be realistically within our price range, it just had to be her dream house. If any of you have seen the video for The Secret, it does contain a thread of truth concerning goal setting and visualization of a better future. Although these things have no impact on a financial market, they can influence decisions in one's daily life that have a powerful synergistic effect leading in many cases to the achievement of the goals and aspirations of one's deepest vision. This post is my wife's vision board of the perfect house.
Now if I could just get each of the 3,500 daily readers to donate $3,336.85 to my downpayment fund, I could raise the $11,679,000 necessary to buy the house. I haven't quite figured out where I am going to come up with the $9,732 per month I would need to cover the property taxes, but according to The Secret, I don't need to worry about how these things will happen, I just need to focus on the vision of it happening. Perhaps I am a bit myopic, but I have a hard time seeing this coming to pass...
Tuscany inspired residence on one of Shady Canyon's largest and most private lots. One of the finest homes yet to be offered in one of the country's most prestigious private communities. This home features 5 large bedrooms, 6 full and 3 half baths, 3000+ square feet subterranean garage, commercial elevator and nearly 11000 feet of living area, huge pool and outdoor entertaining areas with multiple water features.
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Let's take a closer look at this property...
The view is fantastic. The rock outcrop provides an interesting focal point.
A great entertaining room with wet bar and big screen with beautiful wood inlays.
A modest room to hang out with the family. I particularly like how the indoor and outdoor spaces blend together by eliminating the separating wall.
This was one of my wife's favorite features. Again the distinction between what is an indoor space and what is an outdoor space is blurred. The swimming pool becomes part of the environment.
The pool and spa are spectacular.
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So there you have it, my wife's Irvine dream home. I must admit, I like her vision.
For those of you who want to work on your visualization skills this Valentine's day, I have a video for you: Kiss Me.
My guesstimate numbers, from Friday, were pretty close. It seems my math is coming in low for the NODs, but it is still within a 10% error margin. I will experiment with a new calculation for this month, and see if it comes closer to the real numbers. Also, my number for foreclosures will always be higher than DQ's numbers, because I include the homes that are bought by someone, other than the bank, at the auction.
One quibble I have, is Matt stated "To be sure, foreclosures account for a small percentage of total housing stock in O.C., which has increased by tens of thousands of homes since the last downturn of the 1990s." This is not true when you do the math. The owner occupied (keep in mind, DQ’s foreclosure numbers are for owner occupied housing) housing stock at the end of 1996 was 560,753, and in 2007 it was 614,815. The record foreclosure month was October 1996, with 674, and now the record is 802.
That is…
1 foreclosure for every 832 homes in 1996.
1 foreclosure for every 767 homes in 2008.
Any way you look at it, it is bad, it is really, really bad.
And, for the first five days in February there has been 580 NODs recorded (116 per day), 229 NTSs recorded (45.8 per day), and 189 trustee deeds recorded (37.8 per day). Keep in mind, February has 19 business days compared to January's 21 business days. So, while the monthly numbers may not be higher, or the same, they are still increasing.
Today, 40 homes went back to the bank at the Santa Ana court house, and 2 sold. Here are the 5 homes in Irvine that went back to the bank...
And... the big news of the day, (insert awgee snickering here), Slade's home went back to the bank for $1,282,500. It looks like the zestimate of $3.15mil is a bit high. I guess Jo's singing career is not going so well. And, for those who think we at IHB are completely heartless, and kill a puppy for every home sale, I sincerely hope his kid it doing well. Just remember... don't buy stuff you can't afford. You never know what life will throw at you.
I would like to thank tonye for suggesting this song and the Grateful Dead.
With the extreme leverage and volatility of residential real estate, it does cost a lot to win and even more to lose. It is a very important decision one should spend some time thinking about. Right now is a horrible time to buy, and here at the blog we watch each property as it comes into play. The game right now is to wait until your deal comes around...
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I profile Turtle Ridge frequently because the prices are so high, it is easy to find WTF listings -- they all are. This isn't to say Turtle Ridge does not carry a premium. It is a desirable neighborhood. This desirability is reflected in rental rates and amplified in house prices.
The two-bedroom market in Turtle Ridge will cost you $2,400 to $2,500:
Of course, Turtle Ridge wouldn't be Turtle Ridge if someone didn't think their rental was worth a fortune. Perhaps they are trying to cover half their mortgage payment...
The fundamentals of property valuation are the same for the high end as they are for the low end. The breakeven cost of ownership for these units will be near 160 (perhaps a bit lower due to high Mello Roos fees.) This puts the value of two-bedroom units at $384,000 to $400,000. The value for the entry level three-bedroom units would be $464,000 to $480,000. So what would you guess these properties are priced in the market?
Drastic 200K price reduction below market value!!!!!!Stunning turtle ridge home, completely remodeled throughout. Plank hardwood flooring, Travertine flooring in kitchen and all bathrooms. Master bathroom has custom travertine shower with designer sinks and hardware. Custom built-in closets and garage. Added recessed lighting, ceiling fans, crown molding and baseboards throughout home. Surround sound in family room and master bedroom. Garage also has granite flooring. Gorgeous and turnkey. Furniture optional, owners are very motivated!!!!!!! Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!
This is the most incompetent listing I have seen in quite some time. First, how do you like the sideways pictures? This isn't a problem with Redfin. Look at the MLS logo in the corner. The pictures were put up sideways, and rather than correcting the error, the MLS logo was put on them, and they have been there over 90 days.
It really annoys me when a realtor tells me a property is priced below market value (and adds multiple exclamation points.) Market value is whatever someone is willing to pay. Unless someone comes in and pays $200,000 over asking price, the property is not priced below market. In fact, they will probably have to lower the price further to sell it, so it is still priced over market. What the realtor is really saying is "this property is priced $200,000 below the fantasy/wishing/WTF price the owners thought it was worth."
Furniture optional? Can I have the shirt off the seller's back?
Gorgeous Turkey...
Can you just feel the emotion (desperation) of the realtor holding down the exclamation point button on their keyboard. I don't have the patience to count them, but this must be a new record: Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!
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One of the two 3 bedroom rentals featured above is identical to this unit, and it shares the same alley access. You can't get a closer comparable. The breakeven cashflow value for an owner-occupant would be $464,000 to $480,000 -- which is what they paid for the place in 2003. Unfortunately, it is about half of their asking price.
There are other comps in the neighborhood that are priced even higher:
California, preaching on the burning shore
California, Ill be knocking on the golden door
Like an angel, standing in a shaft of light
Rising up to paradise, I know I'm gonna shine.
My time coming, any day, don't worry about me, no
Its gonna be just like they say, them voices tell me so
Seems so long I felt this way and time sure passin' slow
Still I know I lead the way, they tell me where I go.
This could be the song of the guy who delivers the paperwork for a foreclosure...
Today's owner must have estimated a fair profit for their property; otherwise, they probably would not have gone out and borrowed more than they paid for the property. In context with the previous HELOC abusers we have profiled, today's seller is a minor leaguer. They are extraordinary in their ordinariness. They are stereotypical of many homeowner's behavior during the bubble. People really believed their home appreciation was free money they could spend as income because their house would go up in value forever. In hindsight, it is laughable and ludicrous -- and to some of use in foresight it was as well -- but to those caught up in the mania, it made perfect sense.
Irvine will not be savaged by subprime (other than the job losses.) Irvine will be devoured by its own consumption. As I demonstrated in What is Equity?, if you consume your equity or buy at too high a price, the inflation hedge is the only thing keeping you above water, and if you consume too much through bad loan terms or HELOC abuse, you will go underwater and you will be at serious risk of losing your house.
Today's seller bought in the upward trajectory of the speculative equity curve. Since they bought in 2003, they were too late to stay above water at the bottom of the trough; however, it might have been manageable if they had used conservative financing and not used their HELOC. Instead, they chose a different path, and now they are a short sale. This actually makes it easy to estimate their profit: they paid $830,000, and they borrowed $952,000, so the made $122,000 on the property. Of course, since they have recourse loans on the property, and they are a short sale, they have no protection from the lenders collections department. There may be a question as to how much of this "profit" they will be able to keep...
Magnificent turnkey gem nestled on ultra-premium lot on end of safe & quiet CDS! Gorgeous curb appeal thanks to contemporary styling + stone detailing & mature landscaping. Dramatic living room entry boasts nice hardwood flooring + custom lighting & French door access to patio. Stunning gourmet kitchen w/ rich European cabinetry, granite counters, backsplash, island & built-in range & hood. HUGE master suite w/ private bath & walk-in closets. Entertainers' yard.
Ultra-premium end lot? You mean the one backing on to Jamboree? safe & quiet? Have they no shame?
CDS? Collateralized Debt Servitude?
Magnificent Turkey...
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This property will probable look like a breakeven transaction when it finally sells. If they had used a 30 year fixed and avoided the HELOC, they probably would escape with some equity. As it stands, any assets they do escape with will be a target for their lender, although in the short term, they made $122,000. If this house sells for asking price and a 6% commission is paid, the lender stands to lose $106,940.
If you were the lender who had the second lien that did not get paid off in full, aren't you going after the money the borrower took?
Must be getting early, clocks are running late.
Paint my love a morning sky, its all cold.
Dawn is breaking everywhere, light a candle, curse the glare
Draw the curtains I dont care, but its all right
I will get by, I will get by, I will get by, I will survive.
I see youve got your list out, say your piece and kiss off.
Guess I get the gist of it, but its all right
Oh well anyway, sorry that you feel that way.
Every silver linings got a touch of grey
I will get by, I will get by, I will get by, I will survive.
Its a lesson to me, the ablers and the beggars and the thieves
The abcs we all think of, try to win a little love.
I know the rent is in arrears, the dog has not been fed in years
Its even worse than it appears, but its all right
What will be the silver lining in the housing bust? What will be the touch of grey? Right now, it is even worse than it appears, but its all right...
(The rent isn't in arrears, but the mortgage payments certainly are.)
Quail Hill is a great Irvine Village. It is unfortunate it was built during the later stages of the housing bubble because it will become Quail Hell for those who bought there. The discussion about housing is no longer about whether or not there was a real estate bubble: there was. The discussion now is about the depth and devastation of the crash which follows. The bulls will call the bottom every so often, and they will be consistently wrong until we ultimately hit bottom. I have made my case housing prices will fall back to fundamental valuations about 40% off the peak in Irvine. It might get worse. If prices do fall back to fundamental valuations, every buyer in Quail Hill will be underwater -- all of them. Think about that for a moment... an entire neighborhood where every homeowner owns a property worth less than they paid, and the vast majority owe more on a mortgage than it is worth. The last time that many were underwater, Noah built a boat.
What would it be like at the local shopping center when conditions are bad, and every person you look at is in financial distress? This is Irvine, so we probably will not see much urban blight or other outward signs of distress, but inwardly, it will be hell on earth. A touch of grey? I hope affordable housing is the silver lining...
The largest floor plan in Ambridge community with one bed and bath on main floor. Spacious living room with fireplace, dining area, all hardwood floor. Open kitchen with granite counters, large master suit, direct access to two car garage with full size driveway. Short distance to Laguna Beach, shopping, 405/133 Fwys.
Don't you love the picture of the garage door? That has to be the worst, most useless photo on the MLS.
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Look at this unit -- a 3/3 in a new Irvine neighborhood selling for $285 / SF. This is almost $100,000 off a 2004 price. As sales like this one set the comps, it will soon become apparent that every homeowner in Quail Hill is underwater. There will certainly be many who hold out for ridiculous wishing prices, but the fact is the market transactions are occurring at steep rollback pricing. If this selling comp killer gets their full asking price (which looks likely as they are in escrow) and pay a 6% commission, they stand to lose $127,500 on their 2004 purchase.
The first casualty reported by us in the Collage tract was 714 Timberwood. And yes, these are the actual pictures advertising this property. Kinda crappy huh? You really need to evaluate the smaller no-name real estate brokers/agents before you entrust them with your $500k+ sale.
On to the details:
Address: 1602 Timberwood, Irvine, CA 92620 (Northwood) Plan: 1267 sq ft - 2/2.5 MLS: S467201 DOM: 43 Sale History: 02/21/2006: $560,000 10/31/2003: $300,000 4/18/2001: $240,000 Current Price: $560,000
So what happened here? Well our flippers got in over their heads. They purchased in February 2006 for $560,000 using 100% financing. How common is this?!?!
What I find interesting here is that in the 2.5 years from the original sale in 2001 to the 2003, the price went up $60,000 (25%). And then in the next 2.5 years from 2003 to 2006, the price went up $260,000 (87%).
The buyer in 2003 put down about 27%. The flipper in 2006 put down 0%.
In a rapidly appreciating market (from 2003-2005), flippers used other people's money and made out like bandits. They were looked up to as 'real estate gurus'. My guess is the current seller wanted to get in on the game and not be left behind. Too bad for them. At the current asking price, they are facing a loss of about $33,000 (assuming 6% in selling costs). Oh wait! They didn't put anything down.. I suppose the lender (Fremont Investment & Loan) will be the biggest loser given that the private remarks state: "ALL offers need short sale approval from mortgage holder."
UPDATE #1 - February 5, 2008
Yes, it has been over a year since this property was featured. It looks like the property went back to the bank (La Salle Bank) on 5/25/2007 at a price of $484,358.
It was then listed as a REO on 6/5/2007 for $532,500. The price kept dropping over a few months and it finally sold on 12/27/2007 for $447,000 (~20% off the 2006 price).
I'm a loser, I'm a loser
Unsold in 90+ days
