Irvine Housing Blog

WOT 4-19-2008

Lurker's Post

For all you readers out there who have never posted before, please say hello. We know you are out there. This is your chance to break the ice...

Rental Parity?

Savin' Me -- Nickelback

Today's property has been featured before, but the price reduction is so significant, I thought it worthy of a new post. This property may be selling for rental parity.

One of the key concepts we have been espousing here at the Irvine Housing Blog is the idea that prices will bottom at rental parity. When a potential homebuyer can save money versus renting, it makes sense to own. A homeowner does not need appreciation for real estate to be a sound financial investment. If you are saving money versus renting, you are coming out ahead. This property can likely be owned for its rental value. If you are willing to live there long term, you will see substantial savings over renters who face subsequent rental increases. Of course, you have to want to live there, and that is the problem with this property and all apartment-like condos for that matter: They are transitory housing. These units will likely fall below rental parity. They should bottom out at prices where an investor can obtain positive cashflow as a rental. Properties like this will see $250,000 at the bottom.

New Asking Price: $350,900

Old Asking Price: $450,000

Income Requirement: $87,725

Downpayment Needed: $70,180

Monthly Equity Burn: $2,924

Purchase Price: $452,000

Purchase Date: 7/16/2004

Address: 17 Elderglen #15, Irvine, CA 92604

throught? kitchn?

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Do you think this 3/2 could be rented for $2200? That would cover the cost at a 160 GRM. I have seen other rentals in the area at $2,500, so I don't think $2,200 is unrealistic. It looks updated inside.

When I first featured this property, I did not have access to mortgage data. Now I do. The bank is going to eat a steaming $hit sandwich on this one. The owner exercised their "put" option back in November of 2006. The Homecomings Financial Network loaned them $550,000 on this property with a $440,000 first mortgage and a $110,000 stand-alone second. WTF? How did this property ever appraise at $550,000? Can you imagine the lender losing in excess of $200,000 on such a small property? For the record, assuming the lender agrees to the short sale, assuming they get their asking price, and assuming they pay a 6% commission, the total loss will be $220,154. We get used to $200K plus losses here at the blog, but we usually don't see them on small condos. Yikes!

Is it any wonder the banks are hoping someone, anyone, will save them?

I hope you have enjoyed the 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.

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Prison gates won't open up for me
On these hands and knees I'm crawlin'
Oh, I reach for you
Well I'm terrified of these four walls
These iron bars can't hold my soul in
All I need is you
Come please I'm callin'
And oh I scream for you
Hurry I'm fallin', I'm fallin'

Savin' Me -- Nickelback

Vintage

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Another day, another market crushing REO. I have to wonder when the knife catchers will start to realize there is a steady flow of these properties entering the market. It isn't like you need to buy this one because it is the only good deal in the market, and it isn't going to be the only one we will see in the future. In fact, as each one of these comes on the market, they lower the comps and cause a whole new wave of foreclosures as all the overextended homeowners in the area lose their ability to refinance. We are witnessing the first stage of the market's downward spiral.

Asking Price: $601,400

Income Requirement: $150,350

Downpayment Needed: $120,280

Monthly Equity Burn: $5,011

Lender Purchase Price: $625,338

Borrower Purchase Price: $745,000

Lender Purchase Date: 3/27/2008

Borrower Purchase Date: 11/30/2006

Address: 176 Vintage, Irvine, CA 92620

HOOME IS CLISE TO AL? What?

ALL CAPS?

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This property has an interesting history. It was first purchased from Pulte homes in May of 2005 for $650,000. The first owner obviously grossly overpaid, but they were fortunate enough to find the greater fool to buy this property for $745,000 on November 30, 2006. Even after commissions, this original buyer made $50,000 for holding the property just over a year. The second owner was not so fortunate. This owner put $149,000 down and lost it all. The bank purchased the property for $625,338 which appears to be the outstanding balance on the mortgage when the missed payments are added on. If the lender gets their asking price (some knife-catcher will probably step up,) they stand to lose about $60,000 after commissions. A relatively small loss by Irvine standards. Of course, the total loss on the property is over $200,000, but the buyer lost the majority of it. It wasn't a particularly successful flip. Also noteworthy is the asking price is a full 20% under the peak sales price. We are 20% off the peak and still falling...

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In my place, in my place
Were lines that I couldn't change
I was lost, oh, yeah
I was lost, I was lost
Crossed lines I shouldn't have crossed
I was lost, oh yeah
And yeah, how long must you wait for it?
Yeah, how long must you pay for it?
Yeah, how long must you wait for it?
Oh, for it
I was scared, I was scared
Tired and under prepared
But I wait for it
And if you go, if you go
Leave me down here on my own
And I'll wait for you, yeah
Yeah, how long must you wait for it?
Yeah, how long must you pay for it?
Yeah, how long must you wait for it?

In My Place -- Coldplay

Levee Breaks

When the Levee Breaks -- Led Zeppelin

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Today's featured property is another mortgage equity withdrawal casualty. Properties like this underscore the dangers of partaking in the appreciation kool aid of the Great Housing Bubble. Most, if not all, of the people who believed in endless appreciation and serial refinancing took out their equity. Many utilized Option ARMs, and they are going to lose their homes. Think about the ramifications of that belief and the decision it influenced: Homeowners who did not take out their equity and refinance with Option ARMs are not going to be in financial trouble, and they will keep their homes. Those that did take out their equity are going to lose their homes. This is one very important life decision supported by a bevy of fallacious beliefs with very serious consequences. Financial bubbles are only fun when they are inflating...

Mortgage Equity Withdrawal 1991-2007

There could be any of a number of reasons this house is for sale now, but the fact that the owner took out an Option ARM with a 1% teaser rate in January of 2006 is likely the reason for the sale. A 2/28 Option ARM would have reset in February, and the payment on a $1,000,000 mortgage is quite large. There is also a HELOC for $144,500. If the HELOC is tapped, and if the negative amortization has accumulated, the total debt on this property could be approaching $1,250,000. It doesn't seem likely they owe less than a $1,000,000. Perhaps they invested the money wisely and they can pay down the debt at resale. If so, they would be the exception and not the rule.

Asking Price: $1,129,000

Income Requirement: $282,250

Downpayment Needed: $225,800

Monthly Equity Burn: $9,408

Purchase Price: $584,500

Purchase Date: 5/4/2001

Address: 14 Mar Vista, Irvine, CA 92602

Do you like our new graphic, MaxedOut HELOC? 

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If this seller obtains their asking price, they stand to make $476,760. That is a great profit for 7 years ownership. Of course, they probably won't get their asking price, and it is likely they have already spent their profits, but if they get lucky, someone will bail them out of their debts and buy this property. Let's assume for a moment this seller gets their asking price and walks away with no debt and no credit damage. So what? If they spent all the money, they don't have any equity to take with them to buy the next property. Do they have the income and the saved downpayment to afford a similar property in the future? Maybe, but I rather doubt it. Once that money is spent, it is gone forever. There is a price to be paid for that "free" money during the bubble. Many former homeowners will pay the price with a greatly diminished quality of housing. HELOC abusers do pay a price. Nothing in life is free.

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Another song about the housing bubble? Is it raining debt? Is it raining REOs? Will praying for a bailout help? Where is the market going? going down now...

If it keeps on rainin', levee's goin' to break,
If it keeps on rainin', levee's goin' to break,
When The Levee Breaks I'll have no place to stay.

Mean old levee taught me to weep and moan,
Mean old levee taught me to weep and moan,
Got what it takes to make a mountain man leave his home,
Oh, well, oh, well, oh, well.

Don't it make you feel bad
When you're tryin' to find your way home,
You don't know which way to go?
If you're goin' down South
They go no work to do,
If you don't know about Chicago.

Cryin' won't help you, prayin' won't do you no good,
Now, cryin' won't help you, prayin' won't do you no good,
When the levee breaks, mama, you got to move.

All last night sat on the levee and moaned,
All last night sat on the levee and moaned,
Thinkin' about me baby and my happy home.
Going, going to Chicago... Going to Chicago...
Sorry but I can't take you...
Going down... going down now... going down....

When the Levee Breaks -- Led Zeppelin

Greed Killing

Greed Killing -- Napalm Death

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Financial manias are built by greed and fear: the two motivations driving the fluctuation of prices in all financial markets. When prices get greatly detached from fundamental valuations, the market is poised for a dramatic fall. There is a phenomenon in residential real estate markets where foreclosures become bank-owned properties (REO) that causes prices to drop. Today's post explores the impact of a single REO in a neighborhood as it lowers the values for everyone else.

Asking Price: $614,900

Income Requirement: $153,725

Downpayment Needed: $122,980

Monthly Equity Burn: $5,124

Lender Purchase Price: $606,300

Buyer Purchase Price: $758,000

Purchase Date: 6/13/2005

Address: 116 Tall Oak, Irvine, CA 92603

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This property is a rather unique bank-owned property. It is the first I have seen where the lender received a deed in lieu of foreclosure rather than going through the foreclosure process. I have no idea what the terms of the agreement were, but it is interesting that Countrywide was willing to go through this process rather than foreclose on the property. Another interesting feature was that the seller who gave up the property put $151,700 in a downpayment and gave it up. Based on the neighborhood asking prices, it would appear as if this seller had some equity, but then again, the asking prices in the neighborhood may be wishing prices and this seller may have been better off giving the property back to the bank rather than going through with a sale and paying a commission (although I imagine the local realtors don't see it that way.)

The property sold in 2005 for around $750,000. This was not the peak as that occurred about a year later. The 20% off the original purchase price is more like 25%-30% off the peak. Let's take a quick look at the asking prices of neighborhood comps:

321 Tall Oak, Irvine, CA 92603, Price: $709,800 -- LOL

124 Tall Oak, Irvine, CA 92603, Price: $725,000 -- OMG

213 Tall Oak, Irvine, CA 92603, Price: $788,000 -- WTF

We have three sellers on the same street with either the same model or a very similar one. The wide disparity in prices has little to do with the quality of the prices and much to do with the delusions of the sellers. The market is about to give them a cleansing dose of reality.

In a healthy real estate market, when a foreclosure occurs, the auction price is not reflected in property appraisals, and when the REO hits the market, it is absorbed at market prices similar to the asking prices in the rest of the neighborhood. In an unhealthy real estate market like ours, asking prices are all over the spectrum, and they are all greater than bids in the market, so transactions are not occurring. Buyers are either unwilling or unable to purchase at the prices being asked. When there is an REO in a neighborhood it works like a Wal-Mart rolling back the prices of all its competitors.

This REO is going to sell for less than $614,900. When it does, it will serve as a comparable property sale an appraiser cannot ignore. Lenders are now very sensitive to puffed appraisals, and ignoring this comp will not be possible. After this property is sold, buyers looking at the other three properties listed above will have to deal with the lower comp when they seek financing. The lender is going to assume the value of the three properties above are somewhere around $614K, and they will apply their loan-to-value limits based on this amount. If a buyer is only going to be loaned 80% of $614K to purchase any of the other three neighborhood properties, the only way those homeowners are going to obtain their asking prices is if some buyer is willing to put 30%-40% down. How many buyers are ready, willing and able to do that? Not many.

In a restrictive lending environment like we are witnessing now, volume dries up, and prices fall with each sale. Each lower sales price lowers the amount lenders are willing to loan to purchase the next property in the neighborhood. This downward spiral of lower comps reducing lending amounts continues until we reach bottom at rental parity. As the total amount of borrowing declines both the prices of individual properties and aggregate home price measures like the median fall precipitously, just as we have been witnessing since the credit crunch began last August. When we see they aggregate measures reported, it makes for an interesting statistic, but when you see how the process is happening on the ground with properties like today's, you can see the mechanism for the price decline in action. This is happening all over California, and it will continue to drive prices lower as credit continues to tighten and REOs continue to flood the market.

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The wrong time, the wrong place,
our smiling face of distrust.
Buried, the seed deep in all our heads.
Prepared ouselves for the fall.

The greed killing!

Instinct to mistrust,
instinct- the lust.
Their butchery of feelings,
geared for the greed killing.

The greed killing!

Not now, when then?
Not now, when then?

Greed Killing -- Napalm Death

WOT 4-12-2008

Just in case any of you forgot, about 1/3 of all loans originated in 2005 and 2006 in California were Option ARMS. Very few if any of the people with those loans will be able to refinance.

Jefferson

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Thomas Jefferson believed "Financiers, bankers and industrialists make cities the cesspools of corruption, and should be avoided." It is hard to argue with him given it is the actions of lenders that enabled the Great Housing Bubble.

Today's property illustrates why something needs to be done to prevent irrational exuberance from creating volatility in our real estate markets. The family that bought this property put 25% down, and although they started with an Option ARM, they refinanced in 2006 into a fixed-rate mortgage. They tasted the kool aid and did not find it palatable. Families like this should not get screwed based on the timing of their purchases due to life's circumstances. From the photos, it appears they have young children. They probably bought this as a family house. People should be able to do this without losing their life savings. If lenders did not enable people to overborrow, prices would rise about 4.5% a year, and people wouldn't have to worry about when they bought or sold. Housing bubbles are not created with equity; they are created with borrowed money. People blow bubbles; lenders provide the air.

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Asking Price: $739,900

Income Requirement: $184,975

Downpayment Needed: $147,980

Monthly Equity Burn: $6,165

Purchase Price: $800,000

Purchase Date: 5/10/2005

Address: 11 Jefferson Ave., Irvine, CA 92620

Anyone want to comment on the decorative tastes of the owners?

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If the sellers get their asking price (it seems about 10% too high), and if they pay a 6% commission, they stand to lose $104,494 -- over half of their $200,000 downpayment. Realistically, they are going to lose almost all of it.

Just to provide a reminder of how overpriced homes still are, this property would probably rent for about $2,800 a month. A 160 GRM puts the value at $448,000. I you look back at the sale history, this property sold for $390,000 in 2001. Prices in 2001 were inflated, but not in bubble territory yet. A value of $448,000 is about where this house should be; it is where it would be if there was not a bubble, and it is about where it will be in 3-5 years... 

BTW, the featured song today wasn't written about real estate bubbles, but the lyrics offer that interpretation.

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The summer had inhaled
And held its breath too long.
The winter looked the same,
As if it had never gone,
And through an open window,
Where no curtain hung,
I saw you, I saw you,
Coming back to me.

A transparent dream
Beneath an occasional sigh...
Most of the time,
I just let it go by.
Now I wish it hadn't begun.

Comin' Back to Me -- Jefferson Airplane

American Idiots

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The National Association of Realtors hopes that the American sheople are American idiots. They control the media message nearly everywhere, and they constantly push their self-serving agenda: it is always a good time to buy or sell and generate a commission. Unfortunately, you can't even find the truth in newspapers anymore. Does anyone think the OC Register would be willing to write stories about how and why the market is tanking? If they did, I suspect their real estate advertising section would get a lot smaller. People come to the Irvine Housing Blog because we tell them the truth about falling prices, and we explain why prices will continue to fall. Last week I wrote a post called Inventory Panic. In that post, I mentioned that there are a large number of bank owned properties not yet for sale on the MLS. When these get listed and sold, they will continue to push prices lower. Currently, there are more foreclosures each month than there are sales, and Irvine is in the eye of the storm. How long can that continue before the banks start becoming even more aggressive? We better hope there is an increase in sales volumes soon, or the lenders will own all of Southern California.

Today's property is one of those I mentioned in the Inventory Panic post. It has just been listed for about 24% off its peak sales price back in 2005.

Asking Price: $499,900

Income Requirement: $124,975

Downpayment Needed: $99,980

Monthly Equity Burn: $4,165

Borrower Purchase Price: $655,000

Lender Purchase Price: $396,000

Purchase Date: 9/27/2005

Address: 14952 Greenbrae St. Irvine, CA 92604

Beds:	2
Baths:	1
Sq. Ft.:	1,192
$/Sq. Ft.:	$419
Lot Size:	5,256 Sq. Ft.
Type:	Single Family Residence
Style:	Ranch
Year Built:	1975
Stories:	One Level
Area:	El Camino Real
County:	Orange
MLS#:	P631342
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Well Taken Care of? It looks like pretty run down to me.

Bank is Known to Have Quick Response Times? LOL!

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Can you believe someone paid $655,000 for this place? That is $550 / SF. It is still ridiculously priced at $419 / SF.

Properties like this will be real bargains 2 or 3 years from now. IMO, a good way to buy is to find a run down POS like this one and renovate it to your taste (assuming there are not structural defects.) Everyone wants to personalize their home, but if you pay move-in-ready prices, you won't have much left over to renovate.

So how much is the lender going to lose today? Well, sadly, the buyer put 20% down, and they lost $131,000 -- funny how it is sad when the family loses money but not when the lender does. If this sells for asking price (it went for $100,000 less at auction), and if the lender pays a 6% commission, the total loss on the property would be $185,094. The homeowner would be out their 20% downpayment of $131,000, and the lender would be out $54,094.

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Welcome to a new kind of tension.
All across the alien nation.
Where everything isn't meant to be okay.
Television dreams of tomorrow.
We're not the ones who're meant to follow.
For that's enough to argue.

Don't want to be an American idiot.
One nation controlled by the media.
Information age of hysteria.
It's calling out to idiot America.

Welcome to a new kind of tension.
All across the alien nation.
Where everything isn't meant to be okay.
Television dreams of tomorrow.
We're not the ones who're meant to follow.
For that's enough to argue.

Idiot America -- Green Day

A New Season

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Today's property is an example of how the market crash hurts ordinary people. This property is owned by a couple, and although I do not know them, I suspect they are a young couple who purchased this as their first home and they were hoping to do a move up later. That is how the real estate game is played around here. I don't see any data on the first mortgage, but there is a HELOC for $116,850. Assuming this is 20% of the purchase price, I have estimated the purchase price at $584,250 which is consistent with the tax assessment. Therefore, they likely have a first mortgage for $467,400. I can't feel too sorry for them as they don't appear to have any money in the transaction. They are priced over the market and praying for a knife catcher to come bail them out. It probably is not going to happen.

Asking Price: $549,000

Income Requirement: $137,250

Downpayment Needed: $109,800

Monthly Equity Burn: $4,575

Purchase Price: $584,250 -- I think.

Purchase Date: 3/14/2006

Address: 18 New Season, Irvine, CA 92602

Beds:	3
Baths:	3
Sq. Ft.:	1,479
$/Sq. Ft.:	$371
Lot Size:	-
Type:	Condominium
Style:	Mediterranean
Year Built:	2006
Stories:	Two Levels
Area:	Northpark
County:	Orange
MLS#:	P608073
Status:	Active
On Redfin:	158 days
Unsold in 90+ days

Another CAPS LOCK attack.

Rich Walnut Flooring? Is the walnut wealthy? Can you say, Pergraniteel?

DESIREABLE END UNIT? If you desire being at the corner of the 5 and Culver, then this is very desirable. I hope you like noise and air pollution. And yes, it is LOCATED CLOSE TO TRANSPORTATION ROUTES.

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There is a time bomb in their neighborhood that is about to ruin the comps and remove any hope they had of selling this property. The neighbor at 34 New Season was a flipper, and he let the property go back to the bank on 4/2/2008 for $360,000.

34 New Season is not listed on the MLS, so I can't post any pictures for you. It is one of many bank owned properties in Irvine that are not offered for sale yet. It is not an exact match for 18 New Season, but the flipper paid $520,000 back in December of 2005, so the values are within $60,000. Some quick math says the property at 18 New Season is worth $420,000 in today's market not the $549,000 they are asking. The fact that 18 New Season has been on the market for 158 days strongly suggests it is overpriced.

Property traders -- people who bought and sold stucco boxes without doing any improvements to add value -- drove prices up and priced many families out of the market. Most of the properties we have profiled, the ones that have made priced plummet so far, are those being allowed to go into foreclosure by failed flippers. I would like to say they are getting their comeuppance, but it is really their enablers -- the lenders -- who are bearing the brunt of the destruction. I won't be shedding tears for either group.

This leads us back to today's featured property. The sellers are going to be ruined financially as they will have either a short-sale or a foreclosure on their credit. Was this couple a pair of hapless victims who were just doing what you are supposed to do get on the property ladder in California? Were they caught up in the whirlwind of speculation and burned by the market? They likely fit the profile of the family targeted for the various bail-out programs being discussed: do they deserve to be bailed out?

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I feel stupid - but I know it wont last for long
Ive been guessing - I coulda been guessin wrong
You dont know me now
I kinda thought that you should somehow
Does that whole mad season got ya down

I feel stupid but its something that comes and goes
Ive been changin - think its funny how now one knows
We dont talk about - the little things that we do without
When that whole mad season comes around

Mad Season -- Matchbox Twenty

Milestone

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We have reached a new milestone in our documentation of the price decline in the Great Housing Bubble: we have our first property closing at 40% below its previous sale price. That's right, 40% off in Irvine. The median has not declined 40% yet, but individual properties have. Will the median be far behind?

We have been watching this property for some time. It was the source for a post that first appeared on March 17, 2007, and was updated on Sep 15th, 2007. We followed up again with the post, Show Me, on January 15, 2008. It was purchased on May 26, 2005 for $565,000 with 100% financing. There was a first mortgage from New Century for $452,000 and a second from New Century for $113,000. Ordinarily, when a property goes up for auction, the lender will bid the property up to the value of the first mortgage, in this case $452,000. This property was purchased at auction by the trustee for a CDO (U S BANK NA, ; STRUCTURED ASSET INVESTMENT LOAN TRUST 2,) for $337,500. Think about what that means: 1. Lenders and CDO trustees are now letting properties go at auction for less than the value of the first mortgage. 2. At open auction, the highest bidder was 40% under the purchase price of this property. The flippers wouldn't even touch it. 3. If investors are losing 40% on Irvine properties now, how bad will it be for them in 2 or 3 years? 4. The neighborhood comps just got obliterated.

This last point warrants further examination. Let's say you are a homeowner who purchased at the peak, and you are still in denial about the market. In the minds of such individuals, the market is down artificially, and values will rebound soon. The reality is, the market for this property is 40% off the peak (Maybe a bit less if they can resell it for more than $337,500. They are trying.) Percentages can be a bit misleading when it comes to price declines. A 40% decline requires a 67% increase to get back to the peak. Assume for a minute we are at the bottom (which we are not,) how long will it take for this property to appreciate 67% in value?

At a 5% rate of appreciation, it will take 12 years for this property to get back to the peak. Of course, if you believe 15% yearly appreciation will be returning soon, it will get their quicker, but that takes a degree of denial that will be hard to sustain in the long term. It isn't going to happen. In reality, this property will probably decline further in value because less desirable condos always do fall further, so the appreciation does not start in 2008. It probably starts in 2013 from a lower base number. How long are people going to be willing to wait for values to return? Will people be trapped in their homes for another 20 years. I hope they like them.

Asking Price: $399,000

Income Requirement: $99,750

Downpayment Needed: $79,800

Monthly Equity Burn: $3,325

Purchase Price: $564,678

Purchase Date: 1/25/2008

Address: 1 Montgomery #46 Irvine, CA 92604

This property is very close to the freeway. It is practically on it.

BTW, the original asking price on this property was $610,000. LOL!

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It is hard to say who is losing money on this one. New Century is already bankrupt, so either some CDO is losing or the various creditors of New Century are losing. In either case, if we assume this one is on their books at $565,000 (it is probably higher with all the fees and lost interest), and if we assume they get their $399,000 asking price and pay a 6% commission, the total loss will be $189,940. That loss is on one small condo in Irvine. Does anyone really believe the lenders are finished writing down their losses?

So how far will prices drop? Will we see 1999 prices? The aggregate of the market will not, but we may see some of the undesirable condos go for very low prices. I have a sneaking suspicion we may see a 1990 rollback before this is done. I know, that sounds crazy, but 1990 was the peak of the last bubble, and that puts it on par with 1998 or 1999 prices. A small condo bought in 1990 that wasn't particularly well cared for might be a 20-year rollback. It could happen, and we will be watching for it.

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I was dreamin' when I wrote this
Forgive me if it goes astray

But when I woke up this mornin'
Coulda sworn it was judgment day

The sky was all purple
There were people runnin' everywhere

Tryin' 2 run from the destruction
U know I didn't even care

'Cuz they say two thousand zero zero party over
Oops out of time
So tonight I'm gonna party like it's 1999

1999 -- Prince