Check out Howlin' Wolf's description of the blues (it's at the beginning.)
It cannot be denied (rationally) that we are currently in a declining market. In a declining market, banks look at appraisals and comps differently than they do in a rising market. When prices are rising the lender will look at the highest comparable sales to determine total value upon which they will base their loan. When prices are declining like they are now, the lender will look at the lowest comparable sales or asking prices to establish the value upon which they will base their loan. This is a major headache for sellers. Remember the post I did on the big drop in Turtle Rock recently How to Lose $500,000 in a Year? Once that seller put that house on the market asking $800,000, he ruined the comps for every similar home within a mile of his location. Let's say you are the neighbor at 6022 Sierra Siena Road who is asking $950,000 for a similar property. If you find a buyer willing to pay $950,000 and put 20% down, the lender is going to look at the neighboring house asking $800,000 and say, "I can only loan your buyer 80% of $800,000." For the buyer of the Seirra Siena Road property to make a sale, the buyer will need to put down $310,000 -- almost 30% because of the low asking price on Silver Cres.
Also, in a declining market lenders will raise loan-to-value requirements. The lenders I have spoken to have told me that right now, there is no market outside of the conforming loans of the GSEs (Freddie Mac, Fannie Mae) or the FHA. The FHA will allow loans with 3% down, but the income requirements are so tight, that it is very difficult to qualify. The GSEs allow higher DTIs, but they are also requiring higher downpayments. Even now, very few loans are being approved without 20% down. Another interesting thing I was told is that nearly all of the buyers over the last several months were renting at the time of their purchase. It is a classic case of those renters who felt "priced out forever" jumping at the chance to own -- more kool aid. There is almost no move-up market right now, probably due to the deep price drops at the low end of the market. People getting out of entry-level housing do not have any equity, and those who still have equity, are not able to sell their homes.
Today's property is a classic flip. The owners bought it in March, and they are asking $119,000 more than they paid for it. In the bubble rally, they might have pulled it off because the bank would have ignored their low purchase price and financed anyone with 100% financing at almost any price they wanted to ask. However,in today's market, they set their own comp, and the lender is not going to ignore it. For them to get their WTF asking price, someone is going to have to put down a large amount of cash. In short, it is not going to happen.
Asking Price: $659,000
Income Requirement: $164,750
Downpayment Needed: $227,000 based on their purchase price as a comp
The Village of Woodbridge is a desirable Irvine Village. It is an interesting study in the collapse of the market. Woodbridge is laid out with a large loop road framed with large duplexes giving the impression of driving through a series of manor homes. Behind this pleasant veneer is a great deal of high density housing. Outside the loop has the highest concentration of attached product while inside the loop has many large, single family detached homes. As the market decline has progressed, the low end has been deteriorating more quickly than the high end, and this has created a great disparity between the prices on the outside of the loop as compared to prices on the inside of the loop. This large disparity cannot persist forever. Either prices outside the loop will rise (which isn't very likely) or prices inside the loop will fall. People who might want to live inside the loop will find the price differential so great, that many will purchase outside the loop as a next-best substitute. It is this substitution effect that pulls down the prices in the most desirable neighborhoods. It can be seen in small scale within Woodbridge, or it can be seen in large scale between Riverside County and Orange County. As prices drop in adjacent markets, sales volumes will continue to dwindle in the higher priced neighborhoods until the price curve flattens to its natural balance. This is why the big increase in sales volumes being touted by the bulls is only happening in the most downtrodden communities. The high-end properties still suffer from anemic sales volumes and significant price pressures.
Today's featured property is a nice 3/2 outside the loop in Woodbridge. It is a typical starter home that will likely bottom in the $375,000 to $400,000 range. A household making $90,000 to $100,000 a year should be able to comfortably afford a property like this. Right now, they can't.
Sometimes when you see an egregious case of HELOC abuse, you have to ask, "On what did you spend the money?" On many of the properties we profile, the owners at least put some of the money into the property and outfitted it with pergraniteel. Apologists offer the possibility of health issues or investment, but it seem pretty obvious that most of these people just blew the money. It is living like a shooting star, you burn brightly, but it can't go on forever, and when your equity has burned up, you just fade away. Today's featured property took over $400,000 out of their home, and it is being offered for sale as a fixer upper. So I ask again, "On what did you spend the money?
As far as HELOC abusers go, today's sellers are just like boys playing in the street. They made a big noise, tried to take on the world, and ended up a big disgrace. The market put them back in their place.
HELOC abuse crosses all socioeconomic lines. We have profiled high end, middle class, and now small-time condo owners freebasing the kool aid and spending themselves out of house and home. Everyone has ambitions to better themselves and their station in life. However, some people hatch plans to accomplish this goal that are not completely successful. Sometimes it is just fate or bad luck that causes some people to win or lose in life. Sometimes it is bad execution, and sometimes it is just bad planning. HELOC abuse would fall in the "bad planning" category.
How was this supposed to work? Even if the kool aid dreams were true and you could perpetually borrow against your house as it increased in value. What is the end game? Is there no limit to the amount of debt you can support? What happens when you sell and the house is no longer providing income? Does the house ever retire? Or does it provide endless free money forever? In reality, there was not plan. Everyone just took the free money and spent it without regard to future consequences, and now that there are consequences, everyone is avoiding responsibility and letting the lenders deal with the fallout.
The owners of today's featured property managed to find a lender who thought their sub $200K condo was worth over $580K and loaned them money accordingly. These owners may set the record for the greatest return on their initial investment. They put down $5,500 in 1999 and took out more than $400,000 over the 8 years that followed.
Calculated Risk recently had a post Freddie Mac on Walking Away. During a recent conference call, the following exchange occurred:
Analysts: What do you see? Is it in line with historical default rates as they get underwater or does it ...
Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater - you know we're even seeing it when we try to modify and renegotiate those loans - they are walking away. They're finding it not constructive.
In short, when people go underwater, they are walking away from the property. We now have some statistical proof this phenomenon is occurring. Statistics are great for discussing macro trends and the like, but we take a microeconomic approach here at the Irvine Housing Blog: we show you the properties the owners are walking away from. Today's featured property is seriously underwater. It is being offered for sale at 27% under its peak purchase price.
Today's property sets a new low standard in Irvine. This is the first property I have seen below $200/SF. Granted, it is a fixer-upper, but those properties will always be the low-price leader. I really did not think we would see price levels this low in 2008.
This is the kind of property that will interest me in a couple of
years. If you find a house in need of major cosmetic surgery (but
nothing structural), you can buy it with FHA financing and take what
would have been your 20% downpayment and renovate the property to your
taste. After the renovation, you can get the property reappraised, and
hopefully, you will have added enough value to be able to stop paying
private mortgage insurance. At that point, you are in a house finished
the way you want it for equal to or less than a "normal" property in
the community. Right now, it would just be a money pit, but when we are closer to the bottom...
When your playing blackjack and the dealer has given you great cards, you have the option of taking one more card and doubling your initial bet. When the odds are in your favor, it is a smart play. Since the real estate market was a "sure thing," and prices always go up, it makes sense that people would have doubled down in the real estate market. The more property you owned, the more money you made. Well, at least that was the idea after a few kool aids. If you made the mistake of drinking the kool aid in the summer of 2006 and buying two low-end properties right at the peak, your double-down bet was a short cut from first to last.
Don't cry little Robin-Marie 'cause you know you're losing your home...
It always makes me sad when I see these foreclosures and short sales with pictures from the children's rooms. The disruption to family life caused by the Great Housing Bubble has only one precedent in the United States: The Great Depression. Hopefully, this family will be able to move into a comfortable rental rather than a tent city or Hooverville, but they will have to move. Basically, anyone who bought late in the bubble rally is underwater, and these homedebtors will fall into one of two categories: 1. Those who are forced from their homes (or choose to leave), and 2. Those who are trapped in their homes. It is difficult to determine who is worse off. Those who are forced from their homes will have ruined credit and difficulty in obtaining a home in the future. Those who are trapped in their homes have a complete lack of mobility to take promotions and crushing debt service payments that prevent them from doing anything else. All of these problems boil down to one bad decision: they bought a house during a wild financial mania.
The twin towers known as the Marquee at Park Place is a lasting symbol of everything wrong with the housing bubble (Two mass fires, yes! One hundred stories high.) These urban units were 30 years ahead of their time, and perhaps in 30 years, the buyers in these towers will be able to sell their units for what they paid for them. The obscenity of the prices there will be laid bare in today's post. I will run through the cost of ownership numbers as compared to the cost of a rental and demonstrate what these units are really worth to an owner occupant.
I must confess, I have been holding off profiling these towers. There is limited information available on these units in the data services I use, so my picture is somewhat incomplete; however, the main reason I have waited to post on these units is because in the very first post done on this unit back in early 2007, I lost it in the comments section. It is pretty rare that I lose my cool, but I did there. The exchange went as follows:
Comment from a resident:
2007-01-03 04:56 PM
Everyone
is entitled to their opinion, and sometimes its good to keep it to
yourself. It is very simple, for those of you that don’t like Luxury
living in a place like Marquee, hey, no one is forcing you to buy here.
stay where you are and be happy, what is with all the bitterness. Your
bitterness is in result of ENVY. Chill out. Those who buy or bought at
the Marquee made a choice and obviously like their investment.
Comment by me:
2007-01-03 09:10 PM
(Resident)
“Everyone is entitled to their opinion, and sometimes its good to keep it to yourself.”
You should have followed your own advice.
“what is with all the bitterness. Your bitterness is in result of ENVY.”
You people don’t seem to get what we are saying, so I will try to spell it out for you:
WE
DON’T
ENVY
YOU:
WE
PITY
YOU.
You have made the worst possible purchase in all of Orange County. When
the flippers can’t make the payments and are forced to sell, the value
of your units is going to plummet: more so than others because your
fees are so high. Every time we on this board drive by, we look up with
amazement at the monumental folly of buyer greed. Your dark tower is
going to stand as the symbol for the height of hubris of the housing
bubble.
We don’t envy you, we are very thankful we are not you.
P.S. Please ignore my previous post where I tried to make nice, reinforce your delusions, and leave you with a shred of dignity.
.
The comments section on that original post was invaded by residents and Marquee staff members. I hope we get so lucky this time around
Don't cry little Robin-Marie 'cause you know you're losing your home...
