Irvine Housing Blog

WOT 6-14-2008

Mr Mortgage May CA Foreclosure Report

Mortgage Lender Implode-O-Meter

This guy speaks the truth. Take the time to listen.

BTW, who is going to win the US Open?

The Builder’s Bind

Thank You -- Dido

Declining markets are very difficult on builders, and it is not for the reasons you might think. Production homebuilders make their money on sales volume and not on margin. They would rather see stable prices and high volumes than periods of booms and busts. As I described in detail in the post Land Value 101, production builders can adjust to different price points as long as there is demand above their cost of production. The vast majority of the gain or loss in house prices falls to land value. In a price bust like we are seeing now, price of houses may drop 40%, but the price of land may drop 85%. The mistake many of the builders made, which is the same mistake they make in every cycle, is that they become land speculators buying land early in the production process. As they are doing their improvements, land values increase, so they make some extra on the land deal -- as long as prices go up. When a bust occurs, builders get caught with inventory of both land and houses. It is the land inventory that really wipes them out (think Lennar.) The bottom line is that builders are flexible, and they can adjust to any price level where prices exceed their production costs. The real challenge for builders is during the adjustment when prices are falling.

House prices in speculative markets (California and some others) do not respond to price changes like one would expect. When prices decline, sales volume also declines because people expect further price declines, and they do not want to lose their equity. Anyone who is not kool aid intoxicated becomes hesitant to buy in a falling market -- as they should. This is the real problem for homebuilders because theirs is a volume business. The more they lower price to attract buyers, the more buyers are frightened and expect further price declines. It is a downward spiral. Every time a prospective buyers goes into a sales office, they will be told there are no further price reductions and they need to buy now. Of course, further price reductions happen, and the builders lose credibility and buyers become even more hesitant. As we have discussed before, prices will continue to decline until affordability returns to the market, and it makes sense to buy again.

Today's featured property is a classic example of what happens to people who buy from a builder in a declining market. These people bought at the peak, and now they are looking at a $200,000 loss for their troubles.

There are no property pictures today, but this is the street of models.

Asking Price: $699,900

Income Requirement: $174,975

Downpayment Needed: $139,980

Monthly Equity Burn: $5,832

Purchase Price:  $939,000

Purchase Date: 12/19/2006

Address: 21 Conservancy, Irvine, CA 92618

How to Make Your Neighbors Hate You

 Sittin' on a Fence -- The Rolling Stones

We have profiled informal neighborhood cartels where a group of neighbors get together and set WTF asking prices. As with all cartels, they are unstable arrangements because each participant has an incentive to cheat at the expense of the others. Today's featured property was one of two neighboring properties asking WTF prices. One of the two decided it was time to sell and lowered his price accordingly. The neighbor has got to be really angry as not just will the neighbor sell first, it will also set a comparable price that will make it nearly impossible for the other property to get its asking price. We are not talking about $5,000 or even $50,000, we are talking about $500,000!

Asking Price: $1,299,900

Income Requirement: $324,975

Downpayment Needed: $259,980

Monthly Equity Burn: $10,832

Purchase Price: $1,668,000

Purchase Date: 4/5/2006

Address: 9 Paso Robles, Irvine, CA 92602

428 Days on the Market

Think for a Minute -- Housemartins

Have you noticed how silent the bulls have become? The ones that used to hold their heads high now hang their heads in shame. Perhaps, if they had thought for a minute about paying double for real estate, they wouldn't have so many troubles now. Today's featured property has been on the market since April 10, 2007 -- a whopping 428 days. It is a story of a year of stress and wishful thinking about the market.

Asking Price: $530,000

Income Requirement: $132,500

Downpayment Needed: $106,000

Monthly Equity Burn: $4,416

Purchase Price: $628,000

Purchase Date: 1/12/2006

Address: 963 Sumerville, Irvine, CA 92620

Will the Market Panic?

Don't Panic -- Coldplay

Prices are sinking like stones, and we are all done for. It it time to panic?

People will not panic this year. This will be the last year of denial. Only the weakest of speculators have been flooded from the market at this point, and there are many, many more who will be hopelessly underwater and drowning in debt as time goes on. Most of the buying this year has been by foolish knife-catchers who still believe in the fallacies of kool aid intoxication and bought now that they are no longer "priced out." (Of course, now they are "priced in" forever...) There is still the widespread belief among the general public that house prices will return to the peak in a couple of years and everything will be like it was during the bubble rally. That is not going to happen. This fall and winter, prices will make another big drop just as they did last fall and winter. That drop will put fear in the hearts of everyone who owns speculative real estate (which means almost everyone who bought since 2002.) By next year, we will see real fear and possibly some capitulatory selling. Remember, the speculators we have profiled to date have only been the trickle of water that breaks the dam. This problem is much larger than what we have seen to date.

There is a funny mathematical truth few understand: drawdowns are asymmetrical. If prices fall 50%, it takes more than a 50% increase to get them back up to the peak. In fact, after a 50% drop, prices must go up 100% to get back to where they started. Even now, with prices down 20%, prices have to go up 25% to get back to the peak. The deeper the price drop gets, the harder it will be for prices to recover. This is also why timing the market is important. (I will post on this concept in more detail at a future date.)

Today's featured property was purchased in 2004, and now it is selling for significantly less than its purchase price as REO.

Asking Price: $649,900

Income Requirement: $162,475

Downpayment Needed: $129,980

Monthly Equity Burn: $5,415

FB Purchase Price: $730,000

FB Purchase Date: 12/22/2004

WAMU Purchase Price: $610,000

WAMU Purchase Date: 4/2/2008

Address: 14921 Yucca Ave, Irvine, 92606