Would you like to get stranded on Alicante Isle? (I know it is spelled Aisle and it means something else, but just go with it.) People buying properties as flips during the down cycle are betting on the return of the market. There is no shortage of ignorant prognostications of the bottom, and if flippers are foolish enough to believe them, then they deserve to become bagholders. If flippers and lenders became the bagholders for the decline, Karma would be delivering its comeuppance. Flippers hope to get in and out of a property quickly, and like the passengers on the US Minnow who thought they were going on a 3 hour tour, getting off the island will likely take much longer than planned. They end up stranded in a condo searching desperately for a way to get out. The market will eventually rescue them. The castaways of Gilligan's Island were only trapped for 4 years until the series was mercifully cancelled. The flipper who gets trapped in today's featured property will likely be there much longer.
Did you see the recent CNN article on Irvine, Welcome to subprime's ghost town? How about the post at Calculated Risk on the See-through buildings - reminiscent of the '80s. The Business Week article The Other Orange County about the boom town gone bust? We are becoming the center of attention as the housing bubble deflates because the activities here were largely responsible for inflating it. Are we reaping what we sowed? The rest of the nation seems to think so...
Today's featured property was featured before back in November of 2007. It is back now as REO. Last year it was offered as a short sale for $529,000. Anyone who thought about buying that one will be happy they didn't. Now it is for sale for $459,900.
Don't buy now. Just say no. Don't let your downpayment wash away with the declining market. As Boys II Men say "We'll make the biggest mistake of our lives. Don't do it baby"
Today's featured property is a major comp killer establishing a new low water mark in the Watermarke development. They developers of this property are geniuses. They started a high-end apartment complex just as the bubble was taking off, and being opportunistic, they decided to convert the properties to condos, and they made a fortune off the frenzied buying of the Great Housing Bubble. The property was purchased on May 18, 2005 for $367,500. It was flipped on July 3, 2006 for $435,000 right at the peak. The 2006 purchaser used 100% financing (big surprise,) with a $348,000 first and a $78,000 second. The property went REO on January 23, 2008 for $324,900. It appears as if the loans were originated by IndyMac. It was purchased by Deutsche Bank National Trust Company, and the Federal National Mortgage Association (Fannie Mae.) This is the first property I have seen where Fannie Mae has been on the hook. Fannie Mae is one of the Government Sponsored Entities (GSEs) that makes its money by insuring mortgages to facilitate transactions in the secondary mortgage market. Although the GSEs are explicitly not backed by the Federal Government, investors behave as if they are, and if they keep seeing huge losses like the one today, the Federal Government may step in to rescue these companies. If there is going to be a federal bailout, it will probably be caused by the collapse of one of the GSEs. Did you realize your tax dollars are implicitly backing the secondary mortgage market? They are...
* * * GREAT 1 BED / 1 BA CONDO WITH 1 CAR PARKING SPACE! FEATURES:
Great rear end condo , balcony in living room, hardwood floors, granite
counter tops in kitchen, upgraded cabinetry, stainless steel
appliances, this is a must see!!! HURRY or MISS this great DEAL
Hurry, you don't want to miss your chance to be trapped in a 635 sqaure foot apartment for the next several years...
.
.
This unit is being offered for 40% off its peak purchase price. Let that sink in a moment... 40% off in Irvine... Who would have thought that was possible? Oh yeah, we would have...
I must admit, I did not think we would be seeing such large discounts so quickly, but then again, this property will probably fall further -- who wants to own a tiny, one-bedroom apartment? An investor might, but a cashflow investor would want to see a positive cashflow, and considering the $290 a month dues, this property probably needs to fall to $125,000 to be a true cashflow investment.
If this property sells for its asking price (some knife-catcher will think this is a bargain) the total loss will be $187,780. That is the lender loss on a 635 SF condo. When we start seeing losses that large on properties that small, what will the losses on the larger properties look like? I hope Fannie Mae has some significant loss provisions set aside, or we will end up paying for it in the bailout.
.
Wait Don't wait for the water Wait Don't wait for the water
We don't even talk anymore And we don't even know what we argue about Don't even say I love you no more 'cause saying how we feel is no longer allowed Some people will work things out And some just don't know how to change
Chorus: Let's don't wait till the water runs dry We might watch our whole lives pass us by Let's don't wait till the water runs dry We'll make the biggest mistake of our lives Don't do it baby
Now they can see the tears in our eyes But we deny the pain that lies deep in our hearts Well maybe that's a pain we can't hide 'cause everybody knows that we're both torn apart Why do we hurt each other Why do we push love away
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.
THIS IS A GREAT CHANCE TO OWN A HOME IN ONE OF THE BEST CITIES IN
ORANGE COUNTY. THIS IS THE CITY OF IRVINE! THE HOME FEATURES THREE
BEDROOMS AND TWO AND ONE HALF BATHROOMS. THE REAR YARD IS JUST THE
RIGHT SIZE FOR YOUR ENTERTAINING NEEDS; YOU WILL ENJOY THE ASSOCIATION
POOL AND SPA AND PARK AND RECREATION. THE HOOME IS CLISE TO AL THE
GREAT THINGS IN THE CITY; SCHOOLS, SHOPPING, ENTERTAINMENT AND
TRANSPORTATION. COME HOME TO IRVINE AND START LIVING THE ORANGE COUNTY
LIFESTYLE TODAY.
HOOME
IS CLISE TO AL? What?
ALL CAPS?
.
.
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...
.
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
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.
although it is designated as a condominium on tax records this is a
detached Home. Unit is in rear and affords additional pricacy. 3 levels
with master suite on 3rd floor. seperate guest room/office/play room
detached from main residence above garage. Interior upgrades include
grantie coutners, flagstone private patio and pad laid for a spa. View
of greenbelt. Buyer's to independently verify all information including
size, shcools, mello-roos, amenities to their satisfaction.
.
.
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:
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.
.
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.
Wait
In my place, in my place
The wrong time, the wrong place,
