The distress that used to be concentrated at the low end of the market is starting to show in more expensive properties. On Friday, we profiled Heroes of the Potomac a property that went for almost $1,000,000 at the peak. Today's featured property is a large, five-bedroom home in Northwood. It is REO, and it is sold at auction for almost 20% less than its 2004 purchase price.
If you are renting and waiting for prices to drop further, properties like this one light up your life. Of course, if you are trying to sell and get what little equity you have left out of the property, it doesn't feel quite the same. Today's featured property is a rollback on a 2004 purchase, and after 243 days on the market, it probably hasn't rolled back enough.
This property is part of the market segment that will totally collapse
next. The low end of the market has already been obliterated and is
beginning its slow decline to the bottom. The owners of properties over $500,000 are
still clinging to the hope that the jumbo loan market will come back
and allow buyers to finance the sums necessary to purchase them. It
isn't going to happen. Most properties requiring a loan in excess of
$417,000 plus a downpayment are sitting on the market. There are few
buyers who can either obtain the financing or truly afford it. The lenders
are requiring people to prove they make enough to afford the payments.
Most can't.
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.
This property went back to the bank on 1/10/2008 for $850,719. It was sold on 2/28/2008 to a couple who spent $789,000. They took out a $700,000 first mortgage, and they took out a $50,000 second on 4/14/2008. They now have $39,000 of their money into this property. Are they in it for the long haul? Or do you think they will abandon ship when the value of this drops down to about $600,000?
Isn't that the most annoying song you have ever heard? Can you fathom a reason why someone would write and record it? In the same way, can you imagine why someone would buy this condo backing on the 5 for $699,000? Some things you look back on and go, WTF?
Actually, this does illustrate the mindset of the bubble rather well. Any property is a good property when prices are going up. Quality doesn't matter because the property's desirability comes from increasing prices, not from the characteristics of the property itself. This guy bought the tip; he purchased on the high tick of the market action. There was nowhere to go but down.
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.
Great opportunity in desirable Community of Woodbridge. This home
features laminate floors throught out the main living area, living room
fireplace, newer kitchen cabinets and counters, eat-in kitchn and large
laundry area which doubles as a pantry. Master bedroom has huge
mirrored closet. Large enclosed patio with storage and direct access to
your own carport. Newer water heater, heater and A/C unit.
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
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.
Fabulous 3 Bedroom Northwood Home WITH BONUS ROOM and Master Retreat.
This well maintained home is nicely situated on a well manicured
cul-de-sac. An elegant entryway, that includes a curved staircase,
leads to the formal living room and dining room. The large front window
in the living room adds extra charm and sunshine. The kitchen is well
designed, including a breakfast bar, walk in pantry and plenty of
cabinets. A breakfast nook is convenitently located between the kitchen
and spacious family room. A large firplace adds to the beauty of the
family room, making it the perfect gathering spot. Two upstairs
bedrooms open onto the Bonus Room, making the Bonus Room a great spot
for a toy room, excersize room or library. The backyard is beautifully
landscaped including a patio, large shade trees, flowers and grass.
This home is very close to schools, shopping and freeway access. This
Northwood HOA includes 2 Tot Lots & Swimming Pool.
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.
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?
2008
$337,500
100%
2009
$352,688
105%
2010
$368,558
109%
2011
$385,144
114%
2012
$402,475
119%
2013
$420,586
125%
2014
$439,513
130%
2015
$459,291
136%
2016
$479,959
142%
2017
$501,557
149%
2018
$524,127
155%
2019
$547,713
162%
2020
$572,360
170%
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.
Very nice townhome in great area of Irvine. Very close to freeways,
shopping and schools. You must definitely see this one to appriciate
it. living room has 20ft. high ceiling, and upstairs has open balcony
with view of downstairs. all three bedrooms are upstairs, there is a
half bath downstairs for guests. Nice size patio between home and
garage.
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
Prison gates won't open up for me
The summer had inhaled
