Large scale apartment complexes are commercial enterprises with economies of scale. The commercial RE segment is still going gangbusters. Essentially, the $330/sf represents peak pricing.
A individual condo units are a completely different beast.
Posted by carl on 06/05/07 at 05:01 AM
IrvineRenter,
Do you have a typo in this post? I don’t think the property has lost 20%. I think the 20% is the downpayment made by the owner. If the asking price is 650k, and the original purchase price is 743k, isn’t that an 11% haircut? Assuming he or she pays 6% in commission, then the owner will take away 611k to pay back the creditors, which gives a final profit of 25k as you say. That’s pretty bad, considering the amount of antacid the owner must be consuming daily.
You are technically correct; however, when you add in 6% commission costs, and the probability that the seller will back down from the asking price, the net decline in resale value will be about 20%.
When you look at the loss this guy is going to take, it is at least 80%, and it will probably be near 100% by the time he gets out. There is no $25K profit. The 25K is all this guy will have left over from his $147K investment.
I would estimate around $200 SF. It could be more or less depending on other variables.
Posted by carl on 06/05/07 at 07:47 AM
I didn’t consider his original investment! It must feel absolutely horrible to burn up your money like this. It is scary how leverage means every dollar your house goes down is a dollar out of YOUR pocket. Yikes. I hope things stay firm here in Raleigh, NC!
Carl
Posted by Kman on 06/05/07 at 08:10 AM
I say $250 sq/ft is a good point to start buying as that puts the price in with the inflation the last few years.
Posted by lendingmaestro on 06/05/07 at 08:12 AM
I’d say 225 to 250 tops. @ 250/sqft that puts a 1200 sqft condo at 300k. It would have to be nicely upgraded in a nice area of Irvine, with an attached garage
Posted by lendingmaestro on 06/05/07 at 08:26 AM
To comment on losing equity, I want to bring to light the utter lack of sense some borrowers have.
There is an enormous amount of people who PURCHASED 2nd homes and investment properties with negatively amortizing mortgages. Neg Am loans are a niche product, and should not be disgarded totally, but what these people have done is disatrous. Never purchase a home with a neg am loan.
Example: Steve owes 300k on his primary home and takes out 150k heloc, or worse, refi’s his primary residence into a new 450k neg am mortgage. But guess what!! His payment is LOWER than the original mortgage! Now Steve buys a new BMW for 50k and puts the other 100k on a new condo for 500k. But Steve can’t afford a traditional payment on a 400K loan, so guess what he does?? Another Neg Am loan.
So now Steve is instantly losing equity from day one, and this is not “phantom equity” that accumulated from price appreciation; it is his own money that he is losing. Way to go Steve!
This phenomenon is much more rampant that what many people expect. I believe this is the reason why the market crash hasn’t hit full-force yet. These Neg Am loans still offer a low payment and allow the seller to hang on for a lot longer. Those days will soon come to an end when their loans suddenly “recast” and the minimum payment disappears, along with their dreams….
Posted by No_Such_Reality on 06/05/07 at 08:51 AM
I’ll 2nd $200/sf for owner occupiers. Two main disclaimers.
1. Rents may fall. Irvine may not because of the near monopoly of IAC, but the rest of OC may end up in a blood bath as empty condos, townhomes and SFRs come back to the market. The cycle is just beginning and one month free on a year lease is already making common appearances.
2. An overshoot past $200 is easily possible as at the point were $200/sf is reached, and investor won’t touch it unless it will cash flow and that means this unit would need to rent steadily at $2700+.
Possibly $150/sft which would still put it at twice the national average.
Or Even $125/sf. At 8% (investor owner interest rate), 20% down, the fixed expenses at ~$1730. Renting at $2000/month, provides about a 7% return (tax free) and given the scenario of these units going to the 200s/sf nobody will invest for anything other than cashflow until the market turns.
The question is will enough rent savers buyers step up or will rents chase them down.
Posted by Joe on 06/05/07 at 09:23 AM
A good quality, large apartment building in Irvine would sell for over $300 per foot to an insitutional investor. Any of the Irvine Co’s apartment buildings located in Irvine that were built over the last 10 years would sell for over $300 per foot. The Legacy at Main & Jamboree just sold for about $330 per foot, and that is with the buyer (Camden) having to take on the cost and risk of the lease up. If it were sold fully leased and occupied it would have been more like $350 per foot. A new apartment property in the Platinum Triangle developed by Trammel Cros just sold for about $315 per foot…..in a clearly worse location.
That’s just an indicator of where good quality large apartment properties are selling today. There values have gone up a lot in recent years, but at least those buyers/investors are basing their valuations on the income the properties produce.
Posted by oc-conservative on 06/05/07 at 09:45 AM
$300-$330 sounds extremely high. How much equity would one have to have in the complex in order to turn it cash flow positive?
Posted by oc-conservative on 06/05/07 at 09:56 AM
$300-$330 sounds high. How much % equity would one have to have within the complex in order to turn it cash flow positive?
Posted by Joe on 06/05/07 at 10:11 AM
I just checked and the one in the Platinum Triangle and it was $350 per foot. That building was bought by a pension fund advisor, so they probably put 50% down - a lot on a $91 million transaction. The Main/Jamboree building sold to a REIT, so it is very likely that they paid all cash with no financing. They finance their entire portfolio at the corporate level with unsecured bonds at probably 40% to 50% of their portfolio’s value. I guess that would mean they put 50% to 60% down.
The cap rate on those transactions was about 4.5% after they complete the lease up. On a monthly revenue multiplier probably just shy of 180.
Posted by MMG on 06/05/07 at 10:12 AM
150-200 sqft
Posted by Joe on 06/05/07 at 10:13 AM
No-such-reality,
Agreed….I just thought it would be valuable information to contribute to the discussion. $200 per foot sounded low to me.
Posted by Sue on 06/05/07 at 10:20 AM
Looks like even if we wait and buy later, we’ll still get stuck with the subprime bill (see link below). I think maybe I’ll just rent forever, and skip buying homebuying altogether - even after the prices finally come down, there’s going to have to be some kind of new taxation to cover any shortfalls like the ones to be in the article below. At that point, if I’m renting, I can just skip the 6% commision and move somewhere else.
Banks Sell ‘Toxic Waste’ CDOs to Calpers, Texas Teachers Fund
http://www.bloomberg.com/apps/news?pid=20601109&sid=aW5vEJn3LpVw&refer=news
Posted by No_Such_Reality on 06/05/07 at 10:32 AM
Agreed. The commercial information is great! Thanks for providing it. however, the CAP Rate is harsh.
But, I think we’re jaded by the dizzying heights to which prices ran up. I look at homes pushing $600K now and I think they look like a deal until you crunch the numbers and realize after taxes they still cost more than renting. If you look at places like Memphis, you see what a housing market looks like in balance with rents & buying and purchasing power.
Posted by Adam Smith on 06/05/07 at 11:12 AM
Lending Maestro said:
This phenomenon is much more rampant that what many people expect. I believe this is the reason why the market crash hasn’t hit full-force yet. These Neg Am loans still offer a low payment and allow the seller to hang on for a lot longer. Those days will soon come to an end when their loans suddenly “recast” and the minimum payment disappears, along with their dreams….
Let’s finish the story to it’s bloody conclusion.
So our FB Steve goes to cashcall.com, and takes out an unsecured loan to get him by. He fails to realize that Cashcall charges 100% APR for cash advances, so just keeps getting deeper and deeper in debt!
Finally, when things get really painful, Steve finally contacts a bankruptcy attorney to see what his options are. Steve then learns that taking out that HELOC or re-fi mortgage on his primary residence carried the undesirable side effect of negating the homesteading protection afforded by State laws that protected him with his original mortgage, so will lose his home when the “empire” starts to crumble, and his properties go to foreclosure.
Good news: Steve gets to be a renter again (provided he does it before his credit gets too trashed). If not, he’ll be back home with Mom and Dad in his old bedroom (provided Mom and Dad didn’t cash out on the home before the bubble burst, high-tailing it for some retirement home while stashing their equity gains into the bank).
I like hearing lenders make this case. I have long argued that these loans are toxic and they will be the undoing of the market. People who deny the bubble say there are not many people like Steve and it will not be an impact to the market. When I hear lenders—people who see what is really happening—state there are more “Steves” out there than is widely believed, it provides another confirming data point for the bearish argument.
I too have noticed the extremely low cap rates on income properties. There was a recent article in the OC Register (I think) about an income property selling at a 3.25% cap rate. Why wouldn’t you just put the money in a CD at 5%?
People who are paying these rates must be doing so because they expect high growth rates of earnings. If you think apartment rents will continue to go up at 6% a year, a 4.5% cap rate is acceptable because it will be a 10% cap rate soon enough. Take out the growth in earnings factor, and the deal makes no sense at all.
Plus, there is a lot of liquidity in the market right now, probably from the carry trade with Japan and in influx in foreign capital brought about by the declining dollar. The money put into these transactions may have simply needed a place to be parked. There are not enough good deals to be had in any market right now.
Since, IMO, most of the liquidity in world markets is borrowed money, I think we are prone to a severe credit crunch. If creditors start wanting their money back, borrowers will need to liquidate assets to cover the loan. A mass liquidation would be devastating to asset prices. Personally, I think it is only a matter of when, not if.
You just described the life story of thousands of FB’s over the next several years.
Posted by lendingmaestro on 06/05/07 at 01:10 PM
Some morons don’t claim their rent on their income taxes and they file the property as a loss.
That’s not the best use of money/debt in my opinion
Posted by Adam Smith on 06/05/07 at 01:15 PM
You know, a lot of people try to say that this market run-up was a victimless crime, or say that it was a good thing (I mean, who DOESN’T like to feel like a millionaire, even if it’s only because of living in an over-valued stucco-box in Riverside?).
Others say that since only the lenders bear the brunt of borrowers defaulting (and it’s hard to feel sympathetic for a bank, right?), that perhaps we should excuse the over-zealous “investors”, rationalizing that since the home goes back to the bank anyway then there was no harm, no fowl. In fact, some try to say the borrower who fiscally over-extended (via a liar loan) was the victim…
Poppycock, I say.
The thing to remember is we have housing that is sitting idle nowadays, and will continue to do so for YEARS: no one’s able to sell these homes, or even able to rent (maybe willing to rent is a better term, as in the owner is unwilling to rent at prices that they WOULD rent for).
Why were idiots like Casey Serin or David Crisp able to greedliy snap up investment properties without regard for sustainability (i.e. paying the mortgage, taking care of the property, paying property taxes and HOA fees, etc)? I always think of Casey’s rentals in Modesto sitting idle, with the pool allowed to grow algae and mosquitoes (with West Nile Virus a real concern in the Central Valley): what an absolute waste…. It COULD’VE been some family’s starter home, had not GREED driven the market to such excesses, allowing homes to be used as investment vehicles generating passive income.
Why did this happen? It’s simple, really: the mortgage brokers were making their money by NOT thinking about sustainability, just as the real estate agent similarly profits from NOT worrying about anything more than selling as much house to as many buyers as possible, bagging that fat 6% commish. So EVERYONE in the retail chain had “no skin in the game” when it came to NOT buying: as they say, the hardest thing for a person to understand is a concept that challenges what their career depends on! Never ask a barber if you need a haircut, and never ask a real estate agent if now is a good time to buy/sell. You already KNOW what the answer will be.
Hence why no one cared to apply the brakes to stop and ask IF the prices/terms made sense…. In fact, any appraiser who did their job properly was quickly black-listed, and labellled as someone who wouldn’t “hit the price”.
As usual, people are only thinking of themselves, with the infamous “what’s in it for me?” thinking.
The solution is simple: disincentivize home ownership so that someone like Casey Serin couldn’t watch a late-night infomerical and considering jumping into real estate as a speculative flipper! No simultaneous investment loans for home-buying! Don’t let pigs greedily buy up entire neighborhoods, hoping to make a killing! Get rid of the capital gains exemption for buying speculative homes, as they shouldn’t apply to professional investors. Make someone like Serin pay higher taxes on any earnings, so they don’t see the possibility of easy returns based simply on flipping.
If the bubble bursting doesn’t do it, it really SHOULDN’T be THAT hard to disincentivize speculative home buyers in the future…. On the other hand, this is what, the 3rd real estate bubble we’ve seen? Apparently the folks who got crushed in prior bubbles didn’t ring a bell in the current market partipants mind? Guess not: the stock market crash of 1929 apparently was not remembered by anyone who gambled and lost in the dot-com mess (or those who’ll see the Wall Street meltdown of 2007 happen).....
Posted by lendingmaestro on 06/05/07 at 01:19 PM
when you read that, you realize how nobody is really averse to a collapse in the mortgage industry. John and Sally Smithers from Grand Rapids MI own there own home but live off there pension. Let’s hope it’s value holds up!!!
Posted by No_Such_Reality on 06/05/07 at 01:20 PM
It’s a nice alarmist headline to sell papers and page views, but it’s nothing.
Really, Calpers invests $140 million in junk bonds. They have $234 Billion they manage and growing.
So their CDO, ‘junk bonds’ are 0.14/234 = 0.06% of their portfolio.
Posted by No_Such_Reality on 06/05/07 at 01:26 PM
Why were idiots like Casey Serin or David Crisp able to greedliy snap up investment properties without regard for sustainability
The solution is even easier. Casey has openly documented his fraud. I’m still wondering why the FBI has arrested and charged him since it’s a multi-million dollar interstate fraud.
Talk about low hanging fruit. Casey has pretty much done all the documentation needed to convict him of fraud.
Posted by gepetoh on 06/05/07 at 01:31 PM
Agreed. It’s part of their asset allocation, and par for the course for them to maintain the mandated (or discretionary) asset mix.
Posted by Adam Smith on 06/05/07 at 01:53 PM
Ha! I guess it was mostly a rhetorical question, as any fraud investigators working on fraud investigations are no doubt over-worked, under-staffed, and no doubt under-appreciated.
We saw what happened when an Interior Department auditor simply tried to do his job, enforcing mineral rights against the big oil companies: he was ordered to back off, and when he didn’t, he was fired.
GWB and cronies applauds the laissez-faire nature of “free” markets, lauding the ‘self-cleaning’ nature of the markets: Bush does EVERYTHING possible to favor big business, whether we’re talking about immigration policy, war funding, big oil, real estate fraud, etc. Sit back and watch Scooter Libby be given a Presidential Pardon soon. Never before has nepotism and cronyism had such a hey-day as in the past decade….
As far as Casey, he’s considered small potatoes. Investigators are more interested in real estate fraud for profit, which involves insiders who rig the system and violate laws to make boat-loads of money for themselves (e.g. guys like Crisp, who apparently built a pyramid scheme based on selling property to others, using their names, while still controlling the property by handling mortgage payments, etc).
On the other hand, fraud for housing involves those who lie on loan apps to buy their owner-occupied house: it’s unlikely these types of fraud will be investigated, let alone prosecuted.
So Casey falls somewhere in the middle, as a failed would-be real estate magnate who is probably too small-time to hit the threshold. He’s probably lost more than he ever stood to make, so no doubt would have some great tax write-offs to counter-balance all the 1099’s he’ll be getting from all those foreclosure(s)!
CAVEAT: Casey WOULD make a great high-profile sacrifical lamb, a scapegoat that represents all the other small-timers like him who are out there, but off the radar. He probably did more to ensure investigation by going public here…. The FBI and IRS will no doubt be all over him. Time will tell…
Posted by Hope To Buy In Irvine Some Year on 06/05/07 at 02:13 PM
Oh no, an interest rate hike?
“The market is hoping for slow growth and moderate inflation, and now there’s concern they might have to bump up rates in the second half of the year,” said Jim Herrick, director of equity trading at Baird & Co.
Mr. Smith - More legislation will not disincetivize speculation and more legislation makes the business cycle more pronounced with stonger manias and stronger recessions. The only way to lessen the extremes of the business cycle, ( expansion and contraction of credit), is to get rid of the federal reserve or any other central bank and get rid of fiat currency and use money redeemable in precious metal.
Posted by awgee on 06/05/07 at 02:38 PM
That’s the $140 million they hold directly, and I have doubts that number is accurate. The amount of worthless junk they hold indirectly through hedge funds, CDSs, financial stocks, insurance stocks and bonds, will be in the billions, but no one knows how much indirect exposure they have to junk paper.
How much of the direct/partnership, global fixed income, equities, and real estate investments have exposure to CDO, CDSs, CDIs, etc. ? I’ll give you a hint. Even CalPers has no idea.
Posted by fumbling on 06/05/07 at 08:11 PM
how much $/sf should the high rise condos in Irvine go for, given their $1k/month in HOA fees?
Here is cool link to CalPers investments in hedge funds: http://www.calpers.ca.gov/eip-docs/investments/assets/equities/cfac-response.xls
At the end of 2005 they had about $1.8 billion invested in hedge funds. They paid $17.3 million in management fees in 2005 for a 10% return. I probably could have done just as well by throwing darts at the business section of the newspaper. I would only charge half as much too.
They have a total of $31 billion invested in “alternative” investment management.
Posted by mrincomestream on 06/06/07 at 09:55 AM
No blood yet, just a lot of thrashing right now. “LOL” But rest assure the blood is coming.
Posted by mrincomestream on 06/06/07 at 10:05 AM
“...$1k/month in HOA fees?...”
I always find this funny, and i always ask does that fee include a daily happy ending. I don’t get it
Since I live in LA, I’m not too familiar with the Irvine condo/rental scene…but $200-250/sqft for Irvine condos just sounds way too optimistic. I sold my Hancock Park condo a few months ago for $550/sqft.
While everybody agrees that a correction is happening for home prices, my feeling is that rents will rise at a similar rate (to that of home prices decreasing) to bridge the gap between rents and home prices.
This is Southern Cal…it is very very hard to make positive cash flow form single unit rental investments…
Posted by lendingmaestro on 06/06/07 at 01:46 PM
HAHAHA….well…you are in Irvine…..
Posted by Vicki on 06/06/07 at 02:20 PM
I can’t figure out where Redfin is getting their numbers for prior sale amount. I checked 2 sources (title company records) and it shows the original purchase price to be $675,500 on 11/17/2005, with no other transfers or refis since then.
The seller is still losing money, but not quite as much as originally thought.
Posted by detached on 06/06/07 at 03:02 PM
here’s another one with a strange price history -> 43 Rising Sun in woodbury
Posted by No_Such_Reality on 06/05/07 at 10:02 AM
Large scale apartment complexes are commercial enterprises with economies of scale. The commercial RE segment is still going gangbusters. Essentially, the $330/sf represents peak pricing.
A individual condo units are a completely different beast.
Posted by carl on 06/05/07 at 05:01 AM
IrvineRenter,
Do you have a typo in this post? I don’t think the property has lost 20%. I think the 20% is the downpayment made by the owner. If the asking price is 650k, and the original purchase price is 743k, isn’t that an 11% haircut? Assuming he or she pays 6% in commission, then the owner will take away 611k to pay back the creditors, which gives a final profit of 25k as you say. That’s pretty bad, considering the amount of antacid the owner must be consuming daily.
Carl
——-
Posted by IrvineRenter on 06/05/07 at 06:05 AM
Carl,
You are technically correct; however, when you add in 6% commission costs, and the probability that the seller will back down from the asking price, the net decline in resale value will be about 20%.
When you look at the loss this guy is going to take, it is at least 80%, and it will probably be near 100% by the time he gets out. There is no $25K profit. The 25K is all this guy will have left over from his $147K investment.
Posted by bitterLArenter on 06/05/07 at 06:34 AM
:sniff:
:sniff:
I smell blood in the water
Posted by oc_fliptrack on 06/05/07 at 06:43 AM
We’ve got several trillion in wealth that needs to get lit on fire to put housing back at the mean.
Gotta start somewhere, and a Woodbury McCondo is as good as any.
Posted by oc-conservative on 06/05/07 at 07:20 AM
Does anyone know off hand, or roughtly, what the $/sqft should be for condos or sfh’s to fall in line with rents?
Posted by IrvineRenter on 06/05/07 at 07:30 AM
I would estimate around $200 SF. It could be more or less depending on other variables.
Posted by carl on 06/05/07 at 07:47 AM
I didn’t consider his original investment! It must feel absolutely horrible to burn up your money like this. It is scary how leverage means every dollar your house goes down is a dollar out of YOUR pocket. Yikes. I hope things stay firm here in Raleigh, NC!
Carl
Posted by Kman on 06/05/07 at 08:10 AM
I say $250 sq/ft is a good point to start buying as that puts the price in with the inflation the last few years.
Posted by lendingmaestro on 06/05/07 at 08:12 AM
I’d say 225 to 250 tops. @ 250/sqft that puts a 1200 sqft condo at 300k. It would have to be nicely upgraded in a nice area of Irvine, with an attached garage
Posted by lendingmaestro on 06/05/07 at 08:26 AM
To comment on losing equity, I want to bring to light the utter lack of sense some borrowers have.
There is an enormous amount of people who PURCHASED 2nd homes and investment properties with negatively amortizing mortgages. Neg Am loans are a niche product, and should not be disgarded totally, but what these people have done is disatrous. Never purchase a home with a neg am loan.
Example: Steve owes 300k on his primary home and takes out 150k heloc, or worse, refi’s his primary residence into a new 450k neg am mortgage. But guess what!! His payment is LOWER than the original mortgage! Now Steve buys a new BMW for 50k and puts the other 100k on a new condo for 500k. But Steve can’t afford a traditional payment on a 400K loan, so guess what he does?? Another Neg Am loan.
So now Steve is instantly losing equity from day one, and this is not “phantom equity” that accumulated from price appreciation; it is his own money that he is losing. Way to go Steve!
This phenomenon is much more rampant that what many people expect. I believe this is the reason why the market crash hasn’t hit full-force yet. These Neg Am loans still offer a low payment and allow the seller to hang on for a lot longer. Those days will soon come to an end when their loans suddenly “recast” and the minimum payment disappears, along with their dreams….
Posted by No_Such_Reality on 06/05/07 at 08:51 AM
I’ll 2nd $200/sf for owner occupiers. Two main disclaimers.
1. Rents may fall. Irvine may not because of the near monopoly of IAC, but the rest of OC may end up in a blood bath as empty condos, townhomes and SFRs come back to the market. The cycle is just beginning and one month free on a year lease is already making common appearances.
2. An overshoot past $200 is easily possible as at the point were $200/sf is reached, and investor won’t touch it unless it will cash flow and that means this unit would need to rent steadily at $2700+.
Possibly $150/sft which would still put it at twice the national average.
Or Even $125/sf. At 8% (investor owner interest rate), 20% down, the fixed expenses at ~$1730. Renting at $2000/month, provides about a 7% return (tax free) and given the scenario of these units going to the 200s/sf nobody will invest for anything other than cashflow until the market turns.
The question is will enough rent savers buyers step up or will rents chase them down.
Posted by Joe on 06/05/07 at 09:23 AM
A good quality, large apartment building in Irvine would sell for over $300 per foot to an insitutional investor. Any of the Irvine Co’s apartment buildings located in Irvine that were built over the last 10 years would sell for over $300 per foot. The Legacy at Main & Jamboree just sold for about $330 per foot, and that is with the buyer (Camden) having to take on the cost and risk of the lease up. If it were sold fully leased and occupied it would have been more like $350 per foot. A new apartment property in the Platinum Triangle developed by Trammel Cros just sold for about $315 per foot…..in a clearly worse location.
That’s just an indicator of where good quality large apartment properties are selling today. There values have gone up a lot in recent years, but at least those buyers/investors are basing their valuations on the income the properties produce.
Posted by oc-conservative on 06/05/07 at 09:45 AM
$300-$330 sounds extremely high. How much equity would one have to have in the complex in order to turn it cash flow positive?
Posted by oc-conservative on 06/05/07 at 09:56 AM
$300-$330 sounds high. How much % equity would one have to have within the complex in order to turn it cash flow positive?
Posted by Joe on 06/05/07 at 10:11 AM
I just checked and the one in the Platinum Triangle and it was $350 per foot. That building was bought by a pension fund advisor, so they probably put 50% down - a lot on a $91 million transaction. The Main/Jamboree building sold to a REIT, so it is very likely that they paid all cash with no financing. They finance their entire portfolio at the corporate level with unsecured bonds at probably 40% to 50% of their portfolio’s value. I guess that would mean they put 50% to 60% down.
The cap rate on those transactions was about 4.5% after they complete the lease up. On a monthly revenue multiplier probably just shy of 180.
Posted by MMG on 06/05/07 at 10:12 AM
150-200 sqft
Posted by Joe on 06/05/07 at 10:13 AM
No-such-reality,
Agreed….I just thought it would be valuable information to contribute to the discussion. $200 per foot sounded low to me.
Posted by Sue on 06/05/07 at 10:20 AM
Looks like even if we wait and buy later, we’ll still get stuck with the subprime bill (see link below). I think maybe I’ll just rent forever, and skip buying homebuying altogether - even after the prices finally come down, there’s going to have to be some kind of new taxation to cover any shortfalls like the ones to be in the article below. At that point, if I’m renting, I can just skip the 6% commision and move somewhere else.
Banks Sell ‘Toxic Waste’ CDOs to Calpers, Texas Teachers Fund
http://www.bloomberg.com/apps/news?pid=20601109&sid=aW5vEJn3LpVw&refer=news
Posted by No_Such_Reality on 06/05/07 at 10:32 AM
Agreed. The commercial information is great! Thanks for providing it. however, the CAP Rate is harsh.
But, I think we’re jaded by the dizzying heights to which prices ran up. I look at homes pushing $600K now and I think they look like a deal until you crunch the numbers and realize after taxes they still cost more than renting. If you look at places like Memphis, you see what a housing market looks like in balance with rents & buying and purchasing power.
Posted by Adam Smith on 06/05/07 at 11:12 AM
Lending Maestro said:
This phenomenon is much more rampant that what many people expect. I believe this is the reason why the market crash hasn’t hit full-force yet. These Neg Am loans still offer a low payment and allow the seller to hang on for a lot longer. Those days will soon come to an end when their loans suddenly “recast” and the minimum payment disappears, along with their dreams….
Let’s finish the story to it’s bloody conclusion.
So our FB Steve goes to cashcall.com, and takes out an unsecured loan to get him by. He fails to realize that Cashcall charges 100% APR for cash advances, so just keeps getting deeper and deeper in debt!
Finally, when things get really painful, Steve finally contacts a bankruptcy attorney to see what his options are. Steve then learns that taking out that HELOC or re-fi mortgage on his primary residence carried the undesirable side effect of negating the homesteading protection afforded by State laws that protected him with his original mortgage, so will lose his home when the “empire” starts to crumble, and his properties go to foreclosure.
Good news: Steve gets to be a renter again (provided he does it before his credit gets too trashed). If not, he’ll be back home with Mom and Dad in his old bedroom (provided Mom and Dad didn’t cash out on the home before the bubble burst, high-tailing it for some retirement home while stashing their equity gains into the bank).
Life’s grand, eh?
Posted by IrvineRenter on 06/05/07 at 12:22 PM
I like hearing lenders make this case. I have long argued that these loans are toxic and they will be the undoing of the market. People who deny the bubble say there are not many people like Steve and it will not be an impact to the market. When I hear lenders—people who see what is really happening—state there are more “Steves” out there than is widely believed, it provides another confirming data point for the bearish argument.
Posted by IrvineRenter on 06/05/07 at 12:30 PM
I too have noticed the extremely low cap rates on income properties. There was a recent article in the OC Register (I think) about an income property selling at a 3.25% cap rate. Why wouldn’t you just put the money in a CD at 5%?
People who are paying these rates must be doing so because they expect high growth rates of earnings. If you think apartment rents will continue to go up at 6% a year, a 4.5% cap rate is acceptable because it will be a 10% cap rate soon enough. Take out the growth in earnings factor, and the deal makes no sense at all.
Plus, there is a lot of liquidity in the market right now, probably from the carry trade with Japan and in influx in foreign capital brought about by the declining dollar. The money put into these transactions may have simply needed a place to be parked. There are not enough good deals to be had in any market right now.
Since, IMO, most of the liquidity in world markets is borrowed money, I think we are prone to a severe credit crunch. If creditors start wanting their money back, borrowers will need to liquidate assets to cover the loan. A mass liquidation would be devastating to asset prices. Personally, I think it is only a matter of when, not if.
Posted by IrvineRenter on 06/05/07 at 12:33 PM
You just described the life story of thousands of FB’s over the next several years.
Posted by lendingmaestro on 06/05/07 at 01:10 PM
Some morons don’t claim their rent on their income taxes and they file the property as a loss.
That’s not the best use of money/debt in my opinion
Posted by Adam Smith on 06/05/07 at 01:15 PM
You know, a lot of people try to say that this market run-up was a victimless crime, or say that it was a good thing (I mean, who DOESN’T like to feel like a millionaire, even if it’s only because of living in an over-valued stucco-box in Riverside?).
Others say that since only the lenders bear the brunt of borrowers defaulting (and it’s hard to feel sympathetic for a bank, right?), that perhaps we should excuse the over-zealous “investors”, rationalizing that since the home goes back to the bank anyway then there was no harm, no fowl. In fact, some try to say the borrower who fiscally over-extended (via a liar loan) was the victim…
Poppycock, I say.
The thing to remember is we have housing that is sitting idle nowadays, and will continue to do so for YEARS: no one’s able to sell these homes, or even able to rent (maybe willing to rent is a better term, as in the owner is unwilling to rent at prices that they WOULD rent for).
Why were idiots like Casey Serin or David Crisp able to greedliy snap up investment properties without regard for sustainability (i.e. paying the mortgage, taking care of the property, paying property taxes and HOA fees, etc)? I always think of Casey’s rentals in Modesto sitting idle, with the pool allowed to grow algae and mosquitoes (with West Nile Virus a real concern in the Central Valley): what an absolute waste…. It COULD’VE been some family’s starter home, had not GREED driven the market to such excesses, allowing homes to be used as investment vehicles generating passive income.
Why did this happen? It’s simple, really: the mortgage brokers were making their money by NOT thinking about sustainability, just as the real estate agent similarly profits from NOT worrying about anything more than selling as much house to as many buyers as possible, bagging that fat 6% commish. So EVERYONE in the retail chain had “no skin in the game” when it came to NOT buying: as they say, the hardest thing for a person to understand is a concept that challenges what their career depends on! Never ask a barber if you need a haircut, and never ask a real estate agent if now is a good time to buy/sell. You already KNOW what the answer will be.
Hence why no one cared to apply the brakes to stop and ask IF the prices/terms made sense…. In fact, any appraiser who did their job properly was quickly black-listed, and labellled as someone who wouldn’t “hit the price”.
As usual, people are only thinking of themselves, with the infamous “what’s in it for me?” thinking.
The solution is simple: disincentivize home ownership so that someone like Casey Serin couldn’t watch a late-night infomerical and considering jumping into real estate as a speculative flipper! No simultaneous investment loans for home-buying! Don’t let pigs greedily buy up entire neighborhoods, hoping to make a killing! Get rid of the capital gains exemption for buying speculative homes, as they shouldn’t apply to professional investors. Make someone like Serin pay higher taxes on any earnings, so they don’t see the possibility of easy returns based simply on flipping.
If the bubble bursting doesn’t do it, it really SHOULDN’T be THAT hard to disincentivize speculative home buyers in the future…. On the other hand, this is what, the 3rd real estate bubble we’ve seen? Apparently the folks who got crushed in prior bubbles didn’t ring a bell in the current market partipants mind? Guess not: the stock market crash of 1929 apparently was not remembered by anyone who gambled and lost in the dot-com mess (or those who’ll see the Wall Street meltdown of 2007 happen).....
Posted by lendingmaestro on 06/05/07 at 01:19 PM
when you read that, you realize how nobody is really averse to a collapse in the mortgage industry. John and Sally Smithers from Grand Rapids MI own there own home but live off there pension. Let’s hope it’s value holds up!!!
Posted by No_Such_Reality on 06/05/07 at 01:20 PM
It’s a nice alarmist headline to sell papers and page views, but it’s nothing.
Really, Calpers invests $140 million in junk bonds. They have $234 Billion they manage and growing.
So their CDO, ‘junk bonds’ are 0.14/234 = 0.06% of their portfolio.
Posted by No_Such_Reality on 06/05/07 at 01:26 PM
Why were idiots like Casey Serin or David Crisp able to greedliy snap up investment properties without regard for sustainability
The solution is even easier. Casey has openly documented his fraud. I’m still wondering why the FBI has arrested and charged him since it’s a multi-million dollar interstate fraud.
Talk about low hanging fruit. Casey has pretty much done all the documentation needed to convict him of fraud.
Posted by gepetoh on 06/05/07 at 01:31 PM
Agreed. It’s part of their asset allocation, and par for the course for them to maintain the mandated (or discretionary) asset mix.
Posted by Adam Smith on 06/05/07 at 01:53 PM
Ha! I guess it was mostly a rhetorical question, as any fraud investigators working on fraud investigations are no doubt over-worked, under-staffed, and no doubt under-appreciated.
We saw what happened when an Interior Department auditor simply tried to do his job, enforcing mineral rights against the big oil companies: he was ordered to back off, and when he didn’t, he was fired.
GWB and cronies applauds the laissez-faire nature of “free” markets, lauding the ‘self-cleaning’ nature of the markets: Bush does EVERYTHING possible to favor big business, whether we’re talking about immigration policy, war funding, big oil, real estate fraud, etc. Sit back and watch Scooter Libby be given a Presidential Pardon soon. Never before has nepotism and cronyism had such a hey-day as in the past decade….
As far as Casey, he’s considered small potatoes. Investigators are more interested in real estate fraud for profit, which involves insiders who rig the system and violate laws to make boat-loads of money for themselves (e.g. guys like Crisp, who apparently built a pyramid scheme based on selling property to others, using their names, while still controlling the property by handling mortgage payments, etc).
On the other hand, fraud for housing involves those who lie on loan apps to buy their owner-occupied house: it’s unlikely these types of fraud will be investigated, let alone prosecuted.
So Casey falls somewhere in the middle, as a failed would-be real estate magnate who is probably too small-time to hit the threshold. He’s probably lost more than he ever stood to make, so no doubt would have some great tax write-offs to counter-balance all the 1099’s he’ll be getting from all those foreclosure(s)!
CAVEAT: Casey WOULD make a great high-profile sacrifical lamb, a scapegoat that represents all the other small-timers like him who are out there, but off the radar. He probably did more to ensure investigation by going public here…. The FBI and IRS will no doubt be all over him. Time will tell…
Posted by Hope To Buy In Irvine Some Year on 06/05/07 at 02:13 PM
Oh no, an interest rate hike?
“The market is hoping for slow growth and moderate inflation, and now there’s concern they might have to bump up rates in the second half of the year,” said Jim Herrick, director of equity trading at Baird & Co.
http://biz.yahoo.com/ap/070605/wall_street.html?.v=37
Posted by awgee on 06/05/07 at 02:32 PM
Mr. Smith - More legislation will not disincetivize speculation and more legislation makes the business cycle more pronounced with stonger manias and stronger recessions. The only way to lessen the extremes of the business cycle, ( expansion and contraction of credit), is to get rid of the federal reserve or any other central bank and get rid of fiat currency and use money redeemable in precious metal.
Posted by awgee on 06/05/07 at 02:38 PM
That’s the $140 million they hold directly, and I have doubts that number is accurate. The amount of worthless junk they hold indirectly through hedge funds, CDSs, financial stocks, insurance stocks and bonds, will be in the billions, but no one knows how much indirect exposure they have to junk paper.
Posted by No_Such_Reality on 06/05/07 at 02:53 PM
http://www.calpers.ca.gov/eip-docs/about/facts/investme.pdf
Posted by awgee on 06/05/07 at 03:51 PM
How much of the direct/partnership, global fixed income, equities, and real estate investments have exposure to CDO, CDSs, CDIs, etc. ? I’ll give you a hint. Even CalPers has no idea.
Posted by fumbling on 06/05/07 at 08:11 PM
how much $/sf should the high rise condos in Irvine go for, given their $1k/month in HOA fees?
Posted by graphrix on 06/05/07 at 09:37 PM
Here is cool link to CalPers investments in hedge funds: http://www.calpers.ca.gov/eip-docs/investments/assets/equities/cfac-response.xls
At the end of 2005 they had about $1.8 billion invested in hedge funds. They paid $17.3 million in management fees in 2005 for a 10% return. I probably could have done just as well by throwing darts at the business section of the newspaper. I would only charge half as much too.
They have a total of $31 billion invested in “alternative” investment management.
Posted by mrincomestream on 06/06/07 at 09:55 AM
No blood yet, just a lot of thrashing right now. “LOL” But rest assure the blood is coming.
Posted by mrincomestream on 06/06/07 at 10:05 AM
“...$1k/month in HOA fees?...”
I always find this funny, and i always ask does that fee include a daily happy ending. I don’t get it
Posted by eugene on 06/06/07 at 10:20 AM
Since I live in LA, I’m not too familiar with the Irvine condo/rental scene…but $200-250/sqft for Irvine condos just sounds way too optimistic. I sold my Hancock Park condo a few months ago for $550/sqft.
While everybody agrees that a correction is happening for home prices, my feeling is that rents will rise at a similar rate (to that of home prices decreasing) to bridge the gap between rents and home prices.
This is Southern Cal…it is very very hard to make positive cash flow form single unit rental investments…
Posted by lendingmaestro on 06/06/07 at 01:46 PM
HAHAHA….well…you are in Irvine…..
Posted by Vicki on 06/06/07 at 02:20 PM
I can’t figure out where Redfin is getting their numbers for prior sale amount. I checked 2 sources (title company records) and it shows the original purchase price to be $675,500 on 11/17/2005, with no other transfers or refis since then.
The seller is still losing money, but not quite as much as originally thought.
Posted by detached on 06/06/07 at 03:02 PM
here’s another one with a strange price history -> 43 Rising Sun in woodbury
may be a candidate for the WTF award
Date Price Appreciation
06/09/2005 $678,000 -100.0%/yr
06/08/2005 $739,000 80,179,419.2%/yr
06/07/2005 $712,000 3,293,216.5%/yr
06/02/2005 $617,500 -100.0%/yr
05/26/2005 $739,500 137.8%/yr
05/24/2005 $736,000 7,890,976.6%/yr
05/20/2005 $650,500 -99.1%/yr
05/12/2005 $721,500 18,928,186,159.9%/yr
05/10/2005 $650,000 -99.2%/yr
05/06/2005 $685,500 -100.0%/yr
05/03/2005 $1,247,000 34.1%/yr
04/29/2005 $1,243,000 4,546,550,883,158,079,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000.0%/yr
04/28/2005 $659,000 -100.0%/yr
04/26/2005 $694,000 -100.0%/yr
04/25/2005 $730,000 -99.6%/yr
04/22/2005 $764,000 1.4%/yr
03/18/2005 $763,000 —