. . . however baby man may brag of his science and skill, and however much, in a flattering future, that science and skill may augment; yet for ever and for ever, to the crack of doom, the sea will insult and murder him, and pulverize the stateliest, stiffest frigate he can make; nevertheless, by the continual repetition of these very impressions, man has lost that sense of the full awfulness of the sea which aboriginally belongs to it.
. . . these are the times of dreamy quietude, when beholding the tranquil beauty and brilliancy of the ocean’s skin, one forgets the tiger heart that pants beneath it; and would not willingly remember, that this velvet paw but conceals a remorseless fang.
Moby Dick — Herman Melville
Wall Street financiers came up with a number of financial instruments designed to minimize their risks (Collateralized Debt Obligations, Credit Default Swaps, etc.) In doing so, they created a false sense of security and moral hazard which caused huge sums of money to flow into residential home mortgages. Like the first quote from Moby Dick above, the market participants “lost that sense of the full awfulness” the markets can inflict upon them.
For all our wisdom and collective experience, none of us knows what the markets will do next. Like an ocean current or a raging river, a financial market charts its own course. It is fickle and feckless and flows without regard to our hopes and dreams. To forget this fact is to book your financial passage on the Edmund Fitzgerald (Link to great music video).
The ebbs and flows of financial markets are meaningful to us, but in reality they are just movements in price; nothing more. Price rallies make homeowners blissful and renters bitter, while price declines make homeowners gloomy and renters gleeful.
These feelings and emotions are independent of movements in price. The market just moves, that is all it does. It is benign, yet dangerous; it is indifferent, yet demonstrative; the market is a paradox which me must simply accept.
It has been argued — convincingly in my opinion — that the health of a real estate market starts at the bottom of the food chain. Like the plankton in the sea, the entry-level buyer is the base of the real estate food chain. If the organisms that make up the base of the food chain are not healthy, the entire ecosystem is in peril. So it is with our real estate market.
In several posts I have talked about the complete lack of sales at the low end of the market. It occurred to me I haven’t profiled enough of these properties to show just how bad things are. Today I am going to profile three properties in “The Lakes:” a severe rollback, a bank REO and a peak buyer hoping to limit their losses. Enjoy…
Asking Price: $270,000
Purchase Price: $340,000
Purchase Date: 12/15/2005
Address: 79 Lakepines, Irvine, CA 92620
1st Loan $255,000
2nd Mtg. $51,000
Downpayment $30,000
Beds: 1
Baths: 1
Sq. Ft.: 934
$/Sq. Ft.: $289
Lot Size: 763 sq. ft.
Year Built: 1977
Stories: 2
Type: Condominium
View: Water
County: Orange
Neighborhood: Northwood
MLS#: S488313
Status: Active
On Redfin: 86 days
From Redfin, “Charming, Spacious two story Loft Bedroom home in resort like Lakes community. Best location. Tranquil Back patio faces serene stream and water features. Cozy fireplace, Catherdral scraped ceilings, Skylight, Garden Window, new lighting fixtures, designer paint, Newer appliances including stove, microwave, dishwasher. Walk in Closet in bedroom. Turnkey.”
.
.
Look at this depth of this rollback: 20% off; even at this asking price it is still on the market after 77 days. Further price reductions will be necessary before this sells. If they manage to get the asking price, and assuming a 6% commission, this seller and their bank stand to lose $86,200 — that is 25% off a 2005 price!
The lake, it is said, never gives up her dead
When the skies of November turn gloomy.
The Wreck of the Edmund Fitzgerald — Gordon Lightfoot.
Real estate always goes up, or so our next seller hopes…
Asking Price: $241,500
Purchase Price: $191,826
Purchase Date: 6/11/2007
Address: 171 Streamwood, Irvine, CA 92620
1st Loan $178,500
2nd Mtg. $31,500
Downpayment $0
Beds: 0
Baths: 1
Sq. Ft.: 415
$/Sq. Ft.: $582
Lot Size: –
Year Built: 1977
Stories: 1
Type: Condominium
View: Trees/Woods, Water
County: Orange
Neighborhood: Northwood
MLS#: S497917
Status: Active
On Redfin: 17 days
From Redfin, “Enjoy the sounds of meandering streams from one of the least expensive condos in all of Irvine. This studio unit is on the ground floor within a great community close to shopping, dining and transportation. Numerous association amenities including 2 clubhouses, 2 pools, 2 spas, and tennis courts make this a great place to live!!!”
The obligatory three exclamation points…
.
.
Look at this sales history:
Sales History
Date Price
06/11/2007 $191,826
03/21/2005 $210,000
04/16/1998 $57,500
This was a 2005 rollback foreclosed on by the Bank of New York in early June. Does anyone want to bet this will sell for less than the June sales price? And look at the 1998 price. If you calculated its rental value — and at 415 SF, it is only useful as a rental — the 1998 price is probably not far from is real worth.
Back to the behavior of lenders and our moral hazard:
By this, he seemed to mean, not only that the most reliable and useful courage was that which arises from the fair estimation of the encountered peril, but that an utterly fearless man is a far more dangerous comrade than a coward.
Moby Dick — Herman Melville
Asking Price: $399,999
Purchase Price: $427,000
Purchase Date: 3/2/2006
Address: 3 Lakepines, Irvine, CA 92620
1st Loan $340,800
2nd Mtg. $85,200
Downpayment $1,000
Beds: 2
Baths: 1.5
Sq. Ft.: 1,202
$/Sq. Ft.: $333
Lot Size: –
Year Built: 1977
Stories: 2
Type: Condominium
County: Orange
Neighborhood: Northwood
MLS#: U7003339
Status: Active
On Redfin: 1 day
New Listing (24 hours)
From Redfin, “Very spacious and open floor plan. Combination kitchen/dining/living room great room. Private patio area for a small animal, and or bbq area and relaxing. Vaulted ceilings with sky lights. Association area includes two pools & spas, tennis courts. Lakes and streams running all around complex.”
.
.
Given the whopping $1,000 downpayment, I am not surprised this would be millionaire is walking from this stellar investment. If this property sells for its asking price, the seller bank stands to lose $51,000.94 after a 6% commission.
The Captain wired in he had water coming in
And the good ship and crew was in peril
And later that night when his lights went out of sight
Came the wreck of the Edmund Fitzgerald.
The Wreck of the Edmund Fitzgerald — Gordon Lightfoot.
