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?
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.
Income Requirement: $99,750
Downpayment Needed: $79,800
Monthly Equity Burn: $3,325
Purchase Price: $564,678
Purchase Date: 1/25/2008
Address: 1 Montgomery #46 Irvine, CA 92604
|May 26, 2005||$565,000||
|Feb 22, 2008||$337,500||
|Area:||El Camino Real|
|On Redfin:||20 days|
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
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!
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.
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
1999 — Prince