Financing in a Declining Market

How Many More Years — Howlin’ Wolf

Check out Howlin’ Wolf’s description of the blues (it’s at the beginning.)

It cannot be denied (rationally) that we are currently in a declining market. In a declining market, banks look at appraisals and comps differently than they do in a rising market. When prices are rising the lender will look at the highest comparable sales to determine total value upon which they will base their loan. When prices are declining like they are now, the lender will look at the lowest comparable sales or asking prices to establish the value upon which they will base their loan. This is a major headache for sellers. Remember the post I did on the big drop in Turtle Rock recently How to Lose $500,000 in a Year? Once that seller put that house on the market asking $800,000, he ruined the comps for every similar home within a mile of his location. Let’s say you are the neighbor at 6022 Sierra Siena Road who is asking $950,000 for a similar property. If you find a buyer willing to pay $950,000 and put 20% down, the lender is going to look at the neighboring house asking $800,000 and say, “I can only loan your buyer 80% of $800,000.” For the buyer of the Seirra Siena Road property to make a sale, the buyer will need to put down $310,000 — almost 30% because of the low asking price on Silver Cres.

Also, in a declining market lenders will raise loan-to-value requirements. The lenders I have spoken to have told me that right now, there is no market outside of the conforming loans of the GSEs (Freddie Mac, Fannie Mae) or the FHA. The FHA will allow loans with 3% down, but the income requirements are so tight, that it is very difficult to qualify. The GSEs allow higher DTIs, but they are also requiring higher downpayments. Even now, very few loans are being approved without 20% down. Another interesting thing I was told is that nearly all of the buyers over the last several months were renting at the time of their purchase. It is a classic case of those renters who felt “priced out forever” jumping at the chance to own — more kool aid. There is almost no move-up market right now, probably due to the deep price drops at the low end of the market. People getting out of entry-level housing do not have any equity, and those who still have equity, are not able to sell their homes.

Today’s property is a classic flip. The owners bought it in March, and they are asking $119,000 more than they paid for it. In the bubble rally, they might have pulled it off because the bank would have ignored their low purchase price and financed anyone with 100% financing at almost any price they wanted to ask. However,in today’s market, they set their own comp, and the lender is not going to ignore it. For them to get their WTF asking price, someone is going to have to put down a large amount of cash. In short, it is not going to happen.

46 Marsala

Asking Price: $659,000IrvineRenter

Income Requirement: $164,750

Downpayment Needed: $227,000 based on their purchase price as a comp

Monthly Equity Burn: $5,491

Purchase Price: $540,000

Purchase Date: 3/14/2008

Address: 46 Marsala, Irvine, CA 92606


Beds: 3
Baths: 1
Sq. Ft.: 1,100
$/Sq. Ft.: $599
Lot Size:
Property Type: Single-Family House
Year Built: 1994
Seller Type: By Owner
County: Orange
Listing #: 875385610
Source: Oodle
Status: Active
On Redfin: 5 days

This beautiful single-level home is located in the interior of the
tract – quiet and private location. Upgrades include remodeled kitchen
and bathrooms – stainless steel appliances, granite countertops,
tumbled limestone tiled backsplash, and new dark cabinets with brushed
nickle hardware. Marble floors located entry, kitchen, and bathrooms.
Custom earthtone paint throughout. Crown molding and 6″ baseboards
accent the custom paint beautifully. Floorplan is open and inviting.
Private yard includes a waterfall and tropical plants. 2 car garage,
attached and lots of parking directly in front of the home makes it
nice for guests to visit. 2 blocks from Plaza Vista Elementary – award
winning school! Low tax rate and only $50 per month for mello roos.
HOA’s are lowest in the area at $133 per month. Amenities include 2
olympic size association pools and tennis courts. Call today for a
private showing of this spectacular home!

I guess the new pergraniteel added $119,000 in value. Perhaps some pictures would help.



Kool Aid Man

$599 per square foot?


Bubble prices did not reach $600/SF. Maybe that is why they took it down to $599/SF? Since this is a FSBO, there is no commission involved, so if they get their asking price, they stand to make $119,000. Good luck with finding the buyer with $227,000 to put down that wants to grossly overpay for this place.

Thus concludes another week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great holiday weekend.


How many more years, have I got to let you dog me around
How many more years, have I got to let you dog me around
I’d soon rather be dead, sleeping six feet in the ground
I’m gonna fall on my knees, I’m gonna raise up my right hand
I’m gonna fall on my knees, I’m gonna raise up my right hand
Say I’d feel much better darling, if you’d just only understand
I’m going upstairs, I’m gonna bring back down my clothes
I’m going upstairs, I’m gonna bring back down my clothes, do them all
If anybody ask about me, just tell’em I walked out on

How Many More Years — Howlin’ Wolf

Well, now meet me in the bottom,
Bring me my runnin shoes.
Well, now meet me in the bottom,
Bring me my runnin shoes.
When I jump out the window,
I won’t have time to loose.

When you see me streakin by,
Please, don’t be late.
When you see me streakin by,
Please, don’t be late.
Well, when you see me movin,
You know my life is at stake.

Well, I hope you see me,
I come streakin by.
Well, I hope you’ll see me when,
I come streakin by.
She got a bad old man,
You know, I’m too young to die.
Boy, I got to leave here.
Fore I get caught in there.

Meet in the Bottom — Howlin’ Wolf

50 thoughts on “Financing in a Declining Market

  1. Emma Anne

    Marble floors but only one bathroom? I don’t think this will be a really practical choice . . .

    1. cara

      Flipping in a declining market. I don’t think the “owners” have a strong grasp of the conventionally held “reality” in general. Who in the world would pay $599/sqft for a “practical” house, obviously you only get that kinda moola for an impractical house.

      1. mmg

        honestly and seriously, no more than 200k for this appartment at best. are they smoking koolaid instead of drinking it now 😆

    2. Mike

      There must be a mistake on the number of bathrooms. In the property description they refer to “bathrooms” twice. Even with one or two more bathrooms it make you wonder what these people are thinking.

      1. David

        If you click through to the property description on “”, it lists the property as having two bathrooms. But at 1100 square feet, this is a small house. Maybe that’s why there are no pictures of the inside. Still, it’s significantly overpriced.

  2. DML

    1100 sq ft? that seems impossibly small to me for a $500k+ home, but then I guess that’s why I left Orange County.

  3. George8

    Even at $540k this is way over priced.
    $2000 rent at RRM 160=$320k.

    Somebody needs to hit this owner with a 2×4 to wake him up.

    1. NoWow!way

      I’d like to see a postcard sent out to each of the homes listed here. Something to the effect of: Congratulations! Your Listing is being featured on the Irvine Housing Blog on _____(date) at

      Please stop by and read the reviews and make comments of your own!

      1. Major Schadenfreude

        “Call today for a private showing of this spectacular home!”

        …Or visit the IHB website for a “public showing”!

        1. Mr Duncan

          You mean “surveiller” in the sense that Foucault had it? Public torture and hanging? 🙂

      2. lawyerliz

        Boy, if that were done, IR & all the gang would really have to go into deeeeepppp cover

  4. MoneyNing

    Never mind the price for a second. Was this house build to live with only 1 bath for a 3 bedroom house? What was the builder thinking when he/she thought about the liveability of the plan?

  5. Laura Louzader

    I’m talking to lenders right now, and even though GNMA and FNMA have lowered requirements, lenders have become pretty risk-averse, and are pricing further price declines into mortgages.

    They want a FICO of at least 700 and 10% down (at least)for SF homes.

    They want mostly 20% down (and at least 10%) for condos, and require that the bldg. be at least 70% owner-occupied, and that at least 10% of all assessments (or HOA fees, if you prefer)go to the complex’s reserve.

    The Alt-A resets are going to drive foreclosures to new highs, and right now, 2006 and 2007-vintage mortgage pools are the worst performing pools of any so far.

    So expect more inventory and more price declines and tighter lending requirements, for the forseeable future.

    We might not see daylight till 2011 earliest.

    1. houseonlegs

      I am getting the same results with lenders, they may allow only 5-10% down, but they will find any reason to increase a down payment requirement. In my recent experience, 20% down is not enough for a lot of buyers.

  6. Schadendude

    I feel like someone may have bought this property originally at those outlets where they sell defective clothing…

    “This one is missing a bathroom. Box it up and send it to our store in Cabazon.”


  7. Bubblegum

    I can’t even believe these buyers bought the place for $540k for 1100sq ft. Someone got lucky with this knife catcher.

  8. Dog

    Regarding the house on Sierra Siena that IR references: I visited an open house there about 6 months ago when it was listed for $1,095,000. The RE agent, a typically blow-dried, overconfident, too-smiley type, let loose with this zinger: ‘This is Irvine, not Riverside. You’ll never see this home sell for $100,000 less than the asking price.’

    Apparently not, dude. It will be significantly MORE than $100,000 off since the ask is now $145,000 lower. IPO says this one is in escrow now. If it closes, can’t wait to see the final price.

    1. tonye

      Look at their taxable value: $90K.

      Look at the pictures of the house.

      These people have owned this home since it was brand new, so unless they did the HELOC thing, they got equity to burn…

      The lot is also very large for TR. However it backs to Bonita Canyon Rd and the traffic has increased significantly back there. Although the speeds are slower. No more 100mph banzai runs on our private TR roads as it used to be 20 years ago. I imagine that ten cars going 50 make far less noise than one going through the gears at redline: WRAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAH!

      I’ll betcha the house goes for close to $925K.

  9. picflight

    [b]My Offer[/b]
    After giving this property a thorough look, my offer today is [b]$216,150.00[/b]. I believe this is what this property is worth.

  10. Quail-Over-the-Hill

    Given the current average price-per-square-foot in Irvine, this place figures to be worth about $400,000, give or take. What strikes me is that this flipper paid almost $500/square foot just two months ago. The seller in that transaction must have thought he won the lottery.

  11. jeff

    I am looking at a property in Fullerton (East Coyote Hills) and want to find the sales history, refinance history, and heloc history. Can anyone suggest the best place to find this information?



    1. Emma Anne

      I believe Irvine Renter has said you need a subscription service to get this kind of info.

  12. ochomehunter

    There are lots and lots of folks still buying as flippers, for some reason they think if they buy at Auction they can instantly flip the property for profits. These are the idiots who will get burned.
    1. Before we saw flippers who bought with $0 down sold in bidding frenzy. They are now out of the market.
    2. Next came the wave of flippers who bought with $0, did community service by upgrading the units and sold for higher values, those folks are burned as well.
    3. Now, we are getting the last of the flippers who think they are investors who have cash and they can afford to pay cash buyouts at Auctions. Now its their turn to get burned as well as the forget that Auctions, REO, all set the comps.
    4. Soon in 1-2 years, would come investors who will look for properties not to flip, but for positive cash flow. That will be the moment when I would call bottom and get a decent home for my family.

  13. Hormiguero

    Give these flippers some credit. This kind of play in a market like this takes some serious chutzpah, if not a surplus of brains.

  14. Schadendude

    A had a dog once that used to chase cars. He had ‘chutzpah.’ God rest his soul.

  15. LC

    That is really a crazy price. but that is where you get all of the really crazy prices — for sale by owner.

    At least it is a big, wide corner lot. So that everyone can see what big idiots you are.

  16. tonye

    Let’s look into TR for a second and the “comp” that you set up:

    The comparisons of those two homes in TR is incorrect.

    Sierra Sienna is a Broadmoor home, outside of the tract. It’s a Plan 3 with a reasonably large lot and in reasonable shape.

    The other home is a fixer upper in another HOA and inside the loop.

    Homes inside the TR loop are generally larger and more expensive than those outside. Only rebuilt homes (on the outside, only the “Broadmoors” allow second story additions, the rest are forbidden or already built as such) will price top the lower priced homes inside the loop.

    Also, that 800K is a fixer upper. If it were in good shape they’d be asking at least 1MIL.

    So, your statements are incorrect because appraisers will compare like with like.

    (a) the homes are in different areas
    (b) one’s a fixer upper, the other seems OK.

    So the comps for the home in Sierra Sienna should not be affected by the $800K fixer upper.

  17. PadreBrian

    660k and only 1 bath? hahahahahahahahahha hahahahahahahah hahhahahaha

    Good luck sucker! hahahaha

  18. picflight

    This listing really shows how bad we have it here in CA. [url=]Look at this gorgeous home for $460K, look at the pictures.[/url]

    1. tonye

      It’s in Ohio for chrissakes…. you might as well compare Manitoba with Long Island, NY.

      Who cares about a place like that. Just the fuel bill for the riding mower and snow blower will make the difference in mortgage payments.

      1. jhill

        It is not only in Ohio, it is in a suburb of Cleveland, which is a pretty seriously depressed area. The low price for this very attractive home reflects absence of jobs for buyers even at 460K.

    2. Laura Louzader

      picflight, I went to your link and viewed the palace in Ohio for $460K. It only shows how local real estate is, and that you can’t make an apt comparison between the $460K palace in one area and the crapbox condo for the same price in another.

      Fact is, this Ohio palace just might be bubblelicious for the area, for Ohio is one of the most economically depressed areas of the country. I viewed an unbelievably large and elegant vintage condo in Cleveland’s elite old suburb, Shaker Heights, that was priced at $140K for 2200 sq ft of herringbone parquet floors and incredibly beautiful millwork that you can hardly even get now, but just try getting a job in Cleveland. So it’s no use to consider that such an apt. would sell for $500K in Chicago even at current prices.

      You can do still better in Detroit, where you can pick up a luxury suburban home with about 3000 sq ft and incredible architecture, for less than $100K. Detroit is being given away at the rate of about 5 cents on the dollar, and there’s a reason for that- it is a badly failing area with no employment and business opportunities whatsoever, that stands in danger of losing what businesses and jobs it still has.

      So any comparison of property prices between Ohio and Orange County, say, or Detroit and Chicago, will only tell you just how badly one area is suffering economically compared to another.

      ON the other hand.. I believe that once these extremely depressed areas give up any thought of rebuilding dead industries that made them successful in the past but are now gone forever, and rebuild their economies on a different template, that they will experience stunning revivals. If I had huge amounts of money to park for twenty years, I’d buy heavily in Detroit, for I believe that this city, and other trashed midwestern cities, will blossom again as energy becomes more expensive, water transportation regains its importance, and desert cities like Las Vegas and Phoenix become impossible to sustain because of the difficulty and mounting expense of building and maintaining the water diversion projects that make them possible.

  19. John Wheaton

    I’m in “the biz” (22 yrs) and can assure you the appraisal will not hold up. The sales history, the comp killer nature of the last sale in the tract, and other factors will slice the appraisal way down into the 5’s.

    As for down payments, sure you can get 5% down but anyone making a bazillion dollars to qualify for a 5% down, full doc, fully amorizing loan will not be buying this turd of a home at the price the sellers think they can get.

  20. Gemmanager

    Left Cali in 06 and half of 07 because of insane prices here. I got back a year ago this month just in time to see the bloody reversal! Do you know how many arrogant RE agents told me I was priced out 4 ever? I love the payback currently playing out hoorah!. I have a 760 Fico, 10% cash, watching for the bottom like a hawk. Fundamentals always return to the norm eventually.

  21. lawyerliz

    Ok, I guess all of you will jump on me, but I think that we are close to the bottom in Miami-Dade.

    We are now reaching the half-off sale point. I don’t think that all ordinary sellers are realizing it, but we are beginning to see buyers at the half off point. Even in nice neighborhoods like Coral Gables, and the Road area near downtown.

    It may go down another 5%, but on average, I think that will be it. So a 400,000 house at peak will be 200,000, or at 5% less, 190,000.
    If you put 10% down, a lot of people, even here in
    the land of low salaries, can afford that. That is in line will the normal inflationary line as drawn by IR for you guys in California. I sold my nice house for 130 in about 1995. Almost 10,000 square foot lot, 1750 square feet, pool, basically totally gutted after hurricane Andrew, and redone with very nice fixtures, 3/2/2.

    If you assume 4-5% appreciation a year since then, it gets you to about that point.

    This is only SF houses tho. Condos, who knows?
    70% or more off for them.

    My broker buddies who closed shop, but still have their licenses, are referring me some deals. And re-fis! Gosh, have I forgotten by now how to do an institutional loan?

    An officer in the bank branch where I have my escrow account was telling me about all the strict
    “new” standards. They are, of course, the old standards revisited. He was also telling me about a title co, that was negative on their office balance. He wanted to send him a deal, so he could get current, which does contradict what I said above. And how dumb is that? You have somebody who is underwater on the ofc account and you want to send them say a couple hundred grand to finance something and it doesn’t even occur to the branch guy that this is a bad thing, cause the guy’s desperate, and might steal it? To solve a few thou in overdrafts.

    1. Hormiguero

      i’d say that half-off is a good guestimate (though 1/2 of a 2006 dollar may well be more like 1/3 of one in 2010 thanks to inflation).

      when the CA median settles back into the 250-270K range, it will probably be time to buy, and the cost of owning will probably be fairly close to renting.

    2. Woodbury Renter

      check out the article about the smart money renting beautiful S. Florida condos in Friday’s wsj. $2,000 per month to live like a millionaire.

    3. Laura Louzader

      Good to hear from you, lawyerliz.

      I’m watching the condo situation in Miami with beady, greedy eyes, but I’m very afraid. I’m hearing of offers 60% off the ask for glossy new places, but buyers are insisting on contracts that guarantee them against getting hit with extra assessments and utility bills due to so many units in the building in foreclosure and delinquent on these bills.

      My guess is that many of these gleaming new places will sell at 20 cents on the dollar, because of the high risk of being stuck with really high assessments and utility bills, due to the difficulty of collecting them when the place is in foreclosure. A place can accumulate a lot of unpaid assessments before it becomes bank owned, and then there seems to be a large problem in shaking down the banks who are the owners of the foreclosed units, for unpaid assessments needed to cover utilities and maintenance. This risk makes these units appropriate only for well-heeled investors.

      We have a situation similar here in Chicago, in the overbuilt South Loop. Worse, many large South Loop buildings have horrible construction problems such as water infiltration, requiring millions of dollars to correct, thanks to the unspeakable corruption among Chicago city building inspectors, who were signing off on bad buildings in return for $100 bribes.

      One longtime agent here in Chicago says that she expects that units in these buildings will go for 20 cents on the dollar, due to the huge oversupply and number of foreclosures, not to mention the prevalent shoddy construction.

      1. Surfing in Newport

        We vacation a lot in Kauai. We found out that you can rent a timeshare on eBay for the same rate (or less) than what the owners pay in weekly fees. If the idea is to have a nice place where you like to go all the time, then I suggest checking out eBay. We have done this several times for weekly rentals and it’s always worked. If the idea is to get an investment and perhaps a retirement home, just be careful that the fees don’t eat up any potential return.

        BTW, spent two years in Chicago for my Masters. It’s the only livable place in the Midwest. Lot’s of memories of taking the EL to watch the Cubs…and then freezing while drinking a tall one.

        With respect to water infiltration. Be very careful. If it’s an architectural problem, then make sure that they have fixed the architectural/design problem and not just applied better sealing.

        1. Laura Louzader

          Agree that Chicago is currently the only livable place in the Midwest, and it is great. I love old Northern cities, and this is, IMO, the best for most people.

          However, like most major metro areas, the speculation and overbuilding was insane here. The South Loop, for example, was all put into place at once- a newly created neighborhood that used to be a blighted, post-industrial slag heap. Strange thing about these types of neighborhoods that their builders don’t consider and that their sleek plans don’t allow for: the commercial and retail that make city nabes walkable and vibrant. What’s the use of living right next to downtown if you have to drive a mile to get a loaf of bread?
          The South Loop is beautiful and glossy but has the necrotic blandness to it that you associate with really dull, bland, over-planned white-bread suburbs. As for as I’m concerned, it is DOA as a neighborhood and will never retain its value compared to the dense, “messy”, vibrant, varied north neighborhoods.

          And, of course, having a vast oversupply of badly built 50-story condo towers with massive construction problems isn’t going to help it. One developer known for extremely shoddy construction has been permitted to build or rehab 5 buildings in the area, and it is these that have really massive water infiltration problems. You NEVER cure a building of this type of problem, no matter how much money you spend in remediation. At this time, the residents of one large bldg. were just hit with assessments of $50,000 each on average, to pay for about $2.5 million dollars worth of work. It won’t be their last assessment, I feel. The units sold for $500K-$600K, and would now be lucky to sell for $350K if the places were perfect. Now, they could scarcely give them away.

  22. Afro

    Too funny. A bunch of angry renters hoping they can afford a house in 2011. Which is worse – the fact that you didn’t buy a house in the biggest run up in history or that you spend your time on this site with the other losers?

  23. Laura Louzader

    The only thing I feel bad about is having to bail out all the losers who bought in this runup and are now 20 fathoms under and can’t make the payments on their adjustable mortgages.

    Stuff here is quickly rolling back to 2003 prices, and I will make a move when the places I want are at rent-parity.

    I feel bad for the poor losers who bought in 2004-2007, and I can see why 2006 and 2007 vintage mortgages are the worst-performing on record.

    Have fun trying to unload the place you overpaid for during those years.

  24. Lagunalover

    “When prices are declining like they are now, the lender will look at the lowest comparable sales or asking prices to establish the value upon which they will base their loan.”

    IR, I didn’t know that. That’s fascinating info. If lenders look to lowest comp asking prices, then some fancy areas of OC are going to fall quickly based on what I’ve been watching.

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