Thank You — Dido

Declining markets are very difficult on builders, and it is not for the reasons you might think. Production homebuilders make their money on sales volume and not on margin. They would rather see stable prices and high volumes than periods of booms and busts. As I described in detail in the post Land Value 101, production builders can adjust to different price points as long as there is demand above their cost of production. The vast majority of the gain or loss in house prices falls to land value. In a price bust like we are seeing now, price of houses may drop 40%, but the price of land may drop 85%. The mistake many of the builders made, which is the same mistake they make in every cycle, is that they become land speculators buying land early in the production process. As they are doing their improvements, land values increase, so they make some extra on the land deal — as long as prices go up. When a bust occurs, builders get caught with inventory of both land and houses. It is the land inventory that really wipes them out (think Lennar.) The bottom line is that builders are flexible, and they can adjust to any price level where prices exceed their production costs. The real challenge for builders is during the adjustment when prices are falling.

House prices in speculative markets (California and some others) do not respond to price changes like one would expect. When prices decline, sales volume also declines because people expect further price declines, and they do not want to lose their equity. Anyone who is not kool aid intoxicated becomes hesitant to buy in a falling market — as they should. This is the real problem for homebuilders because theirs is a volume business. The more they lower price to attract buyers, the more buyers are frightened and expect further price declines. It is a downward spiral. Every time a prospective buyers goes into a sales office, they will be told there are no further price reductions and they need to buy now. Of course, further price reductions happen, and the builders lose credibility and buyers become even more hesitant. As we have discussed before, prices will continue to decline until affordability returns to the market, and it makes sense to buy again.

Today’s featured property is a classic example of what happens to people who buy from a builder in a declining market. These people bought at the peak, and now they are looking at a $200,000 loss for their troubles.

There are no property pictures today, but this is the street of models.

Asking Price: $699,900

Income Requirement: $174,975

Downpayment Needed: $139,980

Monthly Equity Burn: $5,832

Purchase Price: $939,000

Purchase Date: 12/19/2006

Address: 21 Conservancy, Irvine, CA 92618

ENJOY THE GENTLE BREEZES AND CITY LIGHTS FROM THIS BEAUTIFUL TURN-KEY
HOME IN LOVELY PORTOLA SPRINGS. MANY UPGRADED AMENITIES, GRANITE
COUNTERTOPS, CUSTOM PAINTS THROUGHOUT. VERY PRIVATE BACK AND SIDE
YARDS. DESIRABLE CORNER LOT LOCATION. SHOW YOUR FUSSIEST BUYERS. FORMAL
DINING ROOM, LIVING ROOM W/FIREPLACE. PRIVATE BALCONY OFF MASTER SUITE.
WALK TO ASSOC. POOL/SPA. CLOSE TO SHOPPING,RESTAURANTS.

GENTLE BREEZES? This is Portola Springs. You are more likely to feel the Santa Ana’s rolling out of the hills than the cool ocean air.

UPGRADED AMENITIES? Upgraded from what? This is a new home.

VERY PRIVATE BACK AND SIDE
YARDS. Does this mean your neighbor cannot look into your back yard from their second story windows like the rest of Irvine?

When these people bought the property, they probably did not think prices would ever fall. They were probably assured by the builder it would never happen, and until recently it was the policy of the landowner not to lower prices, so these people probably felt protected. Unfortunately, the market is not controlled by builders or The Irvine Company, so prices did fall after sales volumes fell to near zero. As prices fall, those who bought at the peak are watching whatever equity they had evaporate, and it serves as a lesson to current buyers to beware. Of course, this is exactly what the builders do not want. They want people to rush in and buy now that prices are lower. The casualties in the neighborhood like today’s sellers show why this is such a daunting problem.

Sold property: 15 Arrowhead, Irvine, CA 92618, $768,000

Builder offering: 46 Conservancy, Irvine, CA 92618, $799,000

Builder offering: 48 Conservancy, Irvine, CA 92618, $768,000

If this property sells for its asking price and a 6% commission is paid, the total loss on the property would be $281,094. That is a lot of money to lose in a year and a half. The buyer put 20% down ($187,800) which is all gone, and American Home Mortgage Corporation is going to lose the rest.

Prices are still too high. Expect further price reductions.

I want to share a story with you today. I recently spoke with a couple who knows who I am and that I write for this blog (There are people who know. Hi Vicstah.) This couple told me there were on the verge of buying a property like this one in Portola Springs in late 2006, and they were going to utilize a sizeable downpayment. Once they started reading the IHB, they decided against the purchase. They thanked me for saving them their downpayment, their credit and their sanity. That is why I write for this blog. So far I have been lucky, but some day there may be repercussions for this hobby. Whatever happens, knowing that I have saved many people from financial and emotional hardship makes it all worthwhile. I will never regret it.

Thank you, thank you all for reading this blog and spreading the word.

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 weekend.

🙂

.

My tea’s gone cold, I’m wondering why
I got out of bed at all
The morning rain clouds up my window
and I can’t see at all
And even if I could it’d all be grey,
but your picture on my wall
It reminds me that it’s not so bad,
it’s not so bad

I want to thank you
for giving me the best day of my life
Oh just to be with you
is having the best day of my life

Thank You — Dido

Sittin’ on a Fence — The Rolling Stones

We have profiled informal neighborhood cartels where a group of neighbors get together and set WTF asking prices. As with all cartels, they are unstable arrangements because each participant has an incentive to cheat at the expense of the others. Today’s featured property was one of two neighboring properties asking WTF prices. One of the two decided it was time to sell and lowered his price accordingly. The neighbor has got to be really angry as not just will the neighbor sell first, it will also set a comparable price that will make it nearly impossible for the other property to get its asking price. We are not talking about $5,000 or even $50,000, we are talking about $500,000!

Asking Price: $1,299,900

Income Requirement: $324,975

Downpayment Needed: $259,980

Monthly Equity Burn: $10,832

Purchase Price: $1,668,000

Purchase Date: 4/5/2006

Address: 9 Paso Robles, Irvine, CA 92602

Beds:	4
Baths:	5
Sq. Ft.:	4,335
$/Sq. Ft.:	$300
Lot Size:	7,020 Sq. Ft.
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	2001
Stories:	2 Levels
Area:	Northpark
County:	Orange
MLS#:	S521077
Source:	SoCalMLS
Status:	Active
On Redfin:	123 days
Unsold in 90+ days

Guard gared community? enterance? Gourment? seperate? tanden?

3 car tanden, Gym room or office. That could be read “tan den, gym room, or office.” It would be cool to have your own tanning bed den.

I am starting to wonder if realtors believe poor spelling and schizophrenic use of punctuation is a positive. It does make their listings stand out. If realtors believe all publicity is good publicity, they should continue writing like that so we will bring attention to their listings. Perhaps they do not mind that we ridicule them.

Wow! It comes with a Butler’s Pantry. I hope I get to use that graphic again 😉

This is a seller who knows how to lower his price to reach the market:

At the rate he is lowering the price, the property will sell in about 10 years. Based on the equity burn the market is dropping $11,000 to $18,000 a month. The $60,000 price drops will get there eventually, but since the market is at least $500,000 below his asking price today, it will take a very long time to catch up. Plus, if you remember the post Financing in a Declining Market, the new comparable sale will limit the financing. In short, for someone to buy 15 Paso Robles for asking price, they will need about $800,000 cash.

For the record, if the featured property sells for its asking price, and if they pay a 6% commission, the total loss on the property will be $446,094. It looks as if the owner is going to take a significant equity loss. There is a refinance for $1,334,000, but I see no other HELOCs or second mortgages. Of the $446,094 total loss, $334,000 came out of the owner’s pocket. I guess the WAMU can breathe easy, they will only lose $112,094 on this one.

When you see losses like that, does it inspire you to keep sitting on the fence? The knife catcher that buys this place will probably lose a similar amount. With those dollar figures, they really are a chainsaw catcher…

.

Since i was young i’ve been very hard to please
And i don’t know wrong from right
But there is one thing i could never understand
Some of the sick things that a girl does to a man, so
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
All of my friends at school grew up and settled down
And they mortgaged up their lives
One things not said too much, but I think it’s true
They just get married cause there’s nothing else to do, so
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
The day can come when you get old and sick and tired of life
You just never realize
Maybe the choice you made wasn’t really right
But you go out and you don’t come back at night, so
i’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence

Sittin’ on a Fence — The Rolling Stone