Monthly Archives: August 2008

We Like Short Shorts

Short Shorts — The Royal Teens

Why are people selling for a loss? Nobody wants to lose money when they sell their house. Many of the sellers we have seen to date put no money down, so they were not losing any money, only their credit score. Lately, I have been seeing more and more sellers who have lost some of their own money. So why are they selling? In the crash of the early 90s many people submerged beneath the debt on their homes. They were unable to sell, and the few that had to sell due to job loss, divorce or other circumstances created the foreclosure problems of the early 90s. However, for as bad as the foreclosures were then, we have already quadrupled the previous peak, and the problem is only getting worse.

I suppose the easy answer to why people are selling is that the owners cannot afford the payments. Many probably still believe real estate is a great investment and all the other kool aid nonsense they believed when they bought the property. Unfortunately, they were unable to hang on long enough to enjoy the benefits of their great purchase. The ones who have capitulated already are the lucky ones in many ways. The disaster is over for them. Now they can go back to living within their means in a rental, and the crushing debt service payments are a distant memory. The owners who have not capitulated yet, the ones who have the means to hang on longer, they are the ones for whom this price collapse will be a major disaster.

Bear markets are self fueling. Once a price decline gains momentum, the “weak hands” are shaken out, and as they are, they sell and drive prices even lower. This puts a new series of owners in distress and creates a downward spiral. The only thing that stops a bear market like this one is capitulation among owners who give up waiting for prices to come back to breakeven, or a new influx of buyers.

Larger numbers of buyers will not enter the market until prices are affordable. This isn’t because it is financially prudent or because people started reading this blog. Once a vicious price decline gets underway, the tightening of credit prevents many buyers from committing financial suicide. Whereas lenders were willing to give anyone $600,000 a few years ago, now they are only willing to give $300,000 to a select few with good jobs and solid credit ratings. The realtor spin about “pent up demand” is complete bull$hit. There is probably a lot of pent up desire for housing, but demand is measured in dollars, and there is a major lack of demand with the absence of lender funds, and a large and growing “pent up supply” of REOs.

I have mentioned a number of times that I believe this fall and winter will see another major leg down in the market. The economic recession will be in full swing. When times are tough and jobs are uncertain, it is not a time when people commit to large purchases like houses. Also, it is becoming increasingly obvious there is strong downward momentum in prices. This is prompting many to put off purchases because prices will be lower later. As the foreclosure problem worsens and more and more loans begin resetting to higher payments, supply will continue to enter the market.

Usually there is a strong seasonal component to inventory. This year we did not get a big inventory spike in the summer. Perhaps it is our “inverted year” and we will see ballooning inventories this fall and winter. There are many REOs that are not listed yet, and these will hit the market eventually. The lenders would have been better served selling them this summer when there was some volume. Now many of these will hit in the fall and winter when few buyers are around. Since this is must-sell inventory, it will push prices lower.

We live in interesting times…

Asking Price: $430,000

Income Requirement: $107,500

Downpayment Needed: $86,000

Monthly Equity Burn: $3,583

Purchase Price: $536,000

Purchase Date: 5/25/2006

Address: 308 Quail Ridge, Irvine, CA 92603

Beds:	2
Baths:	2
Sq. Ft.:	1,450
$/Sq. Ft.:	$297
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2006
Stories:	2 Levels
Area:	Quail Hill
County:	Orange
MLS#:	P609489
Source:	SoCalMLS
Status:	Active
On Redfin:	274 days
Unsold in 90+ days

This is a Short Sale. We have begun the process with the seller and the
bank to get your clients in as quickly as possilbe! Bring Offers for
this Highly Upgraded Desireable open floor plan with Hardwood floors,
Gourmet Kitchen, Stainless Appliances, Breakfast Counter & Formal
Dining. THIS HOME WAS UPGRADED AT THE PURCHASE AND STILL SHOWS NEW!!!
Two Car Garage with Direct Access. Enjoy Award Winning Quail Hill
schools and resort style amenities. Minutes away from shopping,
entertainment, restaurants, Irvine Sprectrum, Business area, Hospitals,
Freeways and the Beach!!! Bring your fussiest buyer. Friendly cat not
included…

Unnecessary Capital Letters… Check.

Three exclamation points… Check.

CAPS LOCK PROBLEM… Check.

Spelling errors… Check. (possilbe, Desireable, Sprectrum)

Gourmet Kitchen… Check.

Lame attempt at humor… Check. (Friendly cat not
included…)

Bogus Clichés… Check. (Highly Upgraded)

This realtor earns an “A” for realtorese.

[adsense-ir}

So what do people do when they actually put a little money down? They start with an asking price that gets their money back.

Listing Price History

Date	Price
Nov 10, 2007	$565,000
May 25, 2008	$500,000
Jul 07, 2008	$450,000
Jul 15, 2008	$430,000

Six months of denial, then two big price drops followed by more market chasing. The asking price is only 20% off the peak, so they will likely have to discount this another 5% to 10% to attract a knife catcher. This will likely bottom between $290,000 and $320,000. It is only two bedrooms, so it may go lower. Only time will tell. Our seller originally paid $536,000 on 5/25/2006. She used a $428,400 first mortgage, a $80,300 HELOC and a $27,300 downpayment. There is no other activity, so the seller is at least out her $27,300 downpayment. It is possible that the HELOC was not tapped for the downpayment, but at some point along the way, it probably was. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $131,800.

Ooh man, dig that crazy chick.

Who wears short shorts
We wear short shorts
They’re such short shorts
We like short shorts
Who wears short shorts
We wear short shorts.

Short Shorts — The Royal Teen

2003 Rollback

Back in Time — Huey Lewis and the News

Today’s rollback is truly impressive, not because it is a great property or a great deal, but because the discount is so severe. The low end of the market is searching for the bottom, and it hasn’t found it yet. What is also interesting about this property is its cost per square foot. At $174/SF, it is the least expensive place in Irvine. This might be expected on a large property over 3,000 SF, but when you see a price like that on a small condo, it is signaling more declines in the market. Smaller units almost always carry a higher price tag on a per square foot basis. From a construction cost perspective this makes sense because the smaller units still have the expensive bathroom and kitchen space and very little of the inexpensive filler.

The low end of the market must find a bottom before the market can stabilize. Without price stabilization there, the move-up market is non-existent, and the substitution effect will eventually pull down the larger, more desirable properties. Someone looking for a two bedroom place might take a smaller property if the price differential is great enough. Is that second bedroom really worth paying double for? Today’s featured property is probably the least desirable property in Irvine. It is old, small, ugly and in need up renovation (although it is a livable rental.) All premiums can be measured off units at the bottom. Properties in Brio may be superior, but would you pay 80% more ($360,000) for a smaller unit there? (2701 Ladrillo Aisle, Irvine, CA 92606) People looking at 1 bedroom properties will not likely pay an 80% premium no matter how much nicer the property might be. As you can see this will put further price pressures on units in Brio, and this will reverberate through the entire chain of move ups. High-end property prices will not hold up with continued price erosion at the bottom of the market. The high end may continue to be populated by a few knife catchers, but as the substitution effect really kicks in, volume will decline further, and the imbalance of supply and demand will create a fragile market. REOs that find the few remaining buyers will finally overwhelm the feeble price support, and the next leg down will begin. Look for it this fall and winter.

145 Pineview Kitchen

Asking Price: $199,900

Income Requirement: $49,975

Downpayment Needed: $39,980

Monthly Equity Burn: $1,666

Purchase Price: $295,000

Purchase Date: 3/26/2004

Address: 145 Pineview, Irvine, CA 92606

Beds:	1
Baths:	1
Sq. Ft.:	1,150
$/Sq. Ft.:	$174
Lot Size:	763 Sq. Ft.
Property Type:	Condominium
Style:	Contemporary
Year Built:	1977
Stories:	2 Levels
View:	Creek/Stream, Lake, Pool, Water
Area:	Northwood
County:	Orange
MLS#:	S543235
Source:	SoCalMLS
Status:	Active
On Redfin:	3 days

Lowest price for this square footage in the city. Unbeliveable
opportunity to own a spacious two story townhome in Irvine for under
$200,000. Previous owner had an extension built out over the living
area which could very easily be converted to a second bedroom or used
as an office/den. This home needs some work, so bring your paintbrush
and tool box. The patio overlooks a beautiful water scene with an
island and lily pads and is quiet and serene. Lower level has pergo
flooring and a wood burning or gas fireplace. There is a full laundry
room on the patio and the home has central air. There is one covered
parking space but ample unlimited street parking a few steps from the
home. No Mello Roos. Complex has two pools and tennis courts. Located
in Northwood close to award winning schools, stores the 405 and 5
freeways and toll roads. We expect this to sell in days at this price
so hurry. Great for a first time buyer or investor.

Unbeliveable?

I would be very concerned about the unpermitted extension…

Great for a first time buyer or investor? Oh, really? It cost these people their good credit, but at least they took a wad of bank cash with them on the way out.

Check out the sales history. This is a 2003 rollback:

Sales History

Date	Price	Appreciation
May 08, 1996	$90,000	—
Oct 26, 2001	$173,500	12.8%/yr
Apr 11, 2003	$215,000	15.9%/yr
Mar 26, 2004	$295,000	39.1%/yr

This is practically a 2001 rollback. Of course, some excited knife catcher will probably bid over the asking price. This may be near rental parity for an owner occupant, but who wants to own and live here? An investor looking for positive cashflow would still bid less than this asking price.

None of this is a concern to today’s owners of course. They bought the place in 2004 with a $236,000 first mortgage, a $44,250 second mortgage, and a $14,750 downpayment. They refinanced in 2005 with a $284,000 first and a $71,000 second leaving a total property debt of $355,000. They got their downpayment back plus an additional $60,000. If this property sells for its asking price, and if a 6% commission is paid, then Master Financial Inc. stands to lose $167,094. That is almost half of their loan balance. Ouch!

Tell me, doctor, where are we going this time
Is this the 50’s, or 1999
All I wanted to do – was play my guitar and sing

So take me away, I don’t mind
But you’d better promise me, I’ll be back in time
Gotta get back in time

Don’t bet your future, on one roll of the dice
Better remember, lightning never strikes twice
Please don’t drive eighty eight, don’t wanna be late again

So take me away, I don’t mind
But you better promise me, I’ll be back in time
Gotta get back in time
Gotta get back in time
Get me back in time

Gotta get back in time
Gotta get back in time
Get back, get back

Get back Marty

Gotta get back in time
Gotta get back in time
Get back, get back

Back in Time — Huey Lewis and the New

Timing Does Matter

Time — Pink Floyd

Whenever someone overpays for real estate, it is justified with platitudes like “if you used conservative financing and stayed within your income, then you will be OK.” Or “If you love the home and you can afford it, everything isn’t about money.” I hope people take comfort with statements like these because the financial cost is much greater than most realize. That is the topic of today’s analysis post: how much is buying at the peak really going to cost?

Today, we will look at two families, the Peakers and the Troughers (gotta love those names, right?) Both families have a combined family income of $150,000 per year, and they have both saved $100,000 they can put toward a downpayment on a house.

It is the Summer of 2006, and each family is looking at a $1,000,000 home. The Peakers think the property is a good deal, so they put their $100,000 down and borrow $900,000 with an adjustable-rate mortgage starting at 6% with a 10-year fixed period followed by a 20 year fully amortized payment at a new interest rate. Their monthly payments are $4,500 a month, but after all of the adjustments for taxes and fees and the other costs of ownership, their total monthly cost of ownership is $6,000 per month. (Please don’t turn the comments into a discussion on the true cost of ownership without reading the linked post.)

The Troughers, on the other hand, made the same calculation and decided that the cost was simply too high. They decided to rent and wait for prices to drop to rental parity. As it turns out, this $1,000,000 home can be rented for $3,000 per month (the cost of ownership was double the cost of rental in the summer of 2006.) In order to make this comparison apples-to-apples, the Troughers have decided that will live the same lifestyle as the Peakers, so they will put $3,000 per month into their downpayment fund while prices are dropping.

Fast forward to 2011: five years later, rents have been increasing at about 4% per year, so the Troughers are now paying $3,500 per month in rent, houses similar to the Peakers are now selling at rental parity which is about $560,000. During this five-year period, the Peakers and the Troughers have enjoyed exactly the same lifestyle: both have had use of a house with similar characteristics, and both have been living on the same amount of disposable income. The Peakers are now $340,000 underwater 5 years into their 10-year fixed term, and they are stressed about what will happen. The Troughers have a mountain of cash, and they are about to buy a home.

The Troughers have accumulated $325,000 in their downpayment fund by adding the rent savings each month and having this compound at 5% interest (the calculations are too cumbersome to post.) The Troughers now buy the comparable house for $560,000 using all of their $325,000 downpayment. This only leaves a $235,000 first mortgage. These Troughers are thrifty people, and in keeping with our all-things-being-equal example, the Troughers are going to continue to put away the same $6,000 a month the house is costing the Peakers. They will put $4,543 toward their mortgage, and the remainder toward other ownership costs. By making this $4,543 monthly payment — something they were used to doing from their 5 years of renting and saving — they will pay off the mortgage completely in 5 years.

Fast forward to 2016: It is now 10 years since the Peakers have purchased, and they still owe $900,000 on the house. Let’s assume they got very lucky, and we quickly inflated another housing bubble that brought the resale value of their home up to $1,000,000 — breakeven. The Peakers are facing a dramatically escalating payment as the 900,000 is about to convert to a fully-amortizing loan over the remaining 20 year term. Their payment will now rise to $6,447. Let’s hope they are making more money to pay for it.

Here we are in 2016, both families have enjoyed the same amount of spending money each month and the same lifestyle (remember the tax benefits are already figured in to the cost of ownership.) The Peakers have a $1,000,000 house on which they owe $900,000. They will either need to make a $6,447 payment or refinance again. The Troughers also own a $1,000,000 house, but their mortgage is completely paid off. Their only cost of ownership is reduced to taxes, insurance and maintenance. Whereas the Peakers are trying to figure out how they are going to make payments, the Troughers suddenly have $4,500 a month extra in their monthly budget, and their net worth is $900,000 higher than the Peakers.

What happens if we do not inflate another bubble, and comparable houses are only worth $800,000? What if interest rates go up to 8% or higher? The Troughers couldn’t care less, they are saving money versus renting, and they have plenty of equity; however, the Peakers are in trouble, and they may lose their home. People who bought at the peak are betting on appreciation, and they are betting against higher interest rates. Not a good bet to make when interest rates are near historic lows and prices relative to fundamental valuations are at unprecedented highs.

You can spin this example any number of ways, no matter how the Troughers save or spend their money, they will come out far, far ahead of the Peakers. They could either enjoy a better lifestyle (no mortgage equity withdrawal for the Peakers,) or save for retirement, or save for their larger downpayment. In the real world, those who did not buy at the peak can balance those options to best suit their needs and wants, the Peakers do not have these options. They are imprisoned in their house. Let’s hope it is a gilded cage.

I would like to thank MalibuRenter for providing the conceptual framework for this post in a comment he made last week. I would also like to publically thank him for the editorial job he did on my upcoming book.

Ticking away the moments that make up a dull day
You fritter and waste the hours in an off hand way
Kicking around on a piece of ground in your home town
Waiting for someone or something to show you the way

Tired of lying in the sunshine staying home to watch the rain
You are young and life is long and there is time to kill today
And then one day you find ten years have got behind you
No one told you when to run, you missed the starting gun

And you run and you run to catch up with the sun, but its sinking
And racing around to come up behind you again
The sun is the same in the relative way, but youre older
Shorter of breath and one day closer to death

Every year is getting shorter, never seem to find the time
Plans that either come to naught or half a page of scribbled lines
Hanging on in quiet desperation is the english way
The time is gone, the song is over, thought Id something more to say

Home, home again
I like to be here when I can
And when I come home cold and tired
Its good to warm my bones beside the fire
Far away across the field
The tolling of the iron bell
Calls the faithful to their knees
To hear the softly spoken magic spells.

Time — Pink Floyd

Open Thread 8-9-2008

Greed Is Good — Gordon Gecko

Sometimes you see a property where the asking price simply cannot be explained as anything other than greed. This weekend’s featured property falls in this category. It has been on the market for 580 days! Do you think they might have been able to lower the price and move it by now? These owners have been very conservative with their mortgage, they have paid it down, and there are no HELOCs. Their asking price gyrations have nothing to do with mortgage conditions or anything other than their desire to double their money in 5-6 years. Their inability to grasp the reality of the market has left them changing their asking price frequently and woefully missing the market. I hope they and their realtor are having a good time because they certainly haven’t done much to sell their house.

Listing Price History

Date	Price
Feb 03, 2007	$939,900
Feb 12, 2007	$924,900
Mar 06, 2007	$919,900
May 02, 2007	$914,900
May 04, 2007	$912,000
Jul 21, 2007	$899,900
Jul 25, 2007	$912,000
Aug 18, 2007	$899,000
Jan 27, 2008	$849,900
Mar 03, 2008	$824,900
Mar 08, 2008	$799,900
Apr 30, 2008	$849,900
Jun 30, 2008	$824,900

Source: SoCalMLS

Their listing price activity reminds me of the Curly Shuffle — two steps forward and one step back.

11 Polllena Kitchen

11 Pollena Irvine, CA 92602

Price:
$824,900

Beds:	4
Baths:	3
Sq. Ft.:	2,478
$/Sq. Ft.:	$333
Lot Size:	1 Sq. Ft.
Property Type:	Single Family Residence
Style:	Traditional
Year Built:	2002
Stories:	2 Levels
Area:	West Irvine
County:	Orange
MLS#:	P554341
Source:	SoCalMLS
Status:	Active
On Redfin:	580 days
Unsold in 90+ days

Beautiful Fieldstone Barrington home located on a cul-de-sac. Nice size
yard w/patio cover/dramatic slate hardscape in back & front
yard/ceiling fans/built-in cabinets in garage/french doors/beautiful
tile floors/full splash in kitchen. Do not miss seeing this home!

Gimme Shelter UPDATE 5

Update 5 — I received word that this property finally closed escrow at $1,300,000. The total loss was $529,000 after a 6% commission. They avoided a short sale, but they lost every penny of their equity. Go tell these owners that real estate always goes up…

Update 4 — The saga continues… This house was relisted again for $1,359,000. The total loss stands at $473,540. After putting $525,400 down, I imagine this seller did not think they would be risking a short sale. Their equity is all but gone…

Update 3 — The price is down to $1,499,000 and still no takers. Total loss stands at $341,940 after commissions.

Update 2 — This house was pulled from the MLS and relisted at $1,549,000. This seller must realize they are a bagholder and they are getting really motivated to save whatever they can of their equity. Right now, if they get their new asking price, they stand to lose $294,940 after a 6% commission.

Update 1 — The asking price on this house just dropped from $1,700,000 to $1,650,000. That is a motivated seller. If today’s seller gets their asking price, they stand to lose $203,000.

Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away

Gimme Shelter — The Rolling Stones

Link to Video

Exhausted buyers, tightening credit, excessive inventory, foreclosures: Is the perfect storm threatening our real estate market? As far as finding shelter goes, you could do far worse than today’s property. It is a high-end house in Woodbury. So far the more expensive stuff in Woodbury has maintained its denial, but lately there have been a few properties showing a true desire for a transaction. Today’s seller has been on the market over 90 days, and they are lowering their price to try to move it.

Old Asking Price: $1,700,000

New Asking Price: $1,650,000

Purchase Price: $1,751,000

Purchase Date: 12/30/2005

Address: 33 Triple Leaf, Irvine, CA 92620

1st Loan $1,225,600
Downpayment $525,400

Beds: 4
Baths: 4.5
Sq. Ft.: 3,750
$/Sq. Ft.: $453
Lot Size: 6,348 sq. ft.
Year Built: 2005
Stories: 2
Type: Single Family Residence
View: Park or Green Belt
County: Orange
Neighborhood: Woodbury
MLS#: S472319
Status: Active
On Redfin: 215 days
Unsold in 90+ days

From Redfin, “The Jewel of Woodbury! Ready to deal. Rich woods on floor, ceilings, p aneling etc. Gorgeous paint schemes, tile designs. All Viking Kitchen, open bright floor plan typical of Juliet’s Balcony homes. Surround sound, huge master bath, all bedrooms are suites. Designer window treatments. Across from a private park. Walk to parks and 6 pools, elementary school, shopping center. Woodbury’s amenities are incredible and the lifestyle resort like.”

If today’s seller gets their asking price, they stand to lose $153,000 in less than two years. They have the equity to absorb the blow, but it must still be quite disheartening.

I like Woodbury. It is at the cutting edge of master plan community design. The amenities are first rate, the architecture and landscaping is attractive, and the community center is inviting. It would be a great place to call home — at much lower prices.

Irvine Housing Blog

Established September 2006