Pay My Debts

Precious Declaration — Collective Soul

There is a group of nervous home sellers who are trying to sell their homes for enough to pay off their mortgages. Some of these were buyers toward the end of the rally that paid too much, and some are owners who bought earlier but mortgaged themselves into the same precarious position. They are wise to try to sell now if they can get enough to pay off their debts and save their credit. Today’s featured property is an owner who extracted much of their equity, but they still have some room to maneuver before they go underwater. In my opinion, there feeble price reductions have not shown the aggressiveness necessary to move this property before the market leaves them underwater, but I guess they don’t want to give it away.

55 Declaration Place Kitchen

Asking Price: $839,000IrvineRenter

Income Requirement: $209,750

Downpayment Needed: $167,800

Monthly Equity Burn: $6,991

Purchase Price: $565,000

Purchase Date: 12/20/2002

Address: 55 Declaration Place, Irvine, CA 92602

Beds: 5
Baths: 3
Sq. Ft.: 2,830
$/Sq. Ft.: $296
Lot Size: 5,000

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Year Built: 1997
Stories: 2 Levels
Area: West Irvine
County: Orange
MLS#: P639612
Source: SoCalMLS
Status: Active
On Redfin: 96 days

Unsold in 90+ days

Gourmet Kitchen Award

West Irvine beauty! Five large spacious bedrooms + a loft upstairs. One
bedroom and one bathroom with shower downstairs. Large back yard and
BBQ. Wood floors in entry, bounus room, stairs, loft, and hallway!
Spacious living and dinning Rms, Large Family Room with Fpl. Gourmet
Kitchen w/Granite Countertops, Center Island, Newer Stainless Sink,
Dishwasher, Cooktop, and a Walk-in Pantry! Huge Master Suite w/Walk-in.
Fresh 2-Toned Paint throughout, Custom Window Coverings and Wood
Shutters and Much more!

Title Case… Again…

Plenty of exclamation points!

The owners of this property refinanced in 2006 with a $752,000 first mortgage. They need to sell this place for $800,000 to pay a 6% commission and break even on the deal.

Listing Price History

Date Price
May 29, 2008 $889,000
Jun 24, 2008 $869,000
Aug 06, 2008 $839,000

I imagine the 5% reduction in asking price seems like a lot to them, but if they don’t sell this summer, they will probably go underwater. It is difficult to feel too sorry for them considering they have already extracted $187,000 plus their downpayment from the property. Perhaps they have this money sitting in an investment account and could pay off the shortfall at closing. Does anyone think this scenario is likely?

When you look at our current inventory of homes, you see that the composition is very different than what is found in a normal, healthy real estate market. Usually, the number of distressed properties (REOs, short sales and nearly short sales) is very low. In appreciating market conditions, the distressed properties sell quickly, and the vast majority of sellers can get at or above their asking prices because they don’t need to sell. The amount of distressed inventory becomes a larger percentage of the market, sellers become more aggressive (at least the ones who can) and prices stop appreciating. When the percentage of distressed properties gets very high, prices go down. This is what we are seeing now. It becomes a negative feedback loop as price declines distresses more properties which drives prices down even more. Today’s seller would not be distressed if prices had not fallen to close to their breakeven price. They need to sell now because prices are dropping and they probably have difficulty affording the very large mortgage they now have (It is possible their household income rose 70% since 2002, but I doubt it). This is the downward spiral playing out one property at a time.


Hitched a ride to the peaceful side of town
Then proceeded where thieves were no longer found
Cant crash now Ive been waiting for this
Wont crash now I found some encouragement
Precious declaration reads
Yours is yours and mine you leave alone now
Precious declaration says
I believe all hope is dead no longer

New meanings to the words I feed upon
Wake within my veins elements of freedom
Cant break now Ive been living for this
Wont break now Im cleansed with hopefulness
Precious declaration reads
Yours is yours and mine you leave alone now
Precious declaration says
I believe all hope is dead no longer

Once I jumped thru hoops of fire
As high and far as you required
I was blind but now I see
Salvation has discovered me

Precious Declaration
— Collective Soul

33 thoughts on “Pay My Debts

      1. rkp

        Perhaps time to write an analysis post. I would like you to pick 10 properties that sold for over $800K in Irvine in the last 2 months randomly and describe what their mortgages looked like. Basically, lets try to understand who the current buyers are and what kinds of downpayments they are bringing.

    1. trrenter

      Here is the listing off of the remax site. I am finding that site more reliable then Redfin lately. Not as user friendly though.

      I am noticing something strange with Redfin lately. Properties popping up then disappearing then popping up again. The listing time doesn’t reflect it was ever taken off so it isn’t the take it off then put it back on to show it as a new listing.

  1. AZDavidPhx

    Oh boyeh – west Irvine Beauty MmmmHmmm!

    Comes with hallway and BBQ for the low price of 3/4 MILL-ION dollars!

    SUBMIT today!

  2. Larrygg

    It’s just one of many examples of house that will not sell anytime soon. Or at least sell for anywhere the wishing price. Face it, $850K homes are a dime a dozen (does that make sense?) and there are not enough qualified buyers to go around so many will just sit. And the bank owned ones will drop in price till they reach the plateau where people can afford. And the rest of the homes in the area will follow them into the abyss. I’m sure the listed home is very nice, but unfornately if they really want to attract a buyer they will have to drop the price another 10 or 15%. Or hang on for 3 to 5 years.

  3. yzf600

    So I’m over here Atlanta, trying to unload my town home I bought in 2001 ($132k). It was our 1st house, we used a 100% VA loan (thank you Uncle Sam). After 3 years, our family grew and we need a bigger place, so we offered up the home and got a lease purchase. We are now living in a nice single family home with a fixed rate 1st and fixed rate 2nd mortgage. Thank god I listened to my dad and got the fixed rate.

    Long story short (2 lease/purchases fell through), the house is back on the market, for $3k less than what we paid in 2001. Town home prices have dropped 14% from Jan this year alone. I have come to terms with the fact that the VA loan fee we rolled into the mortgage won’t ever be recovered. This real estate market is really painful.

    I’ve got enough cash from the last least purchase to cover a few more months of payments, but after that, I’m out.

    My wife joked that we should open a home equity loan and max it out, then mail in the keys. We’re not really that kinda people, though. Instead we will live by the right thing to do and either be forced to cough up $5-10k at closing for someone to take the property off our hands, or go into foreclosure. This really sucks.

    Does anyone think a foreclosure on my credit would look that bad?

  4. SoOCOwner

    Question to seller – What on earth did you do with the money from your HELOC? Did you:

    a) spend it on upgrades to your property
    b) invest it
    c) blow it on frivolous material goods
    d) other (please explain)

    We really want to know.

    1. Chris

      Ok, I’ll bite.

      Back in ’04, my brother and I used our HELOC from our house to buy a condo in Irvine for investment.

      So the answer to your question is b).

        1. Chris

          Yes, luckily we sold the property back in summer ’06. My brother was going to renew the lease for 2 years but I adamantly opposed to it. I saw the drop coming 🙂

    1. Walter

      This looks like the same “Amazon goes to $400” Henry Blodget I remember from the dot com days that penned this article.

      Sounds like he is older a wiser. I hope he is right. Question is, do we go back to the + 1 standard-deviation of the pre-bubble years, or get an undershoot of the mean. An undershoot would make the percentage drops truly eye popping. Almost a repeat of what Japan went through in their last big RE crash.

  5. Crayz

    I’d like to thank everyone for their advice on a Columbus Grove home yesterday. It helped me re-evaluate my decision.

    The 2 HOAs combined were $420/month.

    The real estate taxes for last year (with an estimated value of $775K) was $18K or $1500/month.

    That’s almost $2K every month that doesn’t go towards the mortgage.

    1. ockurt

      Crayz, if you’re looking in that area Westpark across the street is much nicer. Most of the homes are already 10 yrs old but it’s away from major street noise and not built on a superfund site…

  6. Ron

    You may already know this, but what you are describing is a positive feedback loop. Negative feedback loops serve to keep a system in equilibrium (mean reversion) On a larger scale, the housing market does have a negative feedback loop where higher prices move more buyers out of the system and serve to lower prices, bringing them into equilibrium and lower prices bring more buyers in causing prices to rise. This results in a long term equilibrium. But at a higher level of granularity, we see booms and busts in property markets. The bubble psychology phenomenon that you are referring to is a positive feedback loop, where the outcome is magnified on each iteration. Prices spiral out of control based on speculative demand as future appreciation is priced into current markets. This happens until an inflection point is reached (usually credit exhaustion) and then prices begin spiraling downward as future depreciation is priced into current markets.

    1. IrvineRenter

      If I am following you correctly, the negative feedback loop is the phenomenon described by efficient markets theory where prices drop due to a lack of buying interest at inflated prices — mean reversion. The positive feedback loop from behavioral economics is witnessed both in the rally and the decline where the price-to-price feedback is positively reinforcing. I called it a negative feedback loop because prices were dropping, but if I am reading your explanation correctly, the current feedback loop is positive even though prices are moving in a negative direction.

      1. Alan

        Correct – negative feedback tends towards damping out variations, whether they are up or down, leading to a stable or at least slowly changing system. Positive feedback tends to reinforce the variations (again, whatever their direction), promoting very rapid and large changes.

    2. Red

      Nice observation, thats what I had been thinking also; home prices were normally a mildly unstable system with oscillations due to the variations in the economy. The big damping factor was downpayments and interest rates. The introduction of zero down and teaser rate loans completely removed the stabilization from the system, leaving only the positive feedback of the change in value of the home, thus the system becomes hugely unstable.
      As long as prices were going up fast enough there was no price high enough, the more expensive the home the more money to be made. Now, on the downside, you can add the value loss to ownership costs and compare that to renting and even at rental parity you can’t afford to buy. This could drive the value of homes far below rental parity.
      Even with prices stable at rental parity the cost of buying and selling a home, perhaps 8% of the home value total, are greater than a entire years rent. If most people move about every seven years, that would drive the home value under rental parity by about 14%.

    3. HydroCabron

      But why call the maximum price point an inflection point? Why not call it a maximum, or a peak?

      An inflection point occurs when the rate of growth turns from increasing to decreasing, or from decreasing to increasing. Put another way, it’s when the graph changes concavity, which has nothing to do with whether it’s at a maximum or minimum.

  7. Ron

    Also, just noticed that, according to RedFin, this listing has gone off the market. Must be all the publicity here 😉 BTW, sorry for being so nitpicky, I figure that you probably know the difference, but other readers may not and I think it is a concept worth learning about. I read your blog all the time, although I rarely comment.

    Keep up the good work.

  8. Beinformed

    To answer the question “what did they do with the HELOC?” The majority of the people that cashed out their equity on their home used the money to pay off their credit cards. They used their home like a piggy bank. I personally know at least 3 couples that did this, the crazy thing about this is that as soon as they paid off the credit card, they started to run it up again! Interesting note: credit card companies are now reporting that people are defaulting on their credit cards! If you don’t have a job and you are maxed out on your card, and bills are pilling up, what do you do? File for bankruptcy? well in the past yes, but now with the implementation of the new laws it is not as easy as it use to be, you are still on the hook for what you owe. Bye Bye good credit!

    1. SoOCOwner

      Yes, spending can be as addictive as drugs or alcohol for some folks. I can’t imagine how these people put any money aside for retirement. I guess they don’t. Very frightening.

      1. Genius

        Very few of my friends (we’re all fairly young; 20’s – early 30’s) have ANY savings; they all live paycheck to paycheck. Actually, most are underwater if you take into account loans / credit cards. Most of them make six figures. Makes me wonder where all of these down payments are going to come from. Maybe my friends are just more fiscally retarded than the majority, but I doubt that’s the case.

        The party’s just getting started imho. What goes around comes around.

        1. zotmecula

          Same thing here – all of my friends (mid 20’s) think it’s amazing I have anything saved up (a modest amount). It really isn’t that hard, and I still enjoy a new TV and video games every now and then. I just a) save for things I want and b) refuse to pay interest on consumer debt. It’s hard to save when you’re paying $500/mo in interest servicing a debt that you incurred 8 years ago. Debt == savings to them. Sad, sad, sad.

  9. George8

    It looks like the owners are chasing the market down. It does not look like they will get it this year to cover their mortgage balance.

  10. Bitter Renter

    Hey, nice choice of song, IR. Collective Soul is underappreciated, I think, and is IMHO one of the few rock bands to come out in the 90s whose music has aged well.

    Not sure what the deal is with the fan collage Harry Potter fake poster thingy (?), but I like it. (Hermione’s purty. :cheese:)

Comments are closed.