Sweet Baby James — James Taylor

The low end of the market collapsed first while the mid- and high-end of the market dropped at a slower rate. There is still a great deal of denial at the high end, but now the mid range is starting to break down. I have profiled a number of properties in the $600,000 to the $1,000,000 range that are showing significant price drops from the peak. The collapse is working its way up the food chain.

The first sign of a troubled real estate market is a dramatic reduction in volume known as buyer exhaustion. There are simply not enough buyers able or willing to push prices any higher even at the lower transaction volumes. In a residential real estate market, this phenomenon is particularly pronounced at the entry level. The imbalance between supply and demand first becomes apparent at the bottom of the affordability scale with entry-level buyers because these buyers are not bringing the profits from a previous sale with them to the next property. Affordability is less of a problem for existing homeowners in the move-up market due to this equity transfer.

The real estate market can be visualized as a massive pyramid. There are very few multi-million dollar properties at the top of the pyramid, and a large number of relatively inexpensive entry-level properties forming the base. Like any structure, if the foundation is weakened, the structure may collapse. In the same way, housing markets collapse from the bottom up due to problems with affordability. The foundation of a residential real estate market is the entry-level buyer. Entry-level buyers are generally young people starting to form new households. When homeowners want to sell their house and move up to a nicer one, someone needs to buy their house. If you follow this chain of move-ups backward, eventually you come to an entry level buyer. If there are no entry level buyers pushing the sequence of move ups, the entire real estate market ceases to function.

Today’s featured property is one of the move-up type properties in one of Irvine’s most desirable neighborhoods: Turtle Ridge. We have not seen much distress in this neighborhood to date as knife catchers have been quick to gobble up any property coming on the market at a discount. The WTF prices at the high end are still living on healthy doses of kool aid. If (I should say when) more properties like today’s enter the market, the bough might break, and down will come prices, Turtle Ridge and all.

Asking Price: $849,000

Income Requirement: $212,250

Downpayment Needed: $169,800

Monthly Equity Burn: $7,075

Purchase Price: $985,000

Purchase Date: 5/24/2006

Address: 49 Bower Tree, Irvine, CA 92603

gurde? moulding?

This house was purchased on 5/24/2006 almost at the peak of the bubble for $985,000. The owners used a $738,750 first mortgage and a $246,250 downpayment. They are trying to sell while they still have some equity left. We are starting to see more properties with 10% and 20% downpayments enter the market.

If this house sells for its asking price, and if a 6% commission is paid, the owners stand to lose $186,940. Ouch!

This house is offered for 14% off its peak purchase price.

{book}

There is a young cowboy he lives on the range
His horse and his cattle are his only companions
He works in the saddle and he sleeps in the canyons
Waiting for summer, his pastures to change

(chorus)
Goodnight you moonlight ladies
Rockabye sweet baby james
Deep greens and blues are the colors I choose
Wont you let me go down in my dreams
And rockabye sweet baby james

Sweet Baby James — James Taylor

Building a Mystery — Sarah McLachlan

In sales, it is an effective technique to build mystery. Entice a prospective buyer with how great a product is, and often times he will purchase just to satisfy his own curiosity. If any of you have stopped by the web page for my book, you probably noticed it reads like one of those cheesy sales pages littering the web. Apparently, these pages are effective, or you wouldn’t see so many of them. Or perhaps, I have read too many realtor descriptions…

Today’s listing agent has come up with a fantastic way to market this property through building mystery. Look at the picture below. You don’t have to refresh your browser, the gray is not going to disappear. That is really the picture that was put on the MLS. Notice the MLS logo in the corner. Don’t you wonder what the property looks like? Aren’t you waiting for the gray to disappear so you can see the rest of the house? Maybe you should contact the realtor and schedule a showing. It might be the most attractive front elevation in Irvine. Or not.

Asking Price: $619,000

Income Requirement: $154,750

Downpayment Needed: $123,800

Monthly Equity Burn: $5,158

Purchase Price: $745,000

Purchase Date: 5/31/2006

Address: 7 Hickory, Irvine, CA 92614

Separate?

oversized side yard? Is it 12′ wide rather than 10′ wide? When the adjacent walls are taller than the space is wide, it doesn’t feel or look particularly “oversized.”

Priced to sell! We will see.

Most of the properties I profile are already underwater, and usually it is the bank that is losing a great deal of money. Today’s property is a bit different. The property was purchased on 5/31/2006, right at the peak, for $745,000. The owner used a $521,500 ARM, and a $223,500 downpayment. He refinanced into an Option ARM on 5/4/2007 also for $521,500.

Look at the situation these owners are in. They are not underwater yet, but they have a toxic loan, and property values are declining. I find it interesting that they are trying to sell. I believe most homeowers in their position would hang on to the property and try to wait out the market. Perhaps they must sell to relocate, or perhaps there was a job loss. I don’t know. It is possible they see the trajectory of prices and believe they must sell now to stop from losing even more money. Most readers of this blog believe that to be true, but based on the activity we have been seeing, it appears the buying public does not share our view. Regardless of their motivations, they are now bargaining to see how much of their downpayment they will recover. It must be an agonizing position to be in. Most people in their circumstances would price over the market and chase it down to an even larger loss.

If this property sells for its asking price, and if a 6% commission is paid, the total loss of the owner’s equity will be $163,140. This would allow them to escape with $60,360 minus the negative amortization on the loan. This is priced 20% off the peak, and in Woodbridge, we have seen properties selling at an even larger discount. They may get lucky and find a knife catcher at this price, or they may not. They may end up losing all the money they put into the deal. They probably wish they would have taken out a HELOC…

I hope you have enjoyed this 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.

🙂

{book}

You come out at night
That’s when the energy comes
And the dark side’s light
And the vampires roam
You strut your rasta wear
And your suicide poem
And a cross from a faith that died
Before Jesus came
You’re building a mystery

Cause you’re working
Building a mystery
Holding on and holding it in
Yeah you’re working
Building a mystery
And choosing so carefully

Building a Mystery — Sarah McLachlan