Little Lies — Fleetwood Mac

Tell me lies
Tell me sweet little lies

Real estate always goes up. I will pay back this loan. Stated Income is OK. The market will recover to peak prices soon. There is a huge pent up demand. They are running out of land. Buy now or be priced out forever.

You all recognize the lies of The Great Housing Bubble. I imagine you could compile a longer list than I can. A great many people believed these lies (and many still do) because they wanted to. As long as prices were going up, any reason to buy seemed like a good one. There is one lie that everyone who buys real estate believes: prices will go up from here. Yes, there are people who claim they know prices will drop further, but nobody who buys think this will be very much or for very long.

I remember reading an article last year where a knife catcher was buying in a suburb of Los Angeles because prices had dropped about 10%. He said in the article that prices might drop 1%, 2% at most. Of course, prices have dropped 30% since then. It has been fascinating to me to watch knife catchers buy properties during this decline. I had always wondered what was going through people’s minds when they bought while prices are dropping. From what I have witnessed, they all believe they are buying the bottom.

Close my, close my, close my eyes

There will come a time when prices are still dropping that I may buy. I will do so because the purchase will save me money versus renting. At that price level, there is another valid economic reason to buy. Appreciation does not matter if a purchase has another economic benefit. Today’s knife catchers do not have that benefit. They are getting the worst of both worlds. They have equity evaporation, and they have a negative cashflow as compared to renting. It takes blind faith in the lies of the bubble and baptismal acceptance of kool aid to buy in this market.

Today’s featured property is actually one of the better deals I have seen. It is still above rental parity, but it is quickly approaching that threshold.

Asking Price: $456,000

Income Requirement: $114,000

Downpayment Needed: $91,200

Monthly Equity Burn: $3,800

Purchase Price: $645,000

Purchase Date: 6/30/2005

Address: 15 Woodland Drive, Irvine, CA 92604

Beds:	3
Baths:	3
Sq. Ft.:	1,655
$/Sq. Ft.:	$276
Lot Size:	2,645 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1976
Stories:	2
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	U8004956
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours) Fixer-upper

ALL CAPS.

When I plug the inputs into the calculator, the cost of ownership comes to about $3,000 a month (the HOA Dues are a killer). I would estimate this would rent for about $2,400 a month, so it is only 20% overvalued. That sounds like a lot, but given that Irvine properties were 100% or more overvalued at the top, this is significant progress.

This house was purchased on 6/30/2005 for $645,000. The owner used a $516,000 first mortgage, a $129,000 second mortgage, and a $0 downpayment (big surprise). If this property sells for its asking price, and if a 6% commission is paid, the lender stands to lose $216,360.

This property is being offered for 29% off its 2005 purchase price. That is a significant discount for a single-family detached house in Irvine.

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}

If I could turn the page
In time then Id rearrange just a day or two
Close my, close my, close my eyes

But I couldnt find a way
So Ill settle for one day to believe in you
Tell me, tell me, tell me lies

No more broken hearts
Were better off apart lets give it a try
Tell me, tell me, tell me lies

Little Lies — Fleetwood Mac

Helena — My Chemical Romance

Everyone is wondering when the market will bottom and at what price. For prices to stabilize, they must reach levels of affordability where people can make the payments with a reasonable percentage of their income. These levels are almost completely dependant upon income and financing terms. During The Great Housing Bubble, credit was very loose, and people were able to finance huge sums based on both their real and imagined income. The only limits to prices were imposed by people’s dreams and their willingness to lie on loan applications.

Now that the loose financing has resulted in unprecedented default rates and foreclosures, lenders are tightening credit in the hope of not losing even more money. The tightening of credit will continue. This will result in a continued decrease in the amounts lenders are willing to loan which in turn will lower the amounts buyers are able to bid. Prices will continue to fall.

The first signs of market stabilization will be when prices reach levels of affordability commensurate with historical norms. Prices are still far elevated from these levels. When we get to the bottom, prices at the low end of the market will stabilize first. The bottom tier of the market is the foundation of market stability. It is not until these prices stabilize and begin to rise that will people have equity to move up to larger homes. People who are buying more expensive properties today are not taking their equity from less expensive properties to finance a move up. There is little no equity in these low-end properties, and their continued price decline is making an equity transfer to a more expensive property much more difficult. The ongoing erosion of the equity positions of low-end properties coupled with tightening financing is going to continue to put pressure on high-end homes.

Many low-end properties in the most beaten down markets are nearing rental parity. There has been a dramatic increase in sales volumes of low-end properties where prices are at rental parity. Those markets are beginning the price stabilization process. The same is not true of Irvine. Our low-end properties still have further to fall as they have not yet reached rental parity for an owner-occupant. Many of the least desirable will likely fall below rental parity to price levels where investors can generate a positive cashflow. In short, we are nowhere near the bottom.

Today’s featured property is a typical low-end foreclosure in Irvine. The buyers used 100% financing about 1 year before the peak, and with prices plummeting and the cost of ownership being double the cost of a similar rental, the owners stopped making payments and allowed the property to go to auction in foreclosure. It is a familiar story, and it is one we will see more of here in Irvine over the next few years.

Asking Price: $439,900

Income Requirement: $109,975

Downpayment Needed: $87,980

Monthly Equity Burn: $3,665

Purchase Price: $605,000

Purchase Date: 7/29/2005

Address: 1 Helena #22, Irvine, CA 92604

I guess I can’t make fun of this description.

This property was purchased on 7/29/2005 for $605,000. The owners used a $484,000 first mortgage, a $121,000 second mortgage, and a $0 downpayment. These owners either could not afford the payments, or they saw little reason to continue making them. The lender bid $484,000 at the foreclosure auction which was the outstanding balance on the first mortgage. This is typical of loss mitigation procedures, although we have been seeing some lenders show a willingness to allow properties to go for less than the amount of the first mortgage. Many lenders feel it is more cost effective to lose a little more at auction than to deal with subsequent property management and sale after a foreclosure.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $191,494.

This property is being offered for 27% off its 2005 sales price.

{book}

Long ago
Just like the hearse you died to get in again
We are so far from you

Came a time
When every starfall brought you to tears again
We are the very hurt you sold
And what’s the worst you take (worst you take)
From every heart you break (heart you break)
And like the blade you stain (blade you stain)
Well I’ll be holding on tonight

Helena — My Chemical Romance