The school of hard knocks is a costly way to learn about real estate markets. The owners of today’s featured property are learning a very hard lesson as their property has lost 39% of its resale value in just over two years.

Asking Price: $550,000

Address: 5053 Scholarship, Irvine, CA 92612

Schools Out For Summer — Alice Cooper

School’s out for summer
School’s out forever
School’s been blown to pieces

I have been educating people on the workings of residential real estate since I began writing for the IHB more than two years ago. Two of the concepts I focus on are the cashflow valuation of property as its fundamental value and the price appreciation due to irrational exuberance. Any readers who have absorbed these concepts have a framework for understanding the rise and fall of home prices, and they have a reasonable approximation on price levels where the market will stabilize. This is a significant financial advantage of those who speculate and randomly guess where house prices will go next.

Many people who purchased during the bubble had little or no understanding of real estate markets (despite their beliefs to the contrary). Many of the clueless masses are learning very painful lessons from the school of hard knocks. Today’s featured property is one such learning experience.

Asking Price: $550,000

Income Requirement: $137,500

Downpayment Needed: $110,600

Purchase Price: $902,000

Purchase Date: 5/15/2007

Address: 5053 Scholarship, Irvine, CA 92612

WOW!! ALL CAPS AND MULTIPLE EXCLAMATION POINTS!!!

A PLUS PLUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS MINUS

This property was purchased on 5/15/2007 for $902,000. The owners used a $725,000 first mortgage and a $177,000 downpayment. The owners opened a HELOC for $87,700 a few months later. For their sake, I hope they maxed it out.

In the two years that have passed since they made this investment, they have lost every penney they put into the deal and their credit is trashed. All this in only two years; that is a hard knock.

You can just imagine the sale back in 2007, the buyers thought they were savvy real estate investors poised to make a fortune in the new OC high rise. It hasn’t exactly turned out as planned.

Some may look at this and think, “it was the market,” as if there were no indications that this investment might not turn out well. Many people foolishly buy into the narrative without doing the math. They buy a load of bullshit about real estate always goes up, or buying into these new towers where all the foreign investors will buy them later at inflated prices, or any of the fantasies of speculation on appreciation. Narrative does not measure value, it measures gullibility.

Buy the math, not the mythology.

Can real estate serve as a long-term reservoir of value? For the most part, the answer is no.

Asking Price: $690,000

Address: 18 Bayberry Way, Irvine, CA 92612

Agenda Suicide — The Faint

All we want is just pretty little homes,
Our work makes pretty little homes,
Agenda Suicide. The drones work hard before they die
And give up on pretty little homes.

Has anyone paused to think of the ramifications of what happens if prices never become affordable again? What happens if all future generations are priced out forever?

Lately, houses have been purchased by people with large downpayments. With the limited availability of financing–meaning lending based on real incomes and sustainable terms–people are only being allowed to borrow so much money. This new borrowing limit plus the cash reserves people have been putting forward have been sustaining our housing market for the last several months. How long can that go on? Forever?

Can houses become a reservoir of value? Will houses be passed on from generation to generation with each one assuming a massive debt and a mountain of equity? That seems pretty unlikely, particularly given the spendthrift ways of our HELOC abusing populace. As a reservoir of value, houses have proven to be quite leaky.

Someone, somewhere will be financing a home purchase. First time buyers without an inheritance will have an empty reservoir. Therefore, any neighborhoods populated by first-time buyers cannot by their nature be reservoirs of value. Also, area incomes are by far the biggest determinant of long-term property values. Take a look at what is happening in Detroit’s real estate market. Prices are far below replacement costs and in many areas are worth only their salvage value. House prices in these areas depreciate like cars because jobs are leaving the area and incomes are declining. There is no reservoir value in real estate under those conditions.

Even under the influence of irrational exuberance, there comes a point
when house prices reach the absolute limit of prices supportable by
wages. Once this point is reached, prices cannot and will not rise any
faster than the rate of income growth (unless the finance industry
“innovates” again). If appreciation is limited by wage growth, houses
cease to have significant investment value and only serve as an
inflation hedge. Once the illusory investment value disappears, people
will not receive a great rate if return on their investment, and they will not be motivated to overpay for it (owning for $5,000 per month when you can rent for $3,000). The loss of investment incentive over the long term would cause prices to stabilize at rental parity.

Houses in neighborhoods dominated by the working-class will be dominated by local wages. Entry level housing in these neighborhoods cannot be reservoirs of value because first-time buyers do not have sufficient savings to sustain inflated prices. Unique properties in high-end neighborhoods may store some value, but even these properties are subject to the wealth accumulated by would-be homeowners.

Real estate is a cashflow investment and an inflation hedge. Despite claims to the contrary, it is not the road to unlimited wealth and spending power.

Asking Price: $690,000

Income Requirement: $172,250

Downpayment Needed: $137,800

Monthly Equity Burn: $5,742

Purchase Price: $478,000

Purchase Date: 6/26/2002

Address: 18 Bayberry Way, Irvine, CA 92612

resturants? frreway acess?

This property was purchased on 6/26/2002 for $478,000. The owner used a $448,125 first mortgage and a $29,875 downpayment. It looks as if this owner paid down the mortgage! The current debt is only $332,840. If this sells for its current asking price, the owner stands to profit handsomely. Maybe conservative borrowing does pay off after all.

You don’t need a realtor to sell property. If you know how to market and negotiate, you can do most of the work yourself; however, if you are not skilled in these areas, perhaps a little help might be in order.

Asking Price: $440,000

Address: 3 Camphor S, Irvine, CA 92612

Check out an interview with me at Matt Padilla’s blog, Foreclosure is the ‘cure’.

On My Own — Three Days Grace

I walk alone
Think of home
Memories of long ago

Being a listing agent is where the real money is made in real estate. It takes much less time and effort, but it does take some financial risk in property marketing–although most seem to defer to the MLS and the Internet. Good agents are obsessed with obtaining listings because they know that is where the real money is.

The relationship between cost and value is debatable, but what value there is in the work of a good listing agent can be readily identified. In our modern Internet era, there are really only two things an agent needs to do: (1) obtain good property photographs, and (2) write a good property description. Any property that has those two things will sell itself on the MLS through sites like Redfin or the many others that provide MLS search capabilities. Any agent who can not do these two things well really should not get any listings.

Today’s featured property is For Sale By Owner (FSBO). As such he has probably already been contacted by dozens of agents trying to get his listing. He probably should have taken one of them up on their offer.

This property is a complete mystery to me. There is no description, the photo of the front is so bad that I cannot tell which property is for sale, and the photo of the back yard leaves more questions than it answers. This is a perfect example of how not to market a house. The only way this sells is because the inventory in Irvine is so limited that people will do their own research to find any available deal.

{book}

Just for a little fun, let’s see how many problems we can identify with the photos.

• The photo of the front immediately draws your eye to a light pole. WTF?
• It was taken with a fish-eye lens that distorts everything in the picture.
• What s that at the base of the light pole?
• Why is this so out of focus? Was it taken on a camera phone?
• Are those stepping stones in the grass? They do not seem to lead anywhere.
• Don’t the trees make this yard look tiny (it probably is).

Asking Price: $440,000

Income Requirement: $110,000

Downpayment Needed: $88,000

Monthly Equity Burn: $3,667

Purchase Price: $488,000

Purchase Date: 11/16/2004

Address: 3 Camphor S, Irvine, CA 92612

I recogize that most descriptions are a useless waste of words, but give me something….

This property was purchased on 11/16/2004 for $488,000. The ower used a $390,000 first mortgage and a $98,000 downpayment. He refinanced in 2005 and took out most of his downayment with a $388,000 first mortgage and a $97,000 stand alone second.

If this property sells for its asking price–which doesn’t seem very likely–the lender will lose most of the second mortgage.