Power Poker

Could the Irvine Company play “Power Poker” with our local housing market and support prices at inflated levels?

53 Carver   Irvine, CA 92620  inside

Asking Price: $699,000

Address: 53 Carver Irvine, CA 92620



I am the menace in your eyes
The one you cant escape
Your life falls in my grasp
Your know your end is near

I tear your flesh to shreds
Burn holes throughout your mind
Your eyes now filled with blood
A victim of my force
In endless agony
You realize your defeat
Recite my masters chants

Show No Mercy
— Slayer

Have you ever watched the World Poker Tour? I used to watch it often. I remember one tournament where a single player had a significant chip lead over the others at the table. A big chip advantage allows players to overpower their opponents by forcing them to go “all in” just to be able to play. In the event I was watching, the chip leader used a stone cold bluff to force out opponents on a number of occasions. Sometimes the threat of power is power.

Ben Bernanke, the current Federal Reserve Board Chairman, knows how to run a bluff. In his 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here, he presented the “helicopter drop” bluff as a way to bully financial markets.

The conclusion that deflation is always reversible under a fiat money
system follows from basic economic reasoning. A little parable may
prove useful: Today an ounce of gold sells for $300, more or less. Now
suppose that a modern alchemist solves his subject’s oldest problem by
finding a way to produce unlimited amounts of new gold at essentially
no cost. Moreover, his invention is widely publicized and
scientifically verified, and he announces his intention to begin
massive production of gold within days. What would happen to the price
of gold? Presumably, the potentially unlimited supply of cheap gold
would cause the market price of gold to plummet. Indeed, if the market
for gold is to any degree efficient, the price of gold would collapse
immediately after the announcement of the invention, before the
alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars
have value only to the extent that they are strictly limited in supply.
But the U.S. government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to produce as many
U.S. dollars as it wishes at essentially no cost. By increasing the
number of U.S. dollars in circulation, or even by credibly threatening
to do so
, the U.S. government can also reduce the value of a dollar in
terms of goods and services, which is equivalent to raising the prices
in dollars of those goods and services. We conclude that, under a
paper-money system, a determined government can always generate higher
spending and hence positive inflation.

Notice that the threat of printing money has just as much effect as actually doing it. It is Power Poker Federal Reserve style.

Power Poker Irvine Style

So what does power poker have to do with our local housing market? We all know there is one big player with many chips in the Irvine housing market: The Irvine Company. They have full control (within political constraints) of the type, quantity, location and price of new homes in Irvine, they have enormous holdings of entitled land the value of which is strongly influenced by the activities of the resale market, and they have large amounts of cash being constantly generated from their income properties and ongoing operations. In short, they are in a position to play power poker.

Imagine what would happen if the Irvine Company decided to form a vulture fund to buy Irvine REOs. The Irvine Company has the cash to acquire every REO in Irvine, and they have the management company to rent out these properties and hold them off the for-sale market until prices recover. If the Irvine Company formed a fund and decided that all REO will be purchased at auction for $300/SF, they could buy all the REO and prevent an REO tsunami from washing away the value of their extensive holdings.

There are 75,815 dwelling units in Irvine, many of which are apartments. I can’t find the exact number, but there are around 45,000 houses and condos owned by regular people about one in ten of which are defaulting on their mortgages, and about one in three homes are owned with no mortgage. For the sake of running a simple calculation, let’s say that 3,000 Irvine homes will go through the process and become REO before the Great Housing Bubble has run its course.

If 3,000 homes go through foreclosure at an average price of $400,000, it would require $1,200,000,000 to buy them all. That would be a great deal of money to spend if the Irvine Company wanted to buy all the REO, but this is where Power Poker comes in — they don’t actually have to buy the REOs, they just need to credibly threaten to do so, and the market would change.

What would happen if the Irvine Company said it would buy all REOs at auction for $300/SF?

  • If investors believed TIC was serious, many speculators would step forward and buy these properties for $301/SF believing they are backstopped by TIC.
  • Many underwater homeowners would stay and pay rather than walking away because they believe their property values are being supported. This would serve to lower default rates by cutting back on ruthless defaults.
  • Buyers would no longer believe prices would fall further, and they would stop waiting for future price declines.

The combination of these factors would make it unnecessary for the Irvine Company to actually spend $1,200,000,000 to buy the REO; in fact, if the bluff is successful, they may not have to spend anything at all.

As a renter waiting to buy in Irvine, I do not want to see the Irvine Company do this. If I were a homeowner, I would not feel the same way. Of course, there is a risk that the gambit would fail, and the Irvine Company would buy $800,000,000 worth or real estate for $1,200,000,000, but there is also the possibility that prices will hold at $300/SF or above. As I demonstrated in Land Value 101 the value of the Irvine Company holdings are strongly impacted by the value of homes in the resale market. A $1,200,000 bluff may serve to preserve $12,000,000,000 in property value.

53 Carver   Irvine, CA 92620  inside

Asking Price: $699,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Purchase Price: $800,000

Purchase Date: 9/14/2004

Address: 53 Carver Irvine, CA 92620

Beds: 7
Baths: 3
Sq. Ft.: 2,770
$/Sq. Ft.: $252
Lot Size: 4,750

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Stories: 2
Year Built: 1979
Community: Northwood
County: Orange
MLS#: S584525
Source: SoCalMLS
Status: Active
On Redfin: 2 days

Perfect Home For Large Family Within The Best Area Of Irvine. Modified
Plan With Up To 7 Bedrooms. Built In Outdoor Spa. Close To Shopping And
Schools. Don’t Miss This One It Will Sell Fast.

What did they do? finish off the attic?

This property was purchased for $800,000 on 9/14/2004 (which is amazing to me). The owners used a $640,000 first mortgage and a $160,000 downpayment. On 11/18/2005 they refinanced with a $714,750 first mortgage and a $142,950 stand-alone second. The total property debt is $857,700 plus accumulated missed payments. The owners borrowed themselves into oblivion, and they began defaulting back in early 2007:

Foreclosure Record
Recording Date: 07/09/2009
Document Type: Notice of Default
Document #: 2009000364972

Foreclosure Record
Recording Date: 11/12/2008
Document Type: Notice of Rescission
Document #: 2008000530065

Foreclosure Record
Recording Date: 01/04/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000006033

Foreclosure Record
Recording Date: 10/01/2007
Document Type: Notice of Rescission
Document #: 2007000592079

Foreclosure Record
Recording Date: 09/27/2007
Document Type: Notice of Default
Document #: 2007000586776

Foreclosure Record
Recording Date: 05/23/2007
Document Type: Notice of Default
Document #: 2007000334839

This house has been in default as long as I have been writing for the IHB. It looks as if they have received two loan modifications, and they still can’t make the payments. Obviously, the lender was in no hurry to take this one back. The owners are now working on three years without a consistent mortgage payment, so they are also happy with the status quo.

If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $200,640.

Who is going to buy this 7-bedroom house? The Brady’s?

50 thoughts on “Power Poker

  1. MalibuRenter

    We looked at an open house this weekend, and commented that the house was quite big for two people.

    The realtor noted that a nearby 21,000 square foot house on 10 acres had sold recently, to a single man with no children.

    1. MalibuRenter

      It’s THIS house:

      The beautiful Preston Hollow estate of Joyce and Larry Lacerte closed yesterday, opening a new chapter for one of Dallas’ largest homes that has entertained scores of dignitaries and raised millions for Dallas charities. The seller’s agent, Ralph Randall of Dave Perry-Miller, an Ebby Halliday Company, is likely depositing his commission check(s) at several Dallas banks to ensure FDIC coverage. The 26,620 square foot home is set on almost 9 acres of land in the honeypot of Old Preston Hollow. The estate was constructed circa 1991-1993 by a team including architect Cole Smith, Smith/Ekblad & Associates, Sherry Hayslip-Smith, Hayslip Design Associates and Cole Smith, Jr., Crowbar Contractors. It contains a racquetball court, exercise room and locker rooms adjacent to a near Olympic-sized natatorium, bowling alley, wine cellar with tasting room, an Orangerie conservatory overlooking interlocking Koi ponds loaded with about a million dollars worth of Koi, tennis court, baseball diamond and a private lake. Ralph Randall now rules as the high priest of Dallas’ most expensive real estate. Agent to the John Muse family, he participated in the sale of the most expensive home in Highland Park when he helped John and Lyn acquire their lot at 4800 Preston Road, and Ralph has now sold the most expensive home in Old Preston Hollow to date.

      From what I hear, 5313 Park Lane was originally listed last year for $45 million, recently lowered to just under $40 million. ( Zillow had it “zestimated” at $26,063,000.) According to my sources, it sold for about $30 million-ish, and the buyer, Kelsey Warren, asked for an outside appraisal.


      1. IrvineRenter

        “and the buyer, Kelsey Warren, asked for an outside appraisal.”

        When you are that wealthy, and you are bidding all-cash for a $30,000,000 property, why are you getting an appraisal? What is the appraiser going to tell you? It isn’t like there are useful comps or lenders writing Option ARMs with 100% financing. You are the one and only buyer for a property like that. It is worth whatever you and the owner agree that it is worth.

      2. HydroCabron

        I was chortling derisively until they mentioned the natatorium. Then I grew somber and respectful. I take a home with a natatorium very, very seriously.

      3. tonye

        No shit! I think Larry is my tax accountant’s brother.

        If I’m right, from what I’ve heard all of these years, Larry is not hurting for money. He was an early tax software entrepeneur and sold his company for beaucoup d’argent

  2. Journeyman

    When all is said and done it may be necessary for TIC to buy all the REOs AND erect a fence around Irvine because saving Irvine will not save Sacramento or Detroit or Cleveland or …

  3. no_vaseline

    What would the cleaning bill look like for a 21,000 house? I had a 40×60 shop one time, somebody I knew built a 60’x80′ and even though it was twice as big as mine, it didn’t really have any more “workable space”.

    Having played in several thousand poker tournaments (not the $10,000 buy in ones) if you accumulate enough chips to cover most of the field, you simply move in every hand you wish to see to showdown. You need to adjust your hand range slightly for who is in the blinds (if the players are loose and call frequently you need to be more careful), but most of the time you can ship it in there with any pair, any suited connector, or any random two cards Q7 or higher.

  4. IrvineRealtor

    Just remember, no_vas: hooks are for fish…

    [b]Updated MLS Irvine Closed Sales through [color=red]July 2009[/color][/b] at [b][url=http://irvinerealtorsite.com/]www.irvinerealtorsite.com[/url][/b].
    (previous years are at tabs at the bottom)

    – I show 188 closings for July, resale (6.06/day).
    – Mortgage info has been updated through May. Still averaging 44% down payments.
    – July median price for Irvine is in at $550K, back down from $580K in June.

    As a refresher:
    [b]Yellow[/b] is still unconfirmed (no data reported yet)
    [b]Blue[/b] is “suspicious” even though it is recorded.
    [b]Green[/b] is confirmed.

    Closed lease info has been updated through July, as well. 265 leases, again holding firm at $1.55/sqft. average.

    Some additional floorplans have been added (all of Westpark I and II) and placeholders for the rest are in…
    I hope to get one or two neighborhoods added this month.

    Thank you,

    1. Geotpf

      Hmm. Redfin has the average sold $/sq ft at $324 for all of Irvine, condos and houses. Divide that by $1.55 and you get a GRM of 209-still way too high.

    2. NOT

      Sir, when I click on “Foreclosures Search” I don’t get what one would hope (I am using FireFox).

      PS: Thank you for this!

    3. QualityPicks

      Thanks Scott, Wow 44% down. This to me is an important fact that tells me you need to have a substantial amount of cash to be able to buy anything semi-decent in Irvine. No average Joe can afford something here. You need to have $200k in cash and make over $140k a year if you want to buy a detached home 🙂 Wow, it is amazing how many of those buyers we have.

      I have personally thrown-in the towel. It seems I will forever rent since I think it will take me 20 years or so before I can save $200k. At that time, I will not want to put all of it down to buy a home. I guess I’m one of those making the minimum wage of $120k x yr here in Irvine, destined to forever rent. I don’t complain that much though, as right now it saves me money to rent.

  5. Will

    Off topic – but several large Class A office buildings in Irvine are going “back to the lender” soon. The new owners will acquire these properties at a lower cost than competing buildings, with lower debt payments, so they will be able to offer lower rents and get tenants from other buildings to move. Of course, the market is about 20% vacant so it will take a while for things to work out. Still, it’s an iinteresting development.

    1. MRexpert

      here’s an excerpt on bloomberg today about office bldgs in irvine, for the full text, see link below


      Maguire Properties Inc., the largest office landlord in downtown Los Angeles, said its second-quarter loss widened as it wrote down the value of seven properties it’s planning to relinquish to lenders …………. Maguire’s decision is a sign that landlords in Southern California’s overleveraged office market can no longer make payments and may be forced to abandon properties…..“It does highlight the credit problems associated with recent vintage CMBS loans and a trend in borrower behavior to increasingly walk away,” said Barclays Capital Research analysts Aaron Bryson and Tee Yong Chew in a research note today…….Maguire paid $2.88 billion in 2007 for 24 office properties and 11 development sites. The purchase, from Blackstone Group, encompassed all of the real estate in downtown Los Angeles and Orange County that Blackstone acquired in its acquisition of billionaire Sam Zell’s Equity Office Properties Trust. The subsequent credit-market freeze blocked Maguire’s plans to refinance. The seven properties are: Stadium Towers Plaza in Anaheim; Park Place I and II in Irvine; 2600 Michelson in Irvine; Pacific Arts Plaza in Costa Mesa; 500 Orange Tower in Orange; and 550 S. Hope in Los Angeles. Six of the seven buildings are located in Orange County, formerly headquarters to some of the nation’s biggest subprime mortgage lenders including New Century Financial Corp. and Ameriquest Mortgage Co…..

      and here’s the link to update1


  6. IrvineRenter

    Thank you for the update.

    “Mortgage info has been updated through May. Still averaging 44% down payments.”

    The influx of cash to close deals at elevated prices is remarkable. If it is foreign cash buyers that are causing this, it would not be without historic precedence:


    As Rich Toscano noted in Dumb Money, “Far from being a positive fundamental, a sudden excess of foreign participation in an asset market is indicative of ill-informed speculative money at work. When the foreigners really start piling on, it’s always a good sign that the end of the bubble is nigh.”

    Once the support of the FCBs is exhausted — which it will be — prices will resume their declines.

  7. awgee

    True regarding the Fed because they have a monopoly on money printing, but TIC has no such monopoly. TIC has to compete. TIC has to compete with every other house for sale in Orange County.

    1. WaitingToBuyByAndBy

      If I understand him, IrvineRenter is not suggesting TIC must acquire the properties, but threaten to acquire the properties.

      For example, how much would a house go for at auction if you were the only buyer that showed up?

      How much would the same house go for at the same auction if you and another person showed up?

      Finally, how much would the same house go for at the same auction if the other person was Thurston Howell III?

      The other party doesn’t even need to buy if your bid keeps the sale price in an acceptable price range.

      Personally, I see TIC as a development company, not a land baron.

      1. WaitingToBuyByAndBy

        Sorry, Awgee. I think there is a disconnect here.

        I’m referring to IrvineRenter’s portrayal of TIC as a possible competitor in the home-buying process.

        I get the feeling you are referring to something else.

    2. Anonymous

      Agreed, you only have a monopoly if you have a unique product.
      There are quite a few good school districts in LA/Orange county to compete with …

  8. Kelja

    Compelling argument for the company to take a stand and guarantee or backstop the Irvine market. But it could only work if Irvine was a true island of specialness. At some point, buyers have to ask as values drop further in areas outside Irvine, whether the premium they pay to stay is worth it.

    1. bigmoneysalsa

      Yes, exactly right. Eventually organic resale prices would fall below $300 / sf because of competition from the rest of Southern California. Without REOs that will take longer but it will still happen. Still, IrvineRenter’s idea is very interesting and I wouldn’t put it past the Irvine Company to give it a try if they had enough market power to actually stand a chance of succeeding.

    2. Craig

      Good point. Even a monopolist (like the Irvine Company) can only jack up (or prop up) prices to the point where people start noticing the substantially lower prices for nearly-as-attractive alternatives. Prospective Irvine house buyers may consider Irvine special, but not infinitely more special than Lake Forest, or Mission Viejo, or Tustin, etc.

    1. Gemina13

      The house is twice the size of my apartment, yet their living room is the same size as mine. I’m also wondering if one of those bedrooms is inside the stairwell.

        1. CA

          i’m doing the math…my college dorm room was probably bigger than those bedrooms (~145sq ft for a single) assuming >285sq ft for living room/kitchen/bathroom.

          1. Geotpf

            I suspect there might be unpermitted additions that they are counting as bedrooms but not as added square footage.

            However, three bedroom houses with between 900 and 1,200 square feet are incredibly common in Riverside. There are probably twenty or thirty thousand, or more, of them inside city limits, more if you count houses that were originally that size but were expanded over the years.

            The existance of so many small detached houses makes the condo market here completely dead. Why buy a condo when you can buy a SFR for not much more?

  9. IrvineRenter

    Rental parity analysis is going mainstream:

    A new way of looking at home prices

    Although California home prices have dropped dramatically in the last couple of years as the state experienced a wave of foreclosures and distressed properties flooded the market, coastal regions of the state still have relatively high prices that will discourage renters from buying, a new national housing survey indicates.

    However, inland regions, where home prices have dropped more dramatically, have edged into the area of relative affordability.

    The report was released by the Washington-based Center for Economic and Policy Research and the National Low Income Housing Coalition. It delves into the interrelationship of rents to purchase costs. It concentrates on what it calls “bubble markets” in which the costs of owning a home far outweigh those of renting, several of which are in California.

    The study is based on an assumed “equilibrium level” of 15-to-1 – the ratio being a home’s cost and the rental income it could generate. Thus, a $150,000 that could rent for $10,000 a year is said to be in equilibrium. Any ratio above 15-to-1 is deemed inflated. In cities with those higher ratios, the report contends, renters are less likely to take the plunge into ownership.

    San Jose is the least attractive market for renters at 29.4-to-1, even though declining home prices have dropped it from 35-to-1 in the past year. The study also lists the San Francisco-Oakland area (23.7-to-1) and Los Angeles-Long Beach (21.5-to-1) among the metropolitan areas with particularly high ratios, as well as San Diego (19.3-to-1), and Ventura (20-to-1).

    However, the study also found that several inland regions of California, where home prices have plummeted, have dropped into the theoretically affordable range, including Riverside-San Bernardino (13.7-to-1), Bakersfield (14.7-to-1), Modesto (15-to-1) and Stockton (14.2-to-1). Fresno almost made the cut at 15.8-to-1.

    The narrowing of the gap in Stockton, from 24.7-to-1 in 2008, is especially dramatic, reflecting its status as ground zero for the housing market collapse in California. The Sacramento region also dropped dramatically, from 24-to-1 to 18.1, but is still considered to be inflated. The report makes this comment about the capital area:

    “In Sacramento, CA, under both sets of assumptions the homebuyer who purchases a home remains in negative territory four years out…. While the situation is bad under the status quo assumptions (a deficit of $22,919) under the alternative assumptions the accumulated liability is $57,446. The day when the homeowner is above water, owning a home that is worth more than the loan balance, is much further off.”

    Coincidentally, the Census Bureau released a new report on housing, indicating that while California added 1.1 million homes, apartments and other units of housing between 2000 and 2007, the growth of 9 percent was more than a full percentage point lower than the national average of housing expansion, 10.4 percent.

    No California county was to be found in the list of the nation’s 100 hottest housing growth markets, which were concentrated in Sunbelt states.

    The full housing affordability report is available here while the Census Bureau report can be found here.

    1. Geotpf

      15 to 1 seems reasonable, maybe even high. Going back to the GRM I computed above, Irvine would be a 17.4 to 1, which is actually better than I would have thought.

    2. freedomCM

      The writer clearly does not understand anything, just based on this:

      “San Jose is the least attractive market for renters at 29.4-to-1,”

      That is the most attractive market to be a renter in.

      1. WaitingToBuyByAndBy

        The author could have worded that better. I think the author meant this:

        “San Jose is the least attractive market for renters [to become homeowners] at 29.4-to-1”

        The author appears to be making the argument IrvineRenter has been making all along: there comes a point at which it is cheaper to buy a home than to continue paying rent, and at that point it obviously makes sense to buy.

        San Jose has clearly not reached that point yet.

    3. Anonymous

      Does that hold at the higher end? Out of curiousity, tried this with some recent leases from irvinerealtorsite.com, looks like the high end has bigger disparity between the mythical rental equivalent and recent sales prices than the lower end in Irvine

      For example (note: these are mythical prices using the 15 times annual rent noted in IrvineRenters newspaper link above)

      326 Quail Rdg (2 bd, 2 ba, 1656 sq. ft) just rented for $2350/mo which is $2350 x 12 x 15 = $423,000 or$255/sq. ft.

      36 Paperwhite (4 bd, 3 ba, 1840 sq. ft.) which rented for $3000/mo which is $3000 x 12 x 15 = $540,000 or $293/sq. ft.

      47 Momento (4 bd, 3.5 ba 4200 sq. ft. Vicara ) in Quail Hill rented for $5500/mo is $5500 x 12 x 15 = $990,000

      27 Charity in Turtle Rock in the Concordia tract (6 bd, 4 ba, 3200 sq. ft.) just rented for $3950 which would be $3950 x 12 x 15 = $711,000 which is $222 sq. ft.

      40 VIllager in Northpark – (4 bd, 2 ba, 3240 sq. ft.) rented for $4000/mo is $4000 x12x15 = $720,000

      65 Secret Gdn (5 bd, 4 ba, 3100 sq. ft.) in Northwood rented for $4300/mo is $4300 x 12 x 15 = $774,000

      1. newbie2008

        For a cash flow investor, the interest is much higher than an owner occupied property. With declining house prices, there should be a deprecation built into the formula. The traditional 100 to 120 net rent seems more appropriate (8.3 to 10 x yearly net rents). Seems low in the Irvine market, but it applies in most of the rest of the country.

    4. thrifty

      comparing the two calculations available on your (very useful) rent vs ownulator:
      a purchase price of 500k yields a breakeven with rent of $3100. However, a rent of $3100 yields a purchase price of only $400K. Why the difference?

      1. IrvineRenter

        When we developed the calculator, we could not run an iterative calculation, so we used a percentage to manually adjust back and forth between renting and owning. The percentage changes with the inputs. This is particularly noticeable on properties with very high mello roos and HOAs. When a high percentage of the cost of ownership goes to mello roos and HOAs, values drop significantly.

        We are going to replace this calculator with an interactive online spreadsheet soon.

        1. thrifty

          Thanks. I find the various line items in your “ownulator” very helpful in calculating the cost of not only owning but investing for income in a given property, particularly condos. It hits nearly all the individual expenses excepting mello roos which are not common in the areas I’m interested in. I hope your revised calculator will not lose those helpful inputs nor be too cumbersome for “back of napkin” calculations like the present one. Perhaps you could continue offering the present ones in addition to the new if the spreadsheet will be substantially more in depth.

  10. newbie2008

    For TIC to really benefit as WS, GS, etc. has benefited from say stocks, TIC would need to rumor that the floor is near the current level ($320 psf). Then quickly dump inventory at the current level or above (quickly buy before price go up). They or a friend can buy a few to lend creditablity to the market. Then after the inventory is old, the the market collapses to under $120 psf, TIC et al. can buy on the cheap. Works on stocks with a cheaper selling/buying cost, but should work with housing if the purchased can be levelaged. I’m not saying TIC would do this, but it would be an interesting play. For one to do this, they would need alot of juice.

    1. Sue in Irvine

      They had to cut down the living room to make a few of the “up to 7 bedrooms”. I bet there’s one behind the orange wall and the fireplace.

      1. Craig

        That’s not a fireplace — that’s one of the “up to seven” bedrooms. You do have a small child, don’t you?

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