The mortgage statistics out of Riverside County are pretty grim. Will the substitution effect pull prices down here in Irvine?
Irvine Home Address … 40 SALT BUSH Irvine, CA 92603
Resale Home Price …… $4,995,000
And I'm here to remind you
Of the mess you left when you went away
It's not fair to deny me
Of the cross I bear that you gave to me
You, you, you oughta know
And I'm not gonna fade as soon as you close your eyes
And you know it
And every time I scratch my nails down someone else's back
I hope you feel it…well can you feel it
Alanis Morissette — You Oughta Know
How do you feel about the banks?
I am seeing the argument put forward frequently that we need to coddle the banks because if they lose money, we all suffer. Many are suggesting that Individual borrowers should continue to make payments when they are hopelessly underwater and they can rent something much cheaper elsewhere in order to preserve neighborhood property values and prevent the banks from going under. That is rubbish. People don't owe their neighbors or the banks anything.
The lenders created this mess, and they need to experience the consequences of their foolish lending otherwise they will do nothing to learn from their mistakes and prevent doing it again. They loaned too many people too much money under unstable loan terms. They deserve the pain they get. They do not deserve our tax dollars or assistance.
The more I pay attention to this issue the more I become annoyed at the banks. They inflate bubbles with their loans. They create the Ponzis. They enable the squatters. They conspire to keep prices artificially high and keep prudent families out of reasonably priced homes. I have a problem with their behavior and how it impacts all of us.
Copyright © 2010 The Associated Press. All rights reserved.
NEW YORK — California has the best-performing U.S. region in mortgage performance as well as some of the worst, according to a study by Fitch Ratings.
Results of the ratings agency's study of all securitized non-agency California mortgage loans were released Wednesday.
Among the findings, it said the Bay Area region of San Francisco, San Mateo and Redwood City has a 60-day mortgage delinquency rate of just 4 percent. That was No. 1 among the 382 metropolitan statistical areas tracked by Fitch.
Recent price trends have helped. While California home prices are under stress and further declines are likely, San Francisco home prices have increased by 12 percent over the past year.
I don't know the listed markets to comment, but I I do note that it pays to live in neighborhoods with others with 800 FICO scores. The lower the delinquency rate the better the values are holding up; although, the real correlation is to foreclosures: the higher the rate of foreclosure the lower the resulting property values.
Banks stopped foreclosing after they kicked out all the poor, subprime borrowers. The middle- and upper-middle- class borrowers who were given Alt-A loans and Option ARMs have simply been allowed to squat. Lenders have made a conscious decision to allow the Ponzis to squat in cities like Irvine because they know foreclosing on them will reduce prices.
This isn't a story of the rich getting richer… well, that did happen too, but the poor certainly did get poorer. The borrowers given subprime loans all went delinquent like their higher wage earning counterparts in Alt-A and prime borrowing pools, but the subprime crowd was actually foreclosed upon, and values in these areas cratered as expected. Of course, that means those markets have found a market clearing price, and the lives of the people can be rebuilt and go on.
The Alta-A and prime borrowers took out toxic loans like Option ARMs and interest-only financing with low down payments. Despite recent reports to the contrary, toxic loans and low down payment speculation did inflate the housing bubble. The only difference between these neighborhoods and the subprime neighborhoods is the foreclosures. The middle class and the working affluent are being given a pass.
At the other end of the spectrum is the Riverside-San Bernardino-Ontario (Riverside) region, at 367th among all U.S. metro areas with a 60-day delinquency rate of 23 percent.
Nearly one in four borrowers is not paying their mortgage. One in four. Unemployment is not that high. Despite reports that strategic default is a small percentage of delinquencies, how do lenders explain a 23% delinquency rate without strategic default? The people in the land of the dirt people are not stupid. They recognize when the economics favor walking away, and they do.
Ninety percent of Riverside mortgages are now "underwater," Fitch said, and
Only one borrower in nine has any equity in Riverside County. Wow! I guess it pays not to be a loan owner out there….
nearly 60 percent of borrowers owe more than 150 percent of the value of their homes.
It will take forever for house prices to recover enough for these people to survive without scuba gear. They won't even qualify for a principal reduction program because they are too far underwater. This is the primary reason so many strategic defaults are occuring.
Fitch said California mortgage trends are important for both new and existing securities in the rest of the nation, since the state has about 40 percent of overall mortgage origination volume.
What happens in California determines what happens to the banks. It is in the banks best interest to maintain the Ponzi scheme anywhere it hasn't already imploded. You know they must be desperate when their only option is widespread squatting, and they chose that option. Banks typically are not in the business of buying homes for people and letting them live there for nothing. Yet that is what they are doing. The banks bought all these homes at ridiculous prices, allowed Ponzis to move in, and now they are just letting them live there. Amazing.
Riverside County Substitution Effect
Yesterday, I was in south Corona on the terrace of the Retreat Golf Club overlooking the finishing holes and the surrounding real estate development. It is a sea of McMansions of a quality as high as anything in Irvine. Buyers can have a 4,152 SF home with a prime location looking down on a golf green perched on the edge of a lake for under $600,000. There is a price where people say to themselves, "I can get an 1,800 SF condo touching another 1,800 SF condo in Irvine, or I can go get a 4,000 SF McMansion in Corona for the same price." When the disparity gets very high, like it is now, people substitute for the larger home in the less desirable location.
If you want to speculate on where prices will go up in the future, you can bet on the improvements in our traffic corridors. When improvements go in, real estate values go up in the areas serviced by the improvements. A classic example from history is the construction of the Brooklyn Bridge and the impact it had on property values in Brooklyn. The slow ferries that made commuting slow and expensive gave way to speedy and inexpensive land travel.
There is a bottleneck where the 241 meets the 91 that backs up for hours. If you have ever waited in that line, you know the maddening experience of the people who bypass the entire wait and try to cut in at the last minute. The police patrol it heavily, but I am surprised there are not more road-rage shootings at this location. The daily wait at that location is the primary thing preventing more people from living in Riverside County and working in Orange County.
Much of the real estate value in Orange County remains due to this bottleneck because it strongly inhibits the substitution effect. If cars could quickly and efficiently move to and from Orange and Riverside Counties, much of the real estate value would leak out of Orange County to the nearest transportation system locations in Riverside County. Improvement in our transportation system would be great for commerce, but it would almost certainly raise real estate values in Riverside County at the expense of properties in Orange County.
Is the perception of premium self-reinforcing?
Is it possible that areas where prices have not fallen attracts other money that prevents prices from falling? Is there a premium for being premium? If someone had suggested this to me a year ago, I would have laughed, but there certainly are buyers in the market motivated by the apparent flight to quality. The real question is, "are there enough zealot buyers acting on faith instead of math to support the entire market?" We won't know the answer until the foreclosure and delinquencies problems are resolved. I don't think so.
I have one major problem with this idea. One sign of kool aid intoxication is that people bought property simply because prices were going up. People had no idea why prices were going up, but prices were, and this induced more buying which was actually the cause of prices going up. Isn't buying because prices are not going down the same thing? Isn't buying into a market crash in areas that have not crashed yet another manifestation of buying on faith? Isn't that the very essence of kool aid intoxication?
The fact that we may have witnessed a temporary bottom and a bear rally does not mean that the move we are seeing is based on any underlying fundamentals of the market.
Everything about this real estate market move is an illusion. However, many believe we will fake it 'til we make it. I can't argue with that. We might.
I still believe prices will go down as the cartel loses its grip on the market, but I am surprised at the effectiveness of their squatting program. By allowing Ponzis to squat, they are sustaining values and preventing widespread strategic default in many areas. Only time will tell if this fix was a good solution or an enduring one.
Losing $1,619,700 sucks
This is the biggest loss I have seen to date on an Irvine property, and the owner is the one losing the money, not the bank.
- Today's featured property was purchased on 4/3/2007, the eve of the subprime implosion. The owners used a $3,750,000 first mortgage and a $2,565,000 down payment.
- On 8/2/2007 they refinanced with a $3,400,000 first mortgage. They actually paid their mortgage down. They earn an A for mortgage management. I doubt that is much comfort to them.
No mortgage equity withdrawal, and no squatting. This deal has not worked out as well for them as it has for others….
Irvine Home Address … 40 SALT BUSH Irvine, CA 92603
Resale Home Price … $4,995,000
Home Purchase Price … $6,315,000
Home Purchase Date …. 4/3/2007
Net Gain (Loss) ………. $(1,619,700)
Percent Change ………. -20.9%
Annual Appreciation … -7.2%
Cost of Ownership
$4,995,000 ………. Asking Price
$999,000 ………. 20% Down Conventional
5.07% …………… Mortgage Interest Rate
$3,996,000 ………. 30-Year Mortgage
$1,042,522 ………. Income Requirement
$21,623 ………. Monthly Mortgage Payment
$4329 ………. Property Tax
$750 ………. Special Taxes and Levies (Mello Roos)
$416 ………. Homeowners Insurance
$475 ………. Homeowners Association Fees
$27,593 ………. Monthly Cash Outlays
-$2395 ………. Tax Savings (% of Interest and Property Tax)
-$4740 ………. Equity Hidden in Payment
$1981 ………. Lost Income to Down Payment (net of taxes)
$624 ………. Maintenance and Replacement Reserves
$23,064 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$49,950 ………. Furnishing and Move In @1%
$49,950 ………. Closing Costs @1%
$39,960 ………… Interest Points @1% of Loan
$999,000 ………. Down Payment
$1,138,860 ………. Total Cash Costs
$353,500 ………… Emergency Cash Reserves
$1,492,360 ………. Total Savings Needed
Baths: 5 full 2 part baths
Home size: 7,150 sq ft
($699 / sq ft)
Lot Size: 20,150 sq ft
Year Built: 2006
Days on Market: 28
Listing Updated: 40280
MLS Number: U10001628
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Live La Dolce Vita in Shady Canyon at this tremendous Tuscan-inspired estate on one of the enclave's most sought-after oversized lots. Gracing the top of a scenic promontory, the property soaks in panoramic vistas of the verdant hillsides – while also offering the ultimate in privacy at the end of a cul-de-sac with only one neighbor. Encompassing more than 7,100 square feet of relaxed elegance, the estate provides 5 bedrooms and 5 and 2-half baths, including a secluded guest casita. Designed for alfresco living in all seasons, the estate features expansive living 'suites,' where disappearing doors create a seamless transition from indoor to outdoor spaces. A stylish formal living room opens to a sheltered loggia and to the sparkling hillside pool/spa, cabana and sun-drenched dining terrace beyond. Even the lantern-lit entry portico, with its breathtaking reclaimed brick barrel-vaulted gallery, sets the stage for unparalleled entertaining.
These photographs are beautiful.