Emergence of Shadow Inventory to Push Prices Lower in 2011: Altos Research, Fiserv

Prices are due to take a double dip in 2011. Will that finally signal it is time to buy?

Marquee at Park Place at Night

Irvine Home Address … 3131 MICHELSON Dr #306 Irvine, CA 92612

Resale Home Price …… $274,900

Another turning point

A fork stuck in the road

Time grabs you by the wrist

directs you where to go.

So make the best of this test

and don't ask why.

It's not a question

But a lesson learned in time.

It's something unpredictable

but in the end it's right.

I hope you had the time of your life.

Green Day — Time of Your Life

I originally projected that house prices would fall more and that they would bottom in 2011. With the government manipulation of mortgage rates and the plethora of incentives, it doesn't appear that prices will fall as much as I thought. It has also likely delayed the bottom until 2012 or even later depending on interest rates. However, timing the bottom tick isn't necessary to find compelling reasons to buy property. If prices move lower in 2011 and interest rates remain low, payment affordability will make houses cost less than competing rentals. For those who plan to own for the long term and who are willing to become landlords if they need to move, 2011's lower prices may provide conditions that warrant buying rather than remaining a renter.

Shadow Inventory to Push 2011 Home Prices Lower than '09: Altos Research

Friday, July 30th, 2010, 8:55 am — Jon Prior

House prices will continue to drop through the rest of the year and will begin 2011 lower than they were in 2009, according to a webinar hosted by Scott Sambucci, vice president of data analytics for Altos Research.

The culprit behind the forecast is the weight of the shadow inventory of homes yet to hit the market. But, Sambucci said, anyone who generalizes the size and length of time it takes to clear the shadow inventory will be wrong.

“The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.”

Other firms have released estimates of the national shadow inventory and the general time it could take to clear it.

According to Morgan Stanley, the shadow inventory of foreclosures could top 7m properties and take nearly four years to clear. The credit rating agency, Standard & Poor’s, put the total aggregate balance of the shadow inventory at $480bn worth of loans and would take nearly three years to clear.

I have noted a more concerted effort among clueless realtors to dismiss the idea of shadow inventory. Some of this is due to a misunderstanding of exactly what shadow inventory is. Shadow inventory is composed of delinquent loanowners — those home-occupying squatters who are not paying their mortgage — that have not yet been served a notice by their lender to begin foreclosure proceedings. Since cure rates are so low, these represent a shadow inventory because these properties don't show up in foreclosure lists yet almost all of these people will end up as distressed sales, either by short sale or foreclosure. I have to wonder if some of these local realtors think Morgan Stanley, Standard & Poors, Barclays Capital, and numerous other market watchers are simply making this stuff up.

I agree with the statement above that anyone who generalizes the time it takes to clear this market will be wrong — they will all be too optimistic. It will take much longer than any of these parties estimate. Have you seen anyone be overly pessimistic about the problems in housing to date?

Barclays Capital reported that it could peak at 4.7m in the summer of 2010. The research firm, Capital Economics, said the shadow inventory could reach 5.5m by the end of 2011.

According to Altos Research, the 20-city composite price index, which measures home prices on a rolling 90-day scale, bottomed in 2009 because of the shadow inventory, whatever the estimate.

That is the same point I have made over and over again. We are experiencing a false bottom because banks stopped foreclosing on people. These foreclosures are distressed inventory that must come to the market and be cleared. Perhaps delaying the clearing process and trickling them over time is in their best interest, assuming the cartel can maintain some pricing support. No matter the reason, it is likely that prices will fall again once this inventory is pushed through the system.

It rose to a peak in July 2009 and fell to where it is now in July 2010 (see graph below). Sambucci said it should drop below the 2009 bottom and start at a new low in 2011 before rising back up to the same levels seen in 2010.

But that was a general forecast, and specific markets behave differently. Recovery times can even differ at the ZIP code level within metropolitan statistical areas (MSAs). His example was Sacramento, thought to be one of the MSAs worst hit by the subprime mortgage crisis. Sambucci took a closer look.

Altos looked at three areas within the Sacramento MSA: Carmichael, Rancho Cordova, and Davis. In Carmichael (the black line in the graph below), prices actually increased at the end of 2008 while prices in Davis (brown line) dropped slightly to peak later at the end of 2009. Rancho Cordova (green line) prices ended 2008 at its bottom and has slowly climbed since.

Going forward, the recovery times have shifted. Prices in Carmichael plummeted in the fall of 2009 and began its recovery there. Prices in Davis are still falling and have dropped below its two neighbors. The key, Sambucci said is for analysts to find those inflection points when inventory and pricing levels change and begin to trend. From these points, inventories will continue in whatever direction they're pointing, whether it be moving up or moving down.

“The shadow inventory in each market,” he said, “has momentum.”

The lending cartel will have varying degrees of success in different markets. In markets where there are smaller number of delinquent borrowers relative to the number of homes, there will be less pressure on pricing, and the cartel may hold together. However, in areas with large numbers of foreclosures and delinquent borrowers, there will be a stronger incentive for the cartel members to cheat and liquidate their properties into what little demand remains.

Fiserv projects 4.9% decline in house prices over next 12 months

* by Diana Golobay

* 11:38 AM July 29, 2010

Fiserv, financial services technology provider, found that national average house prices rose 2% in Q110 from a year before, but predicted a drop in prices is coming.

The overall increase — the first yearly gain since 2006 — is driven by a few local markets, and prices look to continue to fall overall in the year to come.

Fiserv projects that single-family house prices are likely to fall another 4.9% over the next 12 months as tight economic circumstances continue. Continued high unemployment and a large number of distressed properties remaining in markets like Florida, Arizona and Nevada are weighing on the housing market.

Steep house price declines are anticipated to continue in hardest-hit markets. For example, average prices in Nevada, Arizona and Florida are expected to fall 11.1%, 10.8% and 8.8%, respectively, from Q110 to Q111.

“The stabilization of residential real estate markets will take many years as buyers and sellers try to find price levels that clear large inventories of vacant homes from the market,” said Fiserv chief economist David Stiff. “Consequently, we expect to see prices bounce up and down around their lows for the next two to three years, especially in markets that experienced the largest home prices bubbles.”

I don't know why California wasn't on this list giving how massive the housing bubble was here.

Stiff added: “This will result in alternating bouts of optimism and pessimism regarding the housing market recovery, similar to what we have seen for the economy as a whole. This will make it difficult to know exactly when the housing market has reached its bottom.”

The projections are based on the Fiserv Case-Shiller Indexes, which found that single-family house prices rose an average 2% in Q110 over the previous-year quarter. It marked the first yearly gain since 2006.

Strong price increases in markets like the San Francisco Bay Area and Washington DC drove the overall increase. On a local basis, however, prices were down in 303 of the 384 metro areas studied for the index.

The largest yearly gains in house prices occurred in lower-priced segments of metro markets — which Fiserv said indicated the recent rebound in prices can be traced to the first-time homebuyer tax credit’s effect on demand.

“Although part of the rebound in the less expensive market segment is due to improving affordability, it is likely the rising sales volumes and prices of low-priced homes were mostly due to the tax credit,” Stiff said. “When the tax credit expires, sales activity for low-priced homes will drop causing a moderate decline in overall home prices.”

Stiff previously noted that buyer optimism likely drove gains in 40% of the metros in Q409.

The latest Standard & Poor’s (S&P)/Case-Shiller House Price Index (HPI) found that house prices in 20 major metropolitan areas rose 1.3% in May from April and 4.6% from a year earlier.

I suppose you could call the government efforts to stimulate market demand a limited success. It put in a false bottom and stopped the freefall of prices nationwide. Perhaps by stopping the momentum of the price declines it gave both buyers and lenders confidence to re-enter the market. Of course, with the widespread declines that will follow now that these stimuli are gone, those people who optimistically bought "the bottom" with the government props will see values drop below their entry point, and they too will feel trapped for several years. Let's hope they are saving money versus a rental.

The time to buy is coming

My writing has been labeled as doom and gloom by my detractors who think I only write about the negative to sensationalize and draw readers. The fact is that I merely call them as I see them. For the realtors whose livelihood depends on creating false urgency in buyers, my message has not been well received. Obviously, I couldn't care less.

Despite my pessimism about future pricing, we are approaching a time when buying may be the right choice for many people. At the end of last year, I made a list of caveats as to why people may not want to buy now. It included the following: " it is a good time to buy when it is cheaper to own than to rent, and it is during a period of no direct government manipulation through tax credits, mortgage interest rate manipulation, and so on."

In many areas even in Orange County, you can find nice single-family detached homes for less than rental parity. California still maintains a credit, but the federal government's tax credits incentive has expired, and the Federal Reserve's program of buying down interest rates is over. In short, the primary conditions I mentioned to hold off buying have been met.

The remaining reasons to consider renting over buying is the presence of shadow inventory and historically low interest rates. However, there is no way of knowing how long these conditions will persist. Interest rates will likely go back up soon, and that will contribute to pricing pressure as we will have a first-time buyer dominated market for the foreseeable future. Interest rates will have a major impact on future resale value, and it likely won't be positive. How long will you wait for interest rates to rise in order to lower pricing? It may take a while. Also, shadow inventory will be with us for a very long time. Are you willing to wait another four or five years for that to clear? I don't know if I am that patient, and being someone who isn't buying for appreciation, I don't need to be.

To me, the housing bubble was easy to spot for one simple reason: you couldn't rent out a house for enough to cover the cost of ownership with stable financing. There was no viable plan B. Once prices drop to rental parity, that is no longer true. If you bought a home today at or below rental parity, and you had to move 3 years from now, you probably couldn't sell it for a profit, but you could always rent it out and not lose any money. That is a viable plan B. Being a landlord isn't for everyone, but it does provide an avenue of escape for those who have to move when their properties are worth less than they paid.

If prices take another leg down this fall and winter — an outcome that seems more and more likely — and if interest rates remain low, we will start to see many properties trading at or below rental parity in Irvine. I will still tell people not to buy because they worry about being priced out or because they think they can make money on resale because neither of those outcomes will happen. However, for those who plan to stay for the long term who wouldn't mind being a landlord if they needed to move, payment affordability has value. I have advised people to Use FHA Financing because Loan Assumption is the Appreciation of the Twenty-Teens.

For those who have been reading this blog for almost four years and waited patiently for a cautious green light, your time may soon be at hand. I won't be calling a bottom. I will merely be reporting on conditions as they are and warning people of the risks they face just as I always have. As affordability improves, the risks lessen, and the premium for ownership changes to a premium for renting — which is where it should be. Once it starts costing me significantly more each month to rent than to own, don't expect me to stay a renter very long. We aren't there yet, but we may be soon enough.

How to lose money flipping in Irvine

I was asked recently if I had seen any losing property flips purchased at trustee sale. I had not. However, I knew that despite the discount at auction, if a bidder does not accurately estimate the resale value, losing is a very real possibility. So I set out to find a loser in Irvine. I only had to look at the North Korea towers to find one. What a surprise.

These condos are purely a cash market. I don't know this for certain, but I doubt there are any lenders willing to give a loan in there. The HOA delinquency rate must be very high, so the GSEs won' touch this place. And since cashflow values to investors is around $225,000, there isn't much reason for a cash buyer to pick up these units. Of course that doesn't stop the occasional foolish speculator from trying. Based on my previous posts on this property, it isn't a stretch for me to say that I would not have purchased a flip in this tower.

The original owner paid $759,000 for this black hole on 3/27/2006. He used a $607,200 first mortgage, a $151,800 HELOC, and a $0 down payment. It is possible that he put money down and didn't use the HELOC, but what would you guess he did?

The NOD was filed in January which means he was delinquent by September 2009, but you have to think he was delinquent much earlier than that and was part of shadow inventory. Do you think he continued to make payments on the mortgages and his HOA dues when it was obvious his speculative flip he bought with no money down was not working out? I rather doubt he made any payments since 2008, but I have no way to know.

In any case, a flipper bought this beauty at auction on 5/21/2010 for $300,469. I don't know if he incurred any sales expenses or if he had to pay much in back taxes, but you have to guess his cost is closer to $315,000. With his current $274,900 asking price, he is certainly going to lose money — probably a lot of it.

Marquee at Park Place at Night

Home Address … 3131 MICHELSON Dr #306 Irvine, CA 92612

Resale Home Price … $274,900

Home Purchase Price … $300,469

Home Purchase Date …. 5/21/2010

Net Gain (Loss) ………. $(42,063)

Percent Change ………. -14.0%

Annual Appreciation … -35.1%

Cost of Ownership


$274,900 ………. Asking Price

$9,622 ………. 3.5% Down FHA Financing

4.60% …………… Mortgage Interest Rate

$265,279 ………. 30-Year Mortgage

$54,357 ………. Income Requirement

$1,360 ………. Monthly Mortgage Payment

$238 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$23 ………. Homeowners Insurance

$998 ………. Homeowners Association Fees


$2,619 ………. Monthly Cash Outlays

-$126 ………. Tax Savings (% of Interest and Property Tax)

-$343 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$34 ………. Maintenance and Replacement Reserves


$2,201 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,749 ………. Furnishing and Move In @1%

$2,749 ………. Closing Costs @1%

$2,653 ………… Interest Points @1% of Loan

$9,622 ………. Down Payment


$17,772 ………. Total Cash Costs

$33,700 ………… Emergency Cash Reserves


$51,472 ………. Total Savings Needed

Property Details for 3131 MICHELSON Dr #306 Irvine, CA 92612


Beds: 2

Baths: 2 baths

Home size: 1,292 sq ft

($213 / sq ft)

Lot Size: n/a

Year Built: 2006

Days on Market: 57

Listing Updated: 40380

MLS Number: S619614

Property Type: Condominium, Residential

Community: Airport Area

Tract: Marq




Questions of the day:

Will you wait until interst rates have risen to historic norms and shadow inventory has cleared to buy a home?

Is payment affordability using stable financing good enough even though prices may decline further?

69 thoughts on “Emergence of Shadow Inventory to Push Prices Lower in 2011: Altos Research, Fiserv

  1. Laura Louzader

    I’d like to buy at a price I think I could sell the place for should a change in my circumstances require I sell.

    Houses look reasonable and condos look downright cheap. However, many don’t pass the rent-parity test, after figuring in a 20% down payment, and most of the properties priced at rent parity here in my local market are “problem” properties that either were damaged (kitchens ripped out, etc.)or are incomplete conversions that have legal problems. One place I have my eye on is absurdly cheap for such a beautiful old place, but it has no tax i.d. number- there is no record of it existing in the county records. Others are in buildings with multiple foreclosures where many units are badly in arrears on the HOA fees, burdening the few legitimate owners remaining with massive special assessments to cover building expenses. Chicago’s South Loop is full of massive buildings with as many as 30% of the units in foreclosure and not paying their assessments- a nightmare for paying owners who are sometimes paying an extra $500 a month in HOA fees to cover shortfalls.

    That is probably a major issue in the Irvine condo tower you feature here. This place would probably have to be given away to be worth it to a prospective buyer, who could be looking at massive special assessments to cover defaulting units’ HOA arrears.

  2. mike23w

    [quote]For those who have been reading this blog for almost four years and waited patiently for a cautious green light, your time may soon be at hand.[/quote]

    i’m one of those readers.

    this is why i enjoy reading your posts.
    you’re objective. your opinions reflect the market, not some personal or professional bias.

    i’m probably a couple of years away from buying a house i like at a price i like in the bay area. but you’ve provided invaluable guidance and saved me from making a mistake that would have easily cost me (at least?) a hundred thousand dollars.

    i’m extremely grateful.
    thanks IR.

    p.s. i love the American Gothic images.

    1. Planet Reality

      The time to buy in both Irvine and SF was during the panic of the stock market low in 2009. If the stock market crashes again it will be the time to buy again.

  3. scottinnj

    Is payment affordability using stable financing good enough even though prices may decline further?

    I’d say yes – provided you have a long term holding period and you are buying in a high quality area (meaning you expect rough population and income stability – I think Orange County meets this test – Detroit at the other extreme does not).

    I bought in 1992 in northern NJ – a time of weak prices and (for the time) relatively favorable interest rate (30 yr fixed was 7.5% which at that time was multi year lows). Estimated allin cost of ownership was about 10% below rent (did give positive consideration – though didn’t quantify in $ terms – value to stability of ownership – eg we starting looking to buy in part because our landlord was going to sell the house following a divorce and didn’t like loss of control, further we expected to have kids soon and we wanted to know we would be long term owners in a good school disrict). Fast forward to today now live in a house nearly fully paid off (with nearly quadruple the real estate tax admittedly) and my all in cost is substantially less (more than 60%)

    In short I have had 18 years of cost below rental parity. The gap between my monthly cost and rental parity has improved as rents rose slighly above inflation in the area and my interest costs reduced over time as the loan was repaid and refinanced at lower rates. I can now look forward to years of significantly below rental parity with no mortgage.

    Whether my house is worth $x or 90% of X isn’t material to me at this time. When we sell – after kids out of house – we will likely be trading down to a more modest house with a cost of 50-75% of our current home.

    I guess I could have timed a sale at the peak and another buy at the trough but there is some value to stability and I’m ahead of the game compared to renting. I cant control home prices but I can control my all in costs and that is good enough.

    1. scottinnj

      my all in cost is substantially less (more than 60%) than renting (is what I meant to say)

    2. lowrydr310

      When we sell – after kids out of house – we will likely be trading down to a more modest house with a cost of 50-75% of our current home.

      I hear this subject popping up once in a while, with its effects contributing to more downward pressure in the housing market. Homeowners, especially baby boomers, downsizing. Is there still a market for 3000+ ft2 McMansions? I mean seriously, do people like these and still look forward to buying them? When I see these homes, I just wonder what the utility and maintenance costs are.

      I never thought I’d be buying a house any time soon, however I may be moving in the next few months. The place I may be headed is economically sound, and despite bubbly prices over the past few years things have cooled off a bit. Looking at some numbers, the rent vs own comparison is *almost* even. Homes are being rented for an amount equivalent to monthly PITI on a mortgage, which changed my mind about not wanting to buy.

  4. Planet Reality

    With less than 5 months to get to 2011 everyone can breath a sigh of relief since the massive Irvine price drops will be here in a blink of an eye.

    Now that the inventory is heading to 900 the price drops should be astounding. The sad part is that people are clueless about the massive Irvine price drops of 2011. They put the inventory into pending sale status too quickly. Don’t be shy about putting in a back up offer in 2011 through IHB.

  5. awgee

    “For the realtors whose livelihood depends on creating false urgency in buyers, my message has not been well received. Obviously, I couldn’t care less.”


  6. awgee

    “Will you wait until interst rates have risen to historic norms and shadow inventory has cleared to buy a home?

    Is payment affordability using stable financing good enough even though prices may decline further?”

    No, market factors are only one aspect of our home buying decision.

    No, we can afford to buy a home whenever we want. We will not buy based on a monthly payment, and my opinion is that those who do will be stuck in the rat race for their entire lives.

  7. BD

    All… what will happen to prices if interest rates pick up just to historic norms or accelerate as slowly exit the great recession?

    It seems to me that you could easily buy now at rental parity and loose money in five years when you try to sell because rates are 2 points higher…thoughts? I’m not convinced we are not in for a 10 year slog of no appreciation or even slow deflation in RE. Look what happened to Japan.

    Bottom line… there is no hurry…

    my .02

    1. IrvineRenter

      Interest rates are my biggest concern. We are not going to see much of a move up market for quite a while, so the first-time homebuyer will dominate. Whatever financing conditions the first-time homebuyer faces will determine the pricing in the market. Right now, those buyers can borrow huge sums and low interest rates. As rates go up the amounts borrowed will go down and prices will stagnate or drop.

      The bottom line is that there is no urgency to buy as long as there is shadow inventory, and that will be with us a long time. The big thing that changes when prices reach rental parity is that there is no big reason not to buy other than prices will continue to slowly deflate as interest rates rise.

      1. BD

        Makes sense to me IR but, if prices do slowly deflate as rates rise what is the real benefit to the buyer?

        In other words, people better want to stay in place a good 5-10 years and be prepared to break-even or even loose money when they sell in 5 years. As you have mentioned this will be even more of a threat at the medium and high-end as they still have the most to fall…

        Remember when the Japaneese bought Peble Beach? They sold it back to us something like a decade later for 40% loss…


        1. Walter

          All things equal, it is better to buy when prices are lower and rates are higher:

          Lower prop taxes
          Bigger interest deduction
          Better chance of not losing money if you need to sell
          Easier to payoff if you come into money
          Can refi if rates drop

          1. irvine_home_owner


            But all things are not equal.

            I’ve put up examples in the past on how low prices would have to drop to make the monthly payment equal if rates were higher and the math doesn’t work.

            Regardless of what we may theorize, a home owner will not reduce their list price so that your monthly payment at 5% (or even 4%) will equal to what it would be at 6% or 7%.

            All I’m saying is I would not depend soley on rising rates to proportionately lower prices… that just doesn’t seem to happen in premium areas.

          2. Walter

            You are correct if you only look at price vs rate and there are no rate shocks to the system.

            You will most likely need significant benefit from the other factors or a rate shock and excellent timing to make rising rates payoff.

          3. matt138

            buyer affordability cares not what a homeowner wants to sell for.

            sellers will be forced to lower prices.

        2. IrvineRenter


          There are only two real benefits to buyers: (1) they may be able to save a little money versus renting, (2) the emotional benefit of owning. My suggestion that people may buy at rental parity is far from a bullish call to action. It’s more like removing a road block for those who want to buy for other reasons.

          “In other words, people better want to stay in place a good 5-10 years and be prepared to break-even or even loose money when they sell in 5 years. As you have mentioned this will be even more of a threat at the medium and high-end as they still have the most to fall…”

          Yes, that is an accurate synopsis of what I believe to be true. I wouldn’t recommend anything in jumbo loan territory because the pricing isn’t at rental parity, and I do believe it has a big drop ahead.

          There is also a significant risk of quickly rising interest rates causing a significant drop in resale prices.

          1. BD

            Thanks for the clarification IR. I think it is good for the blog to hear and understand that each tier of the market from entry to high-end is very different and that expectations of housing RE is very individualized.


          2. Buck


            “There is also a significant risk of quickly rising interest rates…”

            With all respect, I am wondering what makes you be able to assert this with such confidence?

            As a consumer of various media where matters of macroeconomics are the focus, if not also the author’s/commentator’s profession, I still would treat any similar prognostications as wanton speculation.

            I am curious of what drives/informs your view on this matter though.


  8. jb

    This post is a little off topic, and I apologize in advance. Our old neighborhood has a “realtard” that trolls the area and is very unethical. She just sent out a giant postcard that implies that she listed both my property as well as another property in our neighborhood. It says (basically):

    Your Neighborhood Specialist!
    1 Smith Street * 5 Jones Street
    Listed by “Maxine”
    3 Wood Street
    New High Price!

    So it implies, quite heavily, that she listed or brought the buyer in both Smith and Jones (ours), and got a new high price (ours). Our agent did an awesome job and listed both Smith and Jones. “Maxine” had nothing to do with either properties. She did just list Wood Street, but not for a new high price. As a realtor, would you want your client to step in and send a note around the neighborhood clarifying things a tad?

  9. Amazed

    I very much enjoy reading your blog and find your arguments strong, logic compelling and blog fascinating! Thanks for writing!

    That said, you have never wrote a blog piece about the stunning success this year in new home sales in Woodbury and Woodbury East. I noticed a couple of passing comments about these new homes, but that is it. So while I love your blog and analysis, reconciling the stunning success of these new home sales with your negative opinion of Irvine real estate prices is needed to provide a balanced viewpoint.

    If all one knew about real estate were the 2010 sales results in Woodbury and Woodbury East, one would think that we were in the best of times. As of Saturday, after about 6.5 months of being open for sales, Woodbury new home projects Montecito, Sonoma and Carmel are now sold out other than one home in Carmel! Montecito sold out a while ago and now has sold about one-third of their homes in another area of Woodbury! Carmel, being the highest priced of the three with their largest floor plan starting at about $1 million, has also been given another Woodbury tract to sell with homes now starting in the $1.1 to $1.2 million range with 3100 to 3600 sq ft. (It will be interesting to see how these higher priced homes sale!) All of these projects operated on a waiting list throughout the sales process! The homes simply have not been built fast enough to satisfy demand! The sales success has far exceeded The Irvine Company’s best expectations, and perhaps the expectations of anybody on this planet. I believe other new home sales in Woodbury and Woodbury East have achieved similar success, but I am more familiar with these three.

    To be fair to your readers, yourself and to satisfy my interest, please post a blog piece reconciling the amazing success in Woodbury and Woodbury East sales with your gloomy (but reasoned!) negative view on Irvine real estate prices.

    I have been amazed at the success of these sales, and agree that the heavily manipulated and highly indebted real estate market is suspect to say the least! No doubt that the tax credits for new home and first time buyers and the continuing decline in mortgage rates have helped, but that doesn’t fully explain the success in these sales. Note also other new homes in surrounding areas haven’t achieved quite this level of success. It is particularly amazing to see this sales success given the dismal market in high end Irvine real estate (say over $1.4 million) only a few miles away, let alone high levels of delinquencies and shadow inventory in Woodbury and Irvine! I look forward to your analysis!

    1. jumpcut

      Good post, Amazed, but one small correction. The Federal tax credit couldn’t have been a factor in the three projects you cited, since the sales prices were above the limit that qualified for the credit.

      1. Amazed

        All 3 projects qualified for and benefited from the CA $10K new home and first time home buyer tax credits. Interestingly, some had already made their purchase before the law was passed, and hence walked into free money, which illustrates how incredibly stupid the design of these tax credits were. However, even if designed properly I think the tax credits were stupid.

        1. jumpcut

          True (as far as the state is concerned) but — as you indicated — no one is persuaded to buy a $1 million home because they’re getting a $10K tax credit.

    2. Planet Reality

      Stop trying to suggest Irvine is different, we all know how fast the lite brite $1M inventory in Riverside is flying off the shelf.

      To subscribe to this blog you need to repeat the following five times while clicking your ruby slippers together:

      Irvine is not different

      1. Amazed

        I’m not trying to suggest anything, just interested in some analysis that reconciles incredibly strong and weak SFR real estate markets, both within Irvine. It is as if one market (particularly the W/WE new home buyers) didn’t know the other market existed. Two completely different worlds within the same world.

    3. wheresthebeef

      Good post. From the stories I hear, people who bought in the new developments in Woodbury are mostly FCBs or have huge down payments. Where did this money come from? Sale of a previous house, years of savings, generational money pooled together, bubble money from Asia? Obviously, the draw to Irvine for specific ethnic groups was underestimated and this is keeping Irvine RE prices stable. I would imagine most of these buyers wouldn’t even consider any other city…so the TIC has a captive audience so to speak. Also don’t forget that some people absolutely need a new house and will pay a premium to be the first owner and have that “new house smell.”

      1. Psunmsp

        Another factor fueling demand in WB/WBE has to be first time homebuyers on FHA loans. I’ve read elsewhere that currently, RE sales in general are predominated by cash buyers and FHA mortgages. How long can this last?

        As a potential homebuyer in this area, I ask myself this question: Woodbury is hot right now, but where will it be 2-5 years from now when development moves beyond the area to Laguna Crossings and Great Park? It’s well known now that new homes tend to attract more buyers than resales, including in Irvine. Word to the wise for myself and those considering the price premiums now in WB.

        1. irvine_home_owner


          But most of the SFR Trinity at Woodbury are beyond FHA limits.

          I also question how many more buyers are left but considering they already started Stonegate East, added more neighborhoods to Portola Springs-South Enclave and are back to grading Laguna Crossings… seems like TIC has an idea of how many buyers they have waiting on their interest list (which I may add some notorious bears doubted the numbers being reported).

          The funny thing is even though you get less rooms, living spaces and lot size in those Woodbury SFRs, their price/sft is still less or equal to comparable newer homes in Irvine.

          But just because PR said so:

          Irvine is NOT different.

          1. Psunmsp

            Regarding the FHA limits, that’s true for most SFRs, but the smaller 3 bdr SFRs and condos/townhomes are certainly within reach for FHA buyers.

            Someone posted elsewhere about the run-up in prices between phases at WB. That’s certainly true. A 3 bdr townhome I’m looking at jumped by $30k in 1.5 months.

            But can the local market sustain these prices and “ignore” the recent run-up in inventory and foreclosures in Irvine, including at WB?

    4. MovinToOC

      Lots of exclamation points there!!!!ONE!

      I am curious to see how WB/WBE sales go for the next few months. It seems like there was an initial excitement for these developments that has since faded.

      1. Amazed

        Actually, that was what I expected, but that hasn’t been the case. The waiting list for homes continued through to the final sales.

    5. tenmagnet

      That’s an excellent post about Woodbury and the 2010 New Home Collection.
      I’d like to see a blog piece on their success as well.
      Let’s face it, TIC crushed it.
      Demand is off the charts.
      So much so that they’re stepping on the gas and moving forward with additional projects at Stonegate/Stonegate East.

      1. Planet Reality

        It’s similar to what I’m seeing in Las Vegas and Riverside: cash buyers buying million dollar homes before they are finished. The real shame is that these cash buyers will all be selling at a lost in only 5 months after Irvine prices crash in 2011. Boy are the $2000 a month renters of 2BR lucky they won’t have a million dollar home in 2011 paid for with cash considering the looming price devesation. When inventory hits 900 in Irvine it will be time to break out the bubbly.

    6. IrvineRenter


      I have reached out to the new communications director at the Irvine Company to see if they would be willing to give me more information including hard data that I can write about.

      There are numerous reasons for their success not the least of which is their skill in marketing. Many people who would like to buy a more expensive home have been frustrated with the lack of inventory available because so much of it is still priced at WTF prices or tied up in short sales. It was expedient to simply go buy a new house from TIC. Also, much of their buyer interest has been all-cash investors. I recently spoke with an insider who told me that one-third of their high end product was sold all-cash. Some of these were owner-occupants, but some were not. Whether or not this demand is sustainable is yet to be seen.

      The Irvine Company has taken advantage of the mess in the aftermath of the housing bubble to sell some homes. I think even they have been surprised at how effective lenders have been at withholding competing product. I imagine they hope that continues. As someone who works in the building industry, I hope they continue to be successful. With the liquidation of high-end product that must yet occur, even they must be concerned. This market isn’t healthy, and they will have to compete with this resale product in the future.

    7. irvine_home_owner


      I have commented about WB/WBE at least 3 times. I guess there must be an Ignore button on this blog.

      Which is fine… once The Irvine Company opens up Laguna Crossings… I want everyone to ignore it so I don’t get the same run-up in phase pricing that happened at WB/WBE.

      BTW: Looks like I might get that unicorn, but in the wrong direction… mortgage rates have dropped below 4% (ala SGIP):



      1. Planet Reality

        If you had listened to me mortgage rates below 4% were really just a horse with a horn glued to it’s head.

    8. Anonymous

      I think the main reason the new housing is selling well is that there has been no new housing in a past few years, yet Irvine’s population has been growing the whole time (see http://www.cityofirvine.org/about/demographics.asp).

      The population likely grew due to:
      1. School refugees – despite the cutbacks, IUSD is better off than other school districts that had to cut back even more. For example, IUSD still has a gifted program and still has a music program. So some out of area parents moved to Irvine for that reason.
      2. Commerical rentals – businesses looking for new leases wanted to avoid cash poor landlord that might neglect building upkeep and that might go bankrupt. So they rented from the Irvine Ranch Company instead, bringing new workers and businesses to Irvine.

      So it’s not surprising that new home sales should be going well.

      1. irvine_home_owner


        Whoah there… you’re making it sound like Irvine is a premium place to live.

        All the anti-Irvinites aren’t going to like that.

        BTW: I’m not sure commercial/retail is doing that well in Irvine. Many of the shopping centers have more vacancies than I’ve seen in the last 20 years. You would think that Crossroads in the center of the city would have the lowest vacancy rate but it’s got a ton of empty storefronts… and even though people are buying in Woodbury like there is no tomorrow… the shopping center there (and the one south of it below Northwood II) have experienced several closures and have sites that have never had tenants.

        1. Anonymous

          Yeah, I have seen some retails storefronts empty as well.
          But by commercial space, I was thinking more of a corporation leasing office space.

    9. Alfred Nonymous

      Amazed, are you a robot or a realtor?

      You used the word “success” nine times. Your writing style stinks of realtorese, however you do bring up an interesting question. What’s so special about Woodbury?

      1. Psunmsp

        What’s so special about Woodbury is that it’s *NEW*. Simply put, new homes are attracting a lot more buyers in Irvine than resales. Woodbury and the surrounding communities have become such a focal point for buyers for this reason, plus the general appeal of Irvine for safety and schools.

        That’s great for WB, but in the next several years, Laguna Crossing will be the next Woodbury, then Great Park, etc. After 5 years or so WB may become “just another part of Irvine” as far as RE is concerned.

        Don’t forget that the availability of resales and foreclosures is alive and well in WB. Somehow, new home prices are still going up.

      2. IrvineRenter

        “Amazed, are you a robot or a realtor?

        You used the word “success” nine times. Your writing style stinks of realtorese…”

        I noticed that too. The exclamation points and the overly upbeat tone were a giveaway. I am guessing a TIC sales employee by the points being made. No matter, I wish TIC came here more often. Their facts will always be welcomed, but any BS will always be called out as well.

      3. Greg

        At one time Camel is hot, and the prices gone up about $100K compared to initial release, but toward last three months, Camel start giving incentive again, if you already signed the contract, then go to sale office and negotiate some free upgrade.
        For the rest models, especially models in the WBE, the 10% and even 3% down payment method is heavily pushed by loan agents (i.e. BOA). With low mortgage rates and $8,000 tax incentive, I think these all help the sale.

        Regarding WBE, a friend said the land sold to Builders because TIC wanted to push it out faster and builders have better profit margins for selling it.
        Also, from unproven sources, after a couple of accidents in the WB’s swim pool, people starts thinking if the “Woodbury” is good name to use.

        1. Psunmsp

          Thanks for the insight.

          As for the models in WBE, I know of one in particular, a two bedroom townhome that sold in the neighborhood of $570k. I pity the fool who paid that much for a two bdr place…

  10. Alan

    ” … walking distance to shops in restaurants …”

    Those must be some special restaurants you have there in Irvine! Busy people multitasking to free up leisure time I’m sure. A substantial premium might be worth it to live in such a unique neighborhood.

    If the flipper did not put any money down, and did not pay on the mortgage or HOA, have they actually lost much?

    I’m waiting to see stories of flippers losing their other properties including actual residence, but I don’t see it. I would have thought that flippers and investors would be the first, quick targets for banks trying to recover some of these huge losses.

    There may not be much to get from a clerk who bought a $800k McMansion, but flippers and investors should have some assets worth going after. Is it just that the legal process takes so long? Or are they getting away with it after all?

    1. FreedomCM

      Actually, these flippers from the FC auction did put money down.

      All of it! They paid cash for the purchase.

  11. Ben

    “California still maintains a credit, but the federal government’s tax credits incentive has expired, and the Federal Reserve’s program of buying down interest rates is over.”

    According to the data on the CA FTB site (http://www.ftb.ca.gov/individuals/new_home_credit.shtml), the new home buyer credit is probably tapped out by now. It seems that the FTB is pretending the $100 million is not yet depleted, but with over 30,000 applications received, it doesn’t seem likely that there will be any money left there. The new home credit on the other hand is probably still available.

    1. IrvineRenter

      “It didn’t occur to me that a bank could auction off a worthless piece of paper,” Roberta said. …

      “Why would a bank sell a second mortgage that may have no value?”

      The bank does this in the hopes that someone will make the mistake this family made. It’s that simple.

      A little research would have prevented this mistake. Each mortgage lien on the property has an identifying number, and it is the responsibility of the buyer to make sure they are bidding on the right instrument. Foreclosure Radar usually states whether the auction is for a first lien or a second, but a call to a title company or research on the trustee website can clarify any lack of information. If there is any doubt, don’t bid. There are far too many opportunities to risk buying the wrong thing.

      1. Chris

        IR, could a buyer buy the first lien on a property that also has a 2nd lien? What if that were to happen?

  12. FreedomCM

    Oh, and just to follow up on Laura’s post:

    The HOA fee has been raised in the listing from IR’s $998 to $1100.

    I wonder how many units in this building are in arrears?

    Is there a way for the public to get an accounting/forensic audit of an HOA?

    1. IrvineRenter

      This HOA fee has been going up and down. I suspect they are grossly underfunded on their reserves, and any buyer there has significant risk of a huge assessment. The only way to know for sure is to get in escrow and demand the HOA documents. The HOA will resist sending these until the last minute. These documents contain all the information on operations and funding of reserves.

      If any readers have a copy of the HOA docs for these towers, please email a copy to me, and I will shine the light of public disclosure on them.

    1. IrvineRenter

      Rents will stop declining when the economy picks up. Rents will fairly accurately call the bottom in the local economy, and they should turn positive before house prices bottom.

      There was an article in the OC Register calling the bottom in rents :Apartment rents hitting bottom. Given the credibility of the paper and of the story’s source, you can take that for what it is worth.

      1. irvine_home_owner

        I’ve been tracking rents in certain areas of Irvine for the last 2 years… and even though you would think these distressed landlords would lower their prices… they haven’t really.

        That’s one of the compelling reasons why we think renting a home, although maybe saving you a few hundred a month is a hard decision compared against owning. Again, even if it means spending $3 to save $1… at least I’m paying less to Uncle Sam to support taxes and programs that are inefficient and unnecessary. Just cut out the middle man and pay the bank directly… heh.

      2. matt138

        everything being done right now a la govt is further burdening the economy and pushing a recovery further away.

        the million dollar question is: when will the govt and voters figure this out and set the market free allowing it to recover?

  13. BD

    …from my understanding (all anecdotal) the reason people pay up for Irvine is the school systems. I have friends that pay 1K/month/year for each child they want in private schools. This clearly adds up…

    Just what I have heard. When you factor in that a family will pay 20K / year plus to put two children in private school you can see why Irvine is at least a little different. That said, I wouldn’t hessitate to my children in MV or Aliso or RSM or any Laguna school system.

    If you want a bargain for RE look at those areas…good schools and a LOT MORE FOR YOUR MONEY!

    my .02


    1. BD

      Of course..you may have to drive further to your employment. But, most employers will give you some discretion if you open up with your needs.


  14. CE

    So who was the brilliant developer who thought people wanted to live in a “HIGH TECH GLASS AND CONCRETE TOWER” in the middle of a family-oriented suburb?

  15. FDV

    Interesting article… I really liked the YoY Price chert. Then I decided to do it for the ZIP codes I follow and the resulting chart was a mess of ups and downs.

    I think those curves are smoothed with a huge moving average or something else.

  16. Crayz

    If I’m paying $1500 for a 1BR, 1BA apt. in Irvine, what’s the maximum price of a house that I can buy assuming I put 20% down? This is for rental parity. I’m thinking around $300K.

    I have been preapproved for a $600K house, and I’m in the market for a bargain (who isn’t?). For rental parity, what’s a 2000 sq. foot house renting for in Irvine (near Westpark)?

  17. cashbuyer

    This property is in escrow for 294k cash and a fast escrow.I can tell you that there were lots of offers. There was another one on the 8th floor thats a little larger and that one went for 430k cash. Both of these properties were gone within a few days of the listing. Here are some facts about this building if anyone is interested. The purchase price on redfin is not correct. The lender just took the property back and it was listed as a regular sale and not a short sale. Like I said its was in escrow a few days after listing and lots of offers.
    1) you need a min of 25% down for this development.
    2) the association has been lowered to around $980.
    3) The HOA has a law suit against McGuire properties to get rid of the easement payments.If they win the association will come down about $300 a month.
    4) Your HOA dues include all amenities such as pool,gym, movie room, library, biz center,lounge,security, etc…
    5)Insurance is included in HOA. Contents coverage is about $150 per year.
    6) Gas,water and trash are included as well.
    7) similar properties are renting for $2300+ in the same building

    So it would give you about a 3.6% cap rate which is not great but then you cant get much more from the bank these days. Not to mention that in the long run it would appreciate.

    If you can regular sale for a good price in this development its a great deal all around.

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