Home Price Drop Sudden and Dramatic

Home prices are rolling over as expected. Look for the declines to pick up speed over the next four to five months.

Irvine Home Address … 10 FUCHSIA Irvine, CA 92604

Resale Home Price …… $429,900

You know I wouldn’t want to make you feel worse then you should

But if you were me you’d do the same (you know you would, you know you would)

It’s not that hard to say your wrong admit it oh go on, go on

It mean everything, just to hear you say to me

That I was right, and you were wrong

It’s not that hard go on, go on

New Years Day — I Was Right

Last week I profiled a neighborhood in Irvine that inexplicably dropped about 20% in value since the tax credit expired. As it turns out, widespread price declines are beginning to show up in the aggregate statistics. The leg down we have been expecting this fall and winter is happening now.

Clear Capital: Home price drop sudden and dramatic

by KERRY CURRY — Friday, October 22nd, 2010, 12:25 pm

Clear Capital said a 6%, two-month decline in home prices represents a magnitude and speed not seen since March 2009.

“Clear Capital’s latest data through Oct. 22 shows even more pronounced price declines than our most recent (Home Data Index) market report released two weeks ago,” said Alex Villacorta, senior statistician with data analytics firm. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

In other words, the billions the government spent trying to prop up the housing market was a complete waste of taxpayer dollars. We are right back were we started. Since I have consistently maintained that would be the result, I won't pretend to be surprised.

Prices are now at the same level as in mid-April, two weeks prior to the expiration of the federal homebuyer tax credit. The drop, in advance of typical winter housing market slowdowns, paints an ominous picture that will likely show up in other housing indices in the coming months.

If previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months will show a similar downward trend in S&P/Case-Shiller numbers.

I have also consistently stated we will see the Case-Shiller roll over this fall and winter. We will likely take out the false bottom formed in April of 2009. The bear rally is officially over.

Clear Capital uses rolling quarter intervals that compare the most recent four months to the previous three months. The rolling quarters have no fixed start date and can be used to generate indices as data flows in, the multi-month lag time experienced with other indices.

See chart below:

So where does this leave us? If home prices take another steep drop, the resulting strategic defaults will end the bank's denial and may lead to another TARP bailout, only this time, some believe the bailout will benefit loan owners instead.

Shilling Thinks Housing Will Fall Another 20%, But Many Homeowners Will Get Bailed Out

Matt Schifrin — Oct. 18 2010 – 2:55 pm

I just got off the telephone with economist, Forbes magazine columnist and newsletter editor Gary Shilling. As you probably know by now, Gary has been spot-on in his predictions on the economy, global markets and housing.

I asked him what was new and he told me that he had revised his forecast for housing. Here are some of his comments :

If I am right and we see another 20% decline in housing prices, then we figure that the number of mortgages underwater will go from 23% to 40%. That is a huge amount and at some point the dam breaks,” says Shilling.

Why does the dam have to break? Nobody thought we would get this many underwater loan owners. Why didn't it break at 10% or 20%?

What would really cause problems is loan owner capitulation. If and when loan owners give up hope and accelerate their defaults, banks will have to deal with several million more delinquent squatters. So far they have been dealing with it through a combination of denial and government assistance. Why would a few million more delinquent squatters make any difference?

That’s bad news for the economy and bad news for homeowners and real estate brokers. It’s also bad news for banks and the stock market.

Shilling went on to say that if there is a bright spot in all this gloom it probably will benefit the profligate spending homeowners, who were lured by men like Angelo Mozilo into homes and mortgages they couldn’t afford.

Bailing out HELOC abusers is a bright spot? Perhaps for the HELOC abusers, but not for anyone else.

“Home ownership still has a lot of political clout in this country,” said Shilling. ” By hook or by crook, the politicians will come up with some kind of bailout for a lot of people underwater on their mortgages.”

In other words it doesn’t help anyone to have millions of homeowners foreclosed on and thrown into the street. Gary estimates that houses that are foreclosed on and vacant lose an average of $1,000 per month in value as long as they remain unsold. He adds that all the scrutiny that banks are under fire over concerning foreclosure procedures is creating the perfect environment for a massive bail-out of deadbeat homeowners.

If we bail out HELOC abusers, we will have made the final transition to "banana republic" status. You see the borrowers I profile here every day. Do you want your tax money to go toward paying off their debts? While you were being frugal and playing by the rules, they were out spending like kool aid intoxicated owners and having a good time. Now they are looking to you to pick up the tab.

Perhaps I am too cynical, but I also wonder if this story isn't a plant to convince underwater homeowners to stay on a bit longer and make a few more payments. If there is a false or feeble hope of principal forgiveness, many considering accelerated default may delay the inevitable to see what happens. This is exactly the kind of story the banks want to have circulating the web.

Gary thinks we need a Resolution Trust Corp (RTC) type solution for the housing market. You may remember that the RTC was set up by the Office of Thrift Supervision in the 1980s to deal with hundreds of insolvent thrifts who, like homeowners, got in way over their heads. Some of them invested in Mike Milken junk bonds, others invested in real estate and other highly leveraged loans.

The RTC entered into a number of equity partnerships to help liquidate real estate and other assets it had inherited from insolvent thrift institutions. Gary says the key to the RTC’s success was that it acted relatively quickly and that is what is needed for the housing market in order to lift the giant overhang caused by our zombie homeowner situation.

We don't need an RTC-type institution to clear out the housing inventory. What we need is for the banks to foreclose on the squatters and put the houses back on the market. The sooner we get this done, the sooner the housing market bottoms and the sooner we can get back to a healthy real estate market. Amend-extend-pretend creates an overhand of supply that will hinder economic growth for a decade.

I reminded Gary that many investors got rich from buying assets of troubled savings and loans, including billionaire Leon Black. We shall see who steps up this time. Any guesses?

Me for one. There are many people stepping up to buy these troubled assets. Cash is king in the aftermath of a debt-fueled asset bubble.

They thought it would be okay

Many of the Irvine equity strippers really believed everything would work out to their advantage. The value of their property was steadily climbing, and the magic of California real estate assured them prices would rise forever. Taking out all the equity to spend it seemed like no big deal. What's the worst that could happen?

Well, if they over-borrowed based on ever-increasing home prices, and if they can't afford the debt service payments, they may be forced to sell. If prices go down, they can't sell, and they end up in short sale or foreclosure. Welcome to the reality of many of those who spent their houses.

  • Today's featured property was purchased for $335,000 on 3/19/2002. The owners used a $268,000 first mortgage, a $50,250 second mortgage, and a $16,750 down payment.
  • On 4/8/2002 they obtained a $67,000 HELOC which allowed them to consolidate the second mortgage and withdraw all of their down payment. It took them less than three weeks to get their money back out of the property.
  • On 5/23/2003 they refinanced with a $304,000 first mortgage and a $38,000 HELOC.
  • On 8/23/2003 they obtained a $76,000 HELOC.
  • On 4/20/2004 they obtained a $98,000 HELOC.
  • On 10/26/2004 they refinanced with a $448,000 first mortgage.
  • On 11/29/2004 they got a $100,000 HELOC.
  • Total property debt is $548,000.
  • Total mortgage equity withdrawal is $229,750.
  • Total squatting time is about 18 months so far.

Foreclosure Record

Recording Date: 10/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/20/2009

Document Type: Notice of Default

Since they stopped going to the housing ATM in 2004 and prices went up thereafter, I think these borrowers knew they were getting overextended and chose not to go Ponzi. They were trying to be somewhat responsible. Unfortunately, it was too late.

Irvine Home Address … 10 FUCHSIA Irvine, CA 92604

Resale Home Price … $429,900

Home Purchase Price … $335,000

Home Purchase Date …. 3/19/2002

Net Gain (Loss) ………. $69,106

Percent Change ………. 20.6%

Annual Appreciation … 2.8%

Cost of Ownership


$429,900 ………. Asking Price

$15,047 ………. 3.5% Down FHA Financing

4.23% …………… Mortgage Interest Rate

$414,854 ………. 30-Year Mortgage

$81,379 ………. Income Requirement

$2,036 ………. Monthly Mortgage Payment

$373 ………. Property Tax

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

$36 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees


$2,724 ………. Monthly Cash Outlays

-$321 ………. Tax Savings (% of Interest and Property Tax)

-$574 ………. Equity Hidden in Payment

$23 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves


$1,906 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,299 ………. Furnishing and Move In @1%

$4,299 ………. Closing Costs @1%

$4,149 ………… Interest Points @1% of Loan

$15,047 ………. Down Payment


$27,793 ………. Total Cash Costs

$29,200 ………… Emergency Cash Reserves


$56,993 ………. Total Savings Needed

Property Details for 10 FUCHSIA Irvine, CA 92604


Beds: 3

Baths: 2 full 1 part baths

Home size: 1,495 sq ft

($288 / sq ft)

Lot Size: 1,495 sq ft

Year Built: 1974

Days on Market: 408

Listing Updated: 40403

MLS Number: S589143

Property Type: Condominium, Townhouse, Residential

Community: El Camino Real

Tract: Db


According to the listing agent, this listing may be a pre-foreclosure or short sale.

This is a beautiful home with 3 bedrooms 2.5 baths, formal living room with fire place, dining room, kitchen with granite counters, extra room off kitchen that is great for eating area or many have used this area as a family room with sofas and TV area, upstairs family room and office area, this home has a nice patio that leads to a 2 car garage. Close to great schools and shopping!

Are you ready to pay to bail out the HELOC abusers?

31 thoughts on “Home Price Drop Sudden and Dramatic

  1. Honcho

    I’m not sure how you could structure a direct homeowner bailout, especially given the shift in congressional power we are about to witness.

    Perhaps cramdown legislation is passed, which would effectively give defaulted borrowers a way out if they want to go through bankruptcy. Ultimately, it would likely prevent those who can still make payments from defaultig since they wouldn’t be able to get through the bankruptcy court.

    1. HydroCabron

      especially given the shift in congressional power we are about to witness.

      In October 2008, at the request of a conservative Republican administration, the financial industry bailout was passed. The House and Senate Republican leadership – the same men who currently lead the Republicans in both chambers – as well as both John McCain and Sarah Palin, and high-profile conservative media voices (Romney, Beck, O’Reilly) strongly supported the bailout.

      These same congressmen who supported the first bailout have recently taken a lot of campaign cash from the beneficiaries of the bailout. They demanded the bailout; they are now cashing the checks from its beneficiaries.

      We’re transitioning from a single party in control of both branches – a party in the pocket of financial interests – to a government divided between two parties in the pocket of financial interests.

      If cramdowns are favorable to the bankers, they will be permitted. If they aren’t, then they won’t be permitted.

      1. Honcho

        All true. However, you have a large group of cnadidates running on the fact that they are coming to town to cut spending and will not support any future bailouts.

        But, like you, I’ll believe it when I see it.

        1. Alan

          LOL! The Republicans have campaigned for years on “smaller government”, “fiscal prudence”, etc., etc. What they have delivered are bigger deficits, massive unfunded expenditures and real income gains to the super-rich. But it will certainly be different this time. 🙂

      2. JDSoCal

        I really doubt the Tea Partiers will tolerate another bailout, especially not of the HELOCers. The people are pissed, and I just don’t see a bailout getting through Congress.

        Maybe the Fed, since that is a rogue, unaccountable branch of government.

        1. awgee

          Rogue and unaccountable, yes, but the Fed is not a branch of government. The Federal Reserve is an independent private corporation.

          1. JDSoCal

            Hey, thanks so much for the lesson in government, but I actually teach Poli Sci. I was being sarcastic.

            But the Fed is as powerful as a branch of government, and it’s about as “private and independent” as Fannie and Freddie, except that Fannie and Freddie aren’t allowed to create money.

            There’s always some know-it-all who takes one literally.

    2. Perspective

      You’re right about cramdowns, but how do you avoid allowing cramdowns on cash-out abusers? The legislation would have to be narrowly tailored. You’d have to only allow BK cramdowns for loans originated from 2005-2009(?) and not allow cramdowns on cash-out refis.

      Another problem is that this only helps the worst-off homeowners – those that bought or refi’d too much house and have a lot of other debt.

      That’s why I think we’ll see FHA/Fannie/Freddie start offering refis at current rates and underwriting standards with the sole exception of LTV – they’ll allow a CLTV up to 120%. They can charge 150 bps MI on top of the rate to reserve for losses.

      1. Honcho

        You cold limit it to purchase money debt (similar to the recourse/non-recourse distinction here in CA).

  2. Geotpf

    The sold charts on Redfin don’t show a significant drop, at least not yet. House prices in Irvine, for instance, are basically stable at $356/sq ft. They have been at approximately that level for about a year, higher than the bottom of $335/sq ft in March 2009. Prices for condos are currently at $329/sq ft, with the absolute bottom being $323/sq ft in May 2009, with prices trading within a $12/sq ft span or so since March 2009. Price trends in other cities are similar.

    1. irvine_home_owner

      This is my question too.

      Is IR referring to the housing market of Irvine or the RE market in general?

      While I do see prices dropping in South County… newer SFRs in Irvine (and even Tustin Ranch) still tend to be stubborn.

      Maybe I’m looking at the wrong type of house?

    2. Naive

      Based on Redfin data. In the last 30 days, 73 homes/condos with 3+ bedrooms were sold. At the same time 138 new listings appeared.

      Basically the sales rate is almost half the rate at which new listings are appearing. Draw your own conclusions.

  3. awgee

    Existing home sales in Riverside are down 23.7 year over year. Prices will soon follow. Home prices in Riverside will be crushed.

  4. lisa

    I noticed that in last 3 months the existing resale home market almost dead, this should relates to TIC is releasing quite a few new models in recent months, they are in general about 10% lower than the existing home prices but with much better interior design. Also, I checked a few time and even TIC/builders now has hard time to sell, especially model in Portola spring, so if you are a buyer, you can anticipate more incentive to come.
    So I agree that Irvine existing home prices will drop another 10-15 % in a next few months. Even though I just bought a short sell as investment this month, which is about 10% lower than market prices, but what surprise me the most is that there are not too many bidders this time around, so with all cash offer, I have little problems to get it. However, I don’t regret, I sold one of my previous at the pick, and get it back with 65% of original price. If prices drop more, I can buy one or two more.

  5. HydroCabron

    In other words it doesn’t help anyone to have millions of homeowners foreclosed on and thrown into the street.

    I can think of one guy it would help: me.

    I sold and turned renter when it became abundantly clear that housing was ridiculously overpriced and over-leveraged, and that I should not be in debt to 5x my annual income. In other words, I behaved like a rational actor, and a sane housing policy would reward me, punish kool-aid drinking sheep, and encourage moderation in purchasing behavior in the future.

    These guys write as if sane market participants do not exist.

    1. Real Estate Analysis

      Well, you were smart at that time. On the other hand, if you would be in the situation of the owners of the Featured property above, and even if you would have money to pay the monthly mortgage – wouldn’t you rather default and sell it in foreclosure?
      I mean even without getting the equity out in the first few years – they would be still owing now more than the house is really worth today. In that case, it is sometimes financially smarter to default and start over in my opinion. ;o/

  6. Geotpf

    (this is in reply to awgee; the forum software won’t let me reply directly)

    In Riverside, the numbers are even more dramatic, on the positive side. The bottom for Riverside city houses was $111/sq ft during June/July 09. Current price is $128/sq ft, basically steady since late May 10 (between July 09 and May 10, prices rose steadily). I’m excluding condos because of how few there are in Riverside (fewer than one in ten Riverside sales is a condo).

    1. awgee

      No market moves in a straight line. More price declines in Riverside are coming. Anybody who thinks the bottom is in does not have a clue on the fundamentals that affect the real estate market. But, that is ok, it would not be a market if there was not someone to lose money.

      1. Geotpf

        Prices may (or may not) drop back down to that $111/sq ft level, but I would be very surprised if they went below that.

        1. awgee

          from Mulli on Lansner’s blog:

          “I’m more focused on the income levels which will not subordinate the current price of homes. You are looking at 20 months worth of data. In 1960, the ratio of income to home price was 2.73. In 1970 it was 2.48, actually declining (Dr. HB).

          1970 is an important year as that is the year that the consumer debt train left the station and has not returned. From 1980 to 1990, the value of CA homes essentially doubled from $100K to $200K.

          At 3% annualized, it should have increased by about $34K. There is nothing to support the rampant 10% annualized appreciation during the decade of the 80’s.

          Nationally, the figure of income to home prices is around 3. Was CA not in demand in the 60’s? Of course it was. So, why were prices kept in check then? In the 90’s this figure peaked just under 6, and today it stands around 4.30, which is still too high to sustain housing prices at their current levels.

          It is this data that many people look to to determine if we are still in an inflated bubble regarding housing, credit, etc. Facts are facts”

          Bottom line; home prices are determined by demand, (income), and supply, (now 9 months Southern California). To reach the norm or average or median or however you care to measure, prices will fall way below the norm first and they have not even approached the norm yet. Technical, (price), analysis can show what has happened and even give odds on price behavior, but price action says absolutely nothing about the factors which influence prices.

          Like I said before, anybody who thinks residential real estate prices have bottomed does not have a clue as to what fundamentals affect home prices.

          1. Geotpf

            But prices in Riverside are now something like half off of peak. The big fall already happened. People remember when houses that are now selling for $150k sold for $300k. Of course, for a brief moment last year, that house sold for $125k. Maybe it will again, but at that point, long term renters, flippers, and investors come out of the woodwork and start buying.

          2. awgee

            “But prices in Riverside are now something like half off of peak. The big fall already happened. People remember when houses that are now selling for $150k sold for $300k. Of course, for a brief moment last year, that house sold for $125k”

            This is an example of price analysis with no regards to what causes price movement. You point to what has been as if half off is some magic number, but you have no idea what is causing prices to fall or that those same factors are continuing.

          3. Geotpf

            Prices are still 40% – 50% above year 2000 levels.

            Not in Riverside. In most cases they are actually below 2000 levels-which means they are frequently at 1988 levels or so, in actual dollars. Factoring in inflation, they are much cheaper than that.

  7. bltserv

    I will call the bottom in 909 land after they turn the bulldozed homes back into farmland. The next big leg down will just destroy whats left of the IE`s home equity values. The good news is the 91 freeway will be very drivable in a few years without having to pay the insane toll fees.

    1. Geotpf

      This would require significant population declines in the area, which has not, and almost certainly will not, happen. People who were owning and got foreclosed are now renting; people who were renting then bought those foreclosed houses and are now owners. Musical chairs, but in the same neighborhood. I doubt there will be significant population growth in the area as there used to be, but significant population declines are unlikely as well.

  8. Gray

    WHAT homeowner bailout? Most of the 50 billions allocated for HAMP still sit unused in that pot! As is obvious now, the whole legislation was only supposed to delay foreclosures, to reduce the amount of foreclosured houses coming to the market. This was meant to stabilize the prices at a higher level in order to reduce the losses of the banks. As even administration officials admit now, the main purpose wasn’t to bail out a huge number of homeowners at all!

    But since the amount of underwater properties is so much higher than demand, all this policy did so far is to prolong the misery. Stagnation at a low level, without a recovery in sight. It would have been better to simply let the prices fall to a realistical point where it would have made sense again for potential homeowners to buy. The uncertainty now, coming from the articifially created price level, the huge reservoir of foreclosures still waiting to hit the market, and the generally weak economy will keep demand low. Most rational people don’t want to run the risk of losing money with assets of questionable value and going into debt in a time of high job insecurity. And so this misery will continue.

    Really, the whole way this has been handled so far has been a failure! But that was what the banks wanted. Because huge losses from foreclosured homes being sold at a realistic price would have ruined the banks “recovery”, and thus reduced the bankers bonus. And, of course, this had to be avoided at all costs!

Comments are closed.