Author Archives: IrvineRenter

Weeping

While My Guitar Gently Weeps — The Beatles

The carnage in the real estate industry has been truly remarkable. I know many people who work in design, development and homebuilding who are out of work. Statistics have more meaning when you know the people it represents. I have had my own stresses and worries which are ongoing. Right now, I am one of the lucky ones who still has a job. The weeping in the real estate industry is a side effect of the larger problem with declining home prices. That problem has people weeping from all walks of life, and for most of them, it will get much worse before it gets any better. The crash of housing prices is a catastrophe for everyone who is overextended on their mortgages, and that is a great many people. Many are still in denial, but at some point, the denial will give way to acceptance with periodic bouts of weeping along the way.

It must be easier for those who used 100% financing to reach acceptance. They are not losing any of their own money, only their credit score. When subprime rebounds in a few years to service these people, those that saved money while they rented may become homeowners again. Today’s featured property owners are a typical profile of bubble buyers. They bought toward the end of the rally with 100% financing, and now that values have declined, they are walking away and letting someone else absorb the losses.

65 Weepingwood Kitchen

Asking Price: $419,900

Income Requirement: $104,975

Downpayment Needed: $83,980

Monthly Equity Burn: $3,499

Purchase Price: $546,000

Purchase Date: 10/28/2005

Address: 65 Weepingwood #97, Irvine, CA 92614

Beds:	3
Baths:	3
Sq. Ft.:	1,399
$/Sq. Ft.:	$300
Lot Size:	–
Property Type:	Condominium
Style:	Traditional
Year Built:	1981
Stories:	2 Levels
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	P652185
Source:	SoCalMLS
Status:	Active
On Redfin:	2 days

*** SOLD FOR $546000 in 2005! 3 BED / 2.5 BATHS WITH 2 CAR ATTACHED
GARAGE!! FEATURES: Great spacious floor plan, tile flooring and
carpeting through out, cozy brick fireplace in living room, large
family kitchen with tile flooring, granite counter tops and wood
cabinets, lots of closet space, large rooms, bright and airy, ceiling
fans, too much!!

Now it is a selling point that some idiot paid bubble prices in 2005? This statement is actually quite revealing of people’s perception of value in the housing market. The reality is that prices were inflated far above fundamental values by loose credit and unsustainable financing terms. The perception is that peak bubble prices were fair value and today’s discounted properties must be undervalued; therefore, if you buy now, you will be far ahead when prices quickly rebound back to fair value. In fact, there was a recent post at the OC Register where a supposed expert claimed prices are undervalued. Realtors should be pleased when I show a house with a huge loss because that means it is really undervalued 😉

ALL CAPS. Check…

Asterisks. Check…

Multiple exclamation points. Check…

Cozy brick. Check…

too much. Yes, this is still too much money…

This house was purchased in October of 2005 which was about 9 months before the absolute peak. The buyer utilized 100% financing, but was either unwilling or unable to pull out any more. One interesting note on this particular REO: the lender only bid this property up to 85% of the first mortgage. They completely wiped out the second mortgage, and they were willing to take a 15% hit on the first mortgage at the courthouse steps if a knife catcher would have offered it. As it happened, they did take back the property, and now they are trying to get a few bucks more than they paid. If this sells for its current asking price, and if they pay a 6% commission, the owner of this mortgage (JP Morgan Chase Bank; Ownit Mortgage Asset Backed Certificate — probably some CDO somewhere,) the total loss on the loans will be $151,294.

I bet they are weeping…

I look at you all see the love there that’s sleeping

While my guitar gently weeps

I look at the floor and I see it need sweeping

Still my guitar gently weeps

I don’t know why nobody told you

how to unfold you love

I don’t know how someone controlled you

they bought and sold you

I look at the world and I notice it’s turning

While my guitar gently weeps

With every mistake we must surely be learning

Still my guitar gently weeps

I don’t know how you were diverted

you were perverted too

I don’t know how you were inverted

no one alerted you

I look at you all see the love there that’s sleeping

While my guitar gently weeps

I look at you all

Still my guitar gently weeps

While My Guitar Gently Weeps — The Beatles

3/2 in Woodbury for $400K

Mysterious Ways – U2

The movements of financial markets are very mysterious and notoriously difficult to predict. Where will the stock market be today? Up or down? Your guess is as good as mine. Of the various types of financial markets, residential real estate markets are probably the easiest to predict because they trend for long periods of time. Of course, the difficult part is predicting when they will reverse. I thought our local real estate market would reverse in 2004, but the widespread sale of the Option ARM delayed the crash for two full years.

The top of the market is relatively easy to identify after the fact. When sales fall off a cliff, prices will soon follow. The bottom is a bit trickier. Sales volumes will pick up at the bottom, but it will also pick up in the false rallies leading to the bottom. Upticks in prices are not telling either because bear rallies have that feature as well. The relationship between price and rent is a good indicator. It predicted the last two bottoms, but if the price-to-rent (GRM) is at historic lows, we may not necessarily be at the bottom because inventories and foreclosures may be very high. In fact, I am of the opinion (and I am not alone) that we will have an overshoot of fundamentals based purely on supply and demand problems due to the REO inventory. Too many people borrowed too much money, and these owners will need to be flushed from the system before it is over.

Personally, I will not try to time the bottom tick of the market. I will buy when I can save money versus renting. In fact, I would prefer to buy before the bottom when inventories are high because I will have the widest selection of properties to chose from. If you wait until the bottom is clearly in the rear view mirror, inventories will be low, and you may not find the property you want (don’t worry, you will not be priced out forever.) The previous bottoms gave about a 3-5 year window of opportunity before prices rose to valuations that were too high relative to rents. This time, the window of opportunity may be longer. The ARM reset problem will persist into 2012, and it will take another 2 or 3 years for all the foreclosures to work their way through the system. I may buy in 2010, but I will not expect to see any appreciation before 2015. That will not matter to me because I will be saving money each month versus renting, and I don’t plan to sell any time soon.

Today’s featured property is as mysterious as the markets. It was only listed yesterday, and there are no pictures. Perhaps they will be up by the time this post airs.

Asking Price: $400,000

Income Requirement: $100,000

Downpayment Needed: $80,000

Monthly Equity Burn: $3,333

Purchase Price: $562,500

Purchase Date: 1/31/2006

Address: 52 Vintage #106, Irvine, CA 92620

Beds:	3
Baths:	2
Sq. Ft.:	1,550
$/Sq. Ft.:	$258
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2006
Stories:	3+ Levels
Floor:	1
View:	Has View
Area:	Woodbury
County:	Orange
MLS#:	S544575
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Descriptions don’t get much shorter than that.

This guy will not accomplish much listing this property as a short sale. It is very unlikely that it will get approved. However, he does destroy the neighborhood comps for everyone in Woodbury. Remember the post Financing in a Declining Market? Lenders are now looking at the lowest sale or offered for sale comparable home in a 1 mile radius. In short, everyone with a similar property just got hosed.

This guy bought at the peak paying $562,500. He used a $449,800 first mortgage, an $84,300 second mortgage and a $28,400 downpayment. Not to worry though, he refinanced through Countrywide with a $544,000 first mortgage in April 2007, and he opened a $68,000 HELOC which one would assume he maxed out (I don’t know for sure.) If he did, the total debt on the property is $612,000, and his total mortgage equity withdrawal was $77,900 including his downpayment. If this property sells for its asking price, and if a 6% commission is paid, Countrywide stands to lose $236,000.

This borrowing behavior makes me wonder about another class of distressed homeowners we have not talked much about. How many people out there banked some of their ill-gotten gains and are making payments with borrowed money? If this guy had put $80,000 in the bank, he could have made payments for quite some time. People who have pulled out hundreds of thousands of dollars can do the same. How many Ponzi-Scheme financiers are out there? How long can they hold out? One thing I am nearly certain of is that they cannot hold out longer than the bear market lasts. Each homeowner in this circumstance has a different holding period, and as the weak hands implode, they knock prices down for the remaining holdouts. Some will survive, but the majority will not. This phenomenon is also one of the reasons banks everywhere were freezing HELOCs, even for borrowers with equity. They might have improved their short-term cashflow to keep allowing Ponzi Scheme financing, but ultimately it hurts their bottom lines when these loans get wiped out in a foreclosure.

Johnny take a walk
With your sister the moon
Let her pale light in
To fill up your room
You’ve been living underground
Eating from a can
You’ve been running away
From what you don’t understand…
Look

She’s slipping
You’re sliding down
She’ll be there
When you
hit the ground

It’s all right, it’s all right, all right
She moves in mysterious ways
It’s all right, it’s all right, all right
She moves in mysterious ways
O-o-oh

Johnny take a dive
With your sister in the rain
Let her talk about the things
You can’t explain
To touch is to heal
To hurt is to steal
If you want to kiss the sky
Better learn how to kneel
On your knees boy

Mysterious Ways – U2

He's Back

Groovy Little Hippie Pad — ZZ Top

I have profiled today’s featured property before, but the price is so outrageous, the decor so over-the-top, that it warrants another look.

337 Tall Oak Kitchen

Original Asking Price: $1,059,000

New Asking Price: $835,000

Income Requirement: $208,750

Downpayment Needed: $167,000

Monthly Equity Burn: $6,958

Purchase Price: $479,000

Purchase Date: 6/27/2003

Address: 337 Tall Oak, Irvine, CA 92603

Beds:	2
Baths:	3
Sq. Ft.:	1,800
$/Sq. Ft.:	$464
Lot Size:	–
Property Type:	Condominium
Style:	Spanish
Year Built:	2003
Stories:	3+ Levels
Floor:	1
View:	Canyon, City Lights, City, Hills, Mountain, Panoramic, Valley, Has View
Area:	Quail Hill
County:	Orange
MLS#:	S544203
Source:	SoCalMLS
Status:	Active
On Redfin:	2 days

This superbly appointed single detached home was customized by a senior
exec. w/ the homebuilder. Every detail was considered w/the goal of
making this home not just a notch above the rest, but THE BEST. An
entertainer’s delight, this designer-inspired home has commanding 270
degree views from the Spectrum to L.A., and an innovative flr plan w/2
bedrm stes (one main floor master + upstairs master)w/dual walk-in
clsts+computer office fully wired + a separate room/studio w/own
private gated entryway. Every bldr & seller upgrade imaginable,
incl. custom distressed wood flring, surround sound, upgraded indoor
& outdoor liting, a 2nd fl. deck w/custom blt-in furniture,
stainless prof. Viking BBQ, fully mature garden w/fruit trees, wine
vines, rose garden, outdoor liting–the largest in the Ivy Wreath–spa,
fountain, stainless heater & fire ring, lites & custom outdoor
furniture & music! This property is unique, edgy, urban–feels like
a Manhattan or San Francisco abode w/CA attitude!

“customized by a senior
exec. w/ the homebuilder.” You mean someone who should know better…

Feels like
a Manhattan or San Francisco abode — except that this is Irvine!

337 Tall Oak Bar 337 Tall Oak Bar 2

The place looks like a Bordello to me. Don’t the pictures above look like they need some hookers and a piano man?

337 Tall Oak Bedroom 1 337 Tall Oak Bedroom 2

The master bedroom has inviting double doors and plenty of vanity mirrors so you can watch yourself doing whatever…

337 Tall Oak Bedroom 3 337 Tall Oak Bar 3

If you prefer a red bedroom in the “red light district,” it has one of those too. Don’t you love the chairs? Is that Dogs Playing Poker in the background? Perhaps not…

First, let’s get to the price. There is no way this is worth $835,000, forget the $1,059,000 he was asking last November. There is an identical floorplan (not so gaudy I hope) at 143 Tall Oak asking $550,000. That comparable is going to make financing this Groovy Little Hippie Pad next to impossible. Basically, someone will need to come up with about $400,000 cash to close the deal. Can anyone possibly think this property warrants a $285,000 premium due to the dubious tastes of its owner? You could buy 143 Tall Oak and spend $285,000 making your own brothel if you wanted. You could pay for some big-time designers and top-of-the-line everything and still not spend the premium. The last time I profiled this property, I challenged everyone to come up with a rationale for the price. I still can’t come up with one.

At least this guy was a conservative borrower. He only owes between $400,000 and $450,000 depending on whether or not he tapped his HELOC. If this property sells for its ridiculous asking price, and if a 6% commission is paid, the owner stands to make $305,900. The $225,000 he backed off of his initial asking price must feel like a huge discount to him. The recession is hurting everyone, I guess.

I’m gonna find me a groovy little hippie pad.
I’m gonna find me a groovy little hippie pad.
I work a hundred grand scam from a border town.
Well, I’ll be feeling glad.

I’m gonna find me a blonde-haired mama,
In a jeep with a german shepherd by her side.
I’m gonna find me a blonde-haired mama,
With boots and a fourty-four on her side.
And if I ain’t too hjigh or used up,
I’ll have her take me for a groovy little hippie ride.

I’m gonna fix brown rice every day,
And drink down a bottle of midnight red.
I’m gonna fix brown rice every day,
And drink down a bottle of midnight red.
That’s all I need to get groovy,
That’s what all the little hippie said.

Groovy Little Hippie Pad — ZZ Top

Affordability Mortgage Products Make Prices Unaffordable

I Want It All — Queen

We all want affordable housing. There are numerous government programs designed to provide low-cost rental and ownership properties to people in all walks of life. Lenders, builders, realtors and buyers all benefit from affordable housing because affordability means an increase in transaction volumes and more money into the pockets of those dependant on the real estate market. The difficult problem with affordable housing is how to provide it without making it unaffordable. Finance is not the answer.

Most of those who worked in the mortgage business really believed the “financial innovation” meme. I have contended that the entire idea is a fallacy. At its core, the belief among financiers is that affordability products reach more customers and permit home ownership for a larger number of people. The statistics during the Great Housing Bubble seem to warrant this enthusiasm.

Home Ownership Rates from 1984-2005

Unfortunately, increasing the home ownership rate also dramatically
increased prices and created an unsustainable bubble in both. Why is
that? As with all macroeconomic concepts, it emerges from the
microeconomic circumstances of individual borrowers and buyers. If you
look back to the lending practices which endured the crash of the last
housing bubble in the late 80s, you see that the financing arena was
dominated by 30-year conventionally amortizing loans with 20%
downpayments and conservative debt-to-income ratios. This is the only
loan program that has relatively low default rates even if prices
decline. So what happens when a new “affordability” product is introduced into this stable system?

Let’s look at an example. Assume our would-be buyer makes $100,000 a
year and could qualify for a $300,000 loan using conventional
financing. He has save $100,000 for a downpayment and costs. He is
looking to buy a $375,000 home. In our stable system, he would find a
home relative to his income. If he is making the median income, then he
would be able to afford a median priced home. Now let’s say that
lenders “innovate” and start offering interest-only loans with a
10-year fixed term followed by an interest rate reset and a recast to a
fully amortized loan on the remaining 20-year schedule (sound
familiar?) Our buyer is conservative and does not want to purchase on
these risky terms and take the risk on future interest rates or the
need to refinance later because he may not be able to afford the higher
payment in 10 years. However, other potential buyers will ignore
these risks and embrace the new financial innovation because it allows
them to buy a house they previously could not afford. The same payment
on an interest-only schedule now finances 15% more money, so other
potential buyers in the marketplace who are making $100,000 can now
finance around $345,000 instead of $300,000. When our conservative
buyer goes out in the open market to bid on properties, he now finds
himself being consistently outbid on properties. At this point, he has
a choice to make: either embrace the new financial innovation and bid
15% higher for the same property, accept a lower quality property, or
not buy a home. The affordability product did not make houses more
affordable, it made them less so.

Our stable system without affordability products saw annual appreciation of around 4% because this is how much incomes and rents were rising (this was true for most national markets outside of California,)
and it reflects the amount of increased borrowing power available to
homebuyers each year. With appreciation only running at 4%, market
participants do not get excited about making millions in real estate,
nor are they worried about buying today because they may get priced out
tomorrow. Affordability products change all that. With the introduction of interest-only borrowing to the system, prices can very quickly appreciate 15% as the financing system seeks a new equilibrium dominated by the new affordability product. This sudden and dramatic rise in appreciation can be the precipitating factor that ignites a housing price bubble. Once people start drinking the appreciation kool aid, they begin to stretch their debt to income ratios to buy properties with the belief that the extra investment will be recouped by rising home values. Plus the fear of being priced out compels people to buy for fear of not being able to later. The value of real estate detaches from its fundamental value, and the perception of value is driven by appreciation alone.

Behavioral Finance Theory

The bubble of the late 80s became dominated by interest only products, and buyers began using DTIs well in excess of the normal 28% limit. However, that bubble rally was of much shorter duration and of much lower volume toward the peak, so the majority of owners still had conventional financing. Mortgage equity withdrawal was much less common, so not as many households were overextended. The result was a period of moderate foreclosure activity and slowly declining prices until affordability returned based on conventional financing products.

Debt-To-Income Ratio 1986-2006

What really sets the Great Housing Bubble apart was the “innovation” which took off in late 2003: the Option ARM. As you can see in the table above, the Option ARM, or negative amortization loan, allowed borrowers to finance twice amount a conventional mortgage would provide. Hence, prices were bid up to twice the price level sustainable with conventional mortgage financing — a price level to which the market is in the process of returning.

In short, affordability products did not make prices more affordable, they inflated a massive housing bubble.

This fact is important because if the truth of affordability products is not recognized for what it is — a series of unstable loan programs that inflate house prices — these products may return to ravage our housing market again. Affordability products do not help buyers get into homes, they prevent buyers from getting into homes under terms which are sustainable. Temporary home ownership is renting. Affordability products simply allow people to rent from a lender. Perhaps some may sustain home ownership, but unless they were one of the first to embrace affordability products, and unless they refinanced later into a conventional mortgage, they will ultimately lose their illusion of home ownership and go back to renting from a landlord rather than the lender. What good came from all of that?

Will lenders learn the right lessons from The Great Housing Bubble? I doubt it…

Adventure seeker on an empty street
Just an alley creeper light on his feet
A young fighter screaming with no time for doubt
With the pain and anger cant see a way out
It aint much Im asking I heard him say
Gotta find me a future move out of my way
I want it all I want it all I want it all and I want it now
I want it all I want it all I want it all and I want it now

Listen all you people come gather round
I gotta get me a game plan gotta shake you to the ground
Just give me what I know is mine
People do you hear me just give me the sign
It aint much Im asking if you want the truth
Heres to the future for the dreams of youth
I want it all (give it all) I want it all I want it all and I want
It now
I want it all (yes I want it all) I want it all (hey)
I want it all and I want it now

Im a man with a one track mind
So much to do in one life time (people do you hear me)
Not a man for compromise and wheres and whys and living
Lies
So Im living it all (yes Im living it all)
And Im giving it all (and Im giving it all)

Yeah yeah
Yeah yeah yeah yeah
I want it all all all all

It aint much Im asking if you want the truth
Heres to the future
Hear the cry of youth (hear the cry hear the cry of youth)
I want it all I want it all I want it all and I want it now
I want it all (yeah yeah yeah) I want it all I want it all and i
Want it now

I Want It All — Queen

30% Off and Falling

Free Fallin’ — Tom Petty

Do you remember the days when a relatively low-priced property would bring out the knife catchers and get bids over the ask? Those days appear to be behind us. The price on today’s featured property was dropped $100,000 at the beginning of the month, and it is still there. It is discounted 30% off its 2005 purchase price which likely represents almost 35% off the peak valuation. With another $70,000 to $90,000 off, this property would be at rental parity. Prices are still free fallling, but at least a potential bottoming figure is in sight. To be honest, I did not think we would be seeing prices like this in 2008.

415 E Yale Loop #13 Inside

Asking Price: $549,900

Income Requirement: $137,475

Downpayment Needed: $109,980

Monthly Equity Burn: $4,582

Purchase Price: $780,000

Purchase Date: 9/22/2005

Address: 415 E Yale Loop #13, Irvine, CA 92614

Beds:	3
Baths:	3
Sq. Ft.:	2,150
$/Sq. Ft.:	$256
Lot Size:	–
Property Type:	Condominium
Style:	Garden Home
Year Built:	1985
Stories:	2 Levels
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	P645606
Source:	SoCalMLS
Status:	Active
On Redfin:	38 days

POPULAR GARDEN ESTATES HOME WITH SPACIOUS, OPEN FLOOR PLAN. STEP DOWN
LIVING ROOM WITH WOOD BEAMS&COZY BRICK FIREPLACE. LARGE KITCHEN
WITH DOUBLE OVEN, PANTRY WITH NOOK AREA. FAMILY ROOM WITH WECOND BRICK
FIREPLACE & BUILT IN BOOK SHELVES. LIGHT TEAK WOOD FLOORS.
PLANTATION SHUTTERS THROUGHOUT. NEWER LIGHT, BERBER CARPET, LARGE
MASTER SUITE WITH DUAL VANITIE, LARGE TUB&SEPARATE SHOWER.
CATHEDRAL CEILINGS. NEWER HVH DIGITAL HEATING SYSTEM. BUILT IN
CEDAR&ORGANIZERS IN CLOSETS. TROPICAL BACKYARD WITH FOUNTAIN.
ROMANTIC JACUZZI AND PALM TREES!!!

COZY BRICK FIREPLACE? Is it just me or do the words “cozy” and “brick” seem incongruous when put together?

WECOND?

ALL CAPS and three exclamation points.

Today’s owners are losing some of their own money. The property was purchased on 9/22/2005 for $780,000. There is a $624,000 Option ARM first mortgage with a 1% teaser rate, and a $78,000 HELOC. If this HELOC was used for the purchase, the downpayment was $78,000. If not, the downpayment was $156,000. It seems likely this 10% was put toward the purchase. Either way, all downpayment money is gone, and the first mortgage is significantly imperiled. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $263,094. The loss to Countrywide/Bank of America will be $185,094.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

Shes a good girl, loves her mam a
Loves jesus and america too
Shes a good girl, crazy bout elvis
Loves horses and her boyfriend too

Its a long day living in reseda
Theres a freeway runnin through the yard
And Im a bad boy cause I dont even miss her
Im a bad boy for breakin her heart

And Im free, free fallin
Yeah Im free, free fallin

All the vampires walkin through the valley
Move west down ventura boulevard
And all the bad boys are standing in the shadows
A ll the good girls are home with broken hearts

And Im free, free fallin
Yeah Im free, free fallin
Free fallin, now Im free fallin, now im
Free fallin, now Im free fallin, now im

I wanna glide down over mulholland
I wanna write her name in the sky
Gonna free fall out into nothin
Gonna leave this world for a while

And Im free, free fallin
Yeah Im free, free fallin

Free Fallin’ — Tom Petty