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Another day, another market crushing REO. I have to wonder when the knife catchers will start to realize there is a steady flow of these properties entering the market. It isn't like you need to buy this one because it is the only good deal in the market, and it isn't going to be the only one we will see in the future. In fact, as each one of these comes on the market, they lower the comps and cause a whole new wave of foreclosures as all the overextended homeowners in the area lose their ability to refinance. We are witnessing the first stage of the market's downward spiral.

Asking Price: $601,400

Income Requirement: $150,350

Downpayment Needed: $120,280

Monthly Equity Burn: $5,011

Lender Purchase Price: $625,338

Borrower Purchase Price: $745,000

Lender Purchase Date: 3/27/2008

Borrower Purchase Date: 11/30/2006

Address: 176 Vintage, Irvine, CA 92620

HOOME IS CLISE TO AL? What?

ALL CAPS?

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This property has an interesting history. It was first purchased from Pulte homes in May of 2005 for $650,000. The first owner obviously grossly overpaid, but they were fortunate enough to find the greater fool to buy this property for $745,000 on November 30, 2006. Even after commissions, this original buyer made $50,000 for holding the property just over a year. The second owner was not so fortunate. This owner put $149,000 down and lost it all. The bank purchased the property for $625,338 which appears to be the outstanding balance on the mortgage when the missed payments are added on. If the lender gets their asking price (some knife-catcher will probably step up,) they stand to lose about $60,000 after commissions. A relatively small loss by Irvine standards. Of course, the total loss on the property is over $200,000, but the buyer lost the majority of it. It wasn't a particularly successful flip. Also noteworthy is the asking price is a full 20% under the peak sales price. We are 20% off the peak and still falling…

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In my place, in my place

Yeah, how long must you wait for it?

In My Place — Coldplay

Greed Killing — Napalm Death

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Financial manias are built by greed and fear: the two motivations driving the fluctuation of prices in all financial markets. When prices get greatly detached from fundamental valuations, the market is poised for a dramatic fall. There is a phenomenon in residential real estate markets where
foreclosures become bank-owned properties (REO) that causes prices to drop. Today’s post explores the impact of a single REO in a neighborhood as it lowers the values for everyone else.

Asking Price: $614,900

Income Requirement: $153,725

Downpayment Needed: $122,980

Monthly Equity Burn: $5,124

Lender Purchase Price: $606,300

Buyer Purchase Price: $758,000

Purchase Date: 6/13/2005

Address: 116 Tall Oak, Irvine, CA 92603

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This property is a rather unique bank-owned property. It is the first I have seen where the lender received a deed in lieu of foreclosure rather than going through the foreclosure process. I have no idea what the terms of the agreement were, but it is interesting that Countrywide was willing to go through this process rather than foreclose on the property. Another interesting feature was that the seller who gave up the property put $151,700 in a downpayment and gave it up. Based on the neighborhood asking prices, it would appear as if this seller had some equity, but then again, the asking prices in the neighborhood may be wishing prices and this seller may have been better off giving the property back to the bank rather than going through with a sale and paying a commission (although I imagine the local realtors don’t see it that way.)

The property sold in 2005 for around $750,000. This was not the peak as that occurred about a year later. The 20% off the original purchase price is more like 25%-30% off the peak. Let’s take a quick look at the asking prices of neighborhood comps:

321 Tall Oak, Irvine, CA 92603, Price: $709,800 — LOL

124 Tall Oak, Irvine, CA 92603, Price: $725,000 — OMG

213 Tall Oak, Irvine, CA 92603, Price: $788,000 — WTF

We have three sellers on the same street with either the same model or a very similar one. The wide disparity in prices has little to do with the quality of the prices and much to do with the delusions of the sellers. The market is about to give them a cleansing dose of reality.

In a healthy real estate market, when a foreclosure occurs, the auction price is not reflected in property appraisals, and when the REO hits the market, it is absorbed at market prices similar to the asking prices in the rest of the neighborhood. In an unhealthy real estate market like ours, asking prices are all over the spectrum, and they are all greater than bids in the market, so transactions are not occurring. Buyers are either unwilling or unable to purchase at the prices being asked. When there is an REO in a neighborhood it works like a Wal-Mart rolling back the prices of all its competitors.

This REO is going to sell for less than $614,900. When it does, it will serve as a comparable property sale an appraiser cannot ignore. Lenders are now very sensitive to puffed appraisals, and ignoring this comp will not be possible. After this property is sold, buyers looking at the other three properties listed above will have to deal with the lower comp when they seek financing. The lender is going to assume the value of the three properties above are somewhere around $614K, and they will apply their loan-to-value limits based on this amount. If a buyer is only going to be loaned 80% of $614K to purchase any of the other three neighborhood properties, the only way those homeowners are going to obtain their asking prices is if some buyer is willing to put 30%-40% down. How many buyers are ready, willing and able to do that? Not many.

In a restrictive lending environment like we are witnessing now, volume dries up, and prices fall with each sale. Each lower sales price lowers the amount lenders are willing to loan to purchase the next property in the neighborhood. This downward spiral of lower comps reducing lending amounts continues until we reach bottom at rental parity. As the total amount of borrowing declines both the prices of individual properties and aggregate home price measures like the median fall precipitously, just as we have been witnessing since the credit crunch began last August. When we see they aggregate measures reported, it makes for an interesting statistic, but when you see how the process is happening on the ground with properties like today’s, you can see the mechanism for the price decline in action. This is happening all over California, and it will continue to drive prices lower as credit continues to tighten and REOs continue to flood the market.

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The wrong time, the wrong place,
our smiling face of distrust.
Buried, the seed deep in all our heads.
Prepared ouselves for the fall.

Not now, when then?
Not now, when then?

Greed Killing — Napalm Death