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Thomas Jefferson believed “Financiers, bankers and industrialists make cities the cesspools of corruption, and should be avoided.” It is hard to argue with him given it is the actions of lenders that enabled the Great Housing Bubble.

Today’s property illustrates why something needs to be done to prevent irrational exuberance from creating volatility in our real estate markets. The family that bought this property put 25% down, and although they started with an Option ARM, they refinanced in 2006 into a fixed-rate mortgage. They tasted the kool aid and did not find it palatable. Families like this should not get screwed based on the timing of their purchases due to life’s circumstances. From the photos, it appears they have young children. They probably bought this as a family house. People should be able to do this without losing their life savings. If lenders did not enable people to overborrow, prices would rise about 4.5% a year, and people wouldn’t have to worry about when they bought or sold. Housing bubbles are not created with equity; they are created with borrowed money. People blow bubbles; lenders provide the air.

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Asking Price: $739,900

Income Requirement: $184,975

Downpayment Needed: $147,980

Monthly Equity Burn: $6,165

Purchase Price: $800,000

Purchase Date: 5/10/2005

Address: 11 Jefferson Ave., Irvine, CA 92620

Anyone want to comment on the decorative tastes of the owners?

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If the sellers get their asking price (it seems about 10% too high), and if they pay a 6% commission, they stand to lose $104,494 — over half of their $200,000 downpayment. Realistically, they are going to lose almost all of it.

Just to provide a reminder of how overpriced homes still are, this property would probably rent for about $2,800 a month. A 160 GRM puts the value at $448,000. I you look back at the sale history, this property sold for $390,000 in 2001. Prices in 2001 were inflated, but not in bubble territory yet. A value of $448,000 is about where this house should be; it is where it would be if there was not a bubble, and it is about where it will be in 3-5 years…

BTW, the featured song today wasn’t written about real estate bubbles, but the lyrics offer that interpretation.

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The summer had inhaled
And held its breath too long.
The winter looked the same,
As if it had never gone,
And through an open window,
Where no curtain hung,
I saw you, I saw you,
Coming back to me.

A transparent dream
Beneath an occasional sigh…
Most of the time,
I just let it go by.
Now I wish it hadn’t begun.

Comin’ Back to Me — Jefferson Airplane

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We have reached a new milestone in our documentation of the price decline in the Great Housing Bubble: we have our first property closing at 40% below its previous sale price. That’s right, 40% off in Irvine. The median has not declined 40% yet, but individual properties have. Will the median be far behind?

We have been watching this property for some time. It was the source for a post that first appeared on March 17, 2007, and was updated on Sep 15th, 2007. We followed up again with the post, Show Me, on January 15, 2008. It was purchased on May 26, 2005 for $565,000 with 100% financing. There was a first
mortgage from New Century for $452,000 and a second from New Century
for $113,000. Ordinarily, when a property goes up for auction, the lender will bid the property up to the value of the first mortgage, in this case $452,000. This property was purchased at auction by the trustee for a CDO (U S BANK NA, ; STRUCTURED ASSET INVESTMENT LOAN TRUST 2,) for $337,500. Think about what that means: 1. Lenders and CDO trustees are now letting properties go at auction for less than the value of the first mortgage. 2. At open auction, the highest bidder was 40% under the purchase price of this property. The flippers wouldn’t even touch it. 3. If investors are losing 40% on Irvine properties now, how bad will it be for them in 2 or 3 years? 4. The neighborhood comps just got obliterated.

This last point warrants further examination. Let’s say you are a homeowner who purchased at the peak, and you are still in denial about the market. In the minds of such individuals, the market is down artificially, and values will rebound soon. The reality is, the market for this property is 40% off the peak (Maybe a bit less if they can resell it for more than $337,500. They are trying.) Percentages can be a bit misleading when it comes to price declines. A 40% decline requires a 67% increase to get back to the peak. Assume for a minute we are at the bottom (which we are not,) how long will it take for this property to appreciate 67% in value?

At a 5% rate of appreciation, it will take 12 years for this property to get back to the peak. Of course, if you believe 15% yearly appreciation will be returning soon, it will get their quicker, but that takes a degree of denial that will be hard to sustain in the long term. It isn’t going to happen. In reality, this property will probably decline further in value because less desirable condos always do fall further, so the appreciation does not start in 2008. It probably starts in 2013 from a lower base number. How long are people going to be willing to wait for values to return? Will people be trapped in their homes for another 20 years. I hope they like them.

Asking Price: $399,000

Income Requirement: $99,750

Downpayment Needed: $79,800

Monthly Equity Burn: $3,325

Purchase Price: $564,678

Purchase Date: 1/25/2008

Address: 1 Montgomery #46 Irvine, CA 92604

This property is very close to the freeway. It is practically on it.

BTW, the original asking price on this property was $610,000. LOL!

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It is hard to say who is losing money on this one. New Century is already bankrupt, so either some CDO is losing or the various creditors of New Century are losing. In either case, if we assume this one is on their books at $565,000 (it is probably higher with all the fees and lost interest), and if we assume they get their $399,000 asking price and pay a 6% commission, the total loss will be $189,940. That loss is on one small condo in Irvine. Does anyone really believe the lenders are finished writing down their losses?

So how far will prices drop? Will we see 1999 prices? The aggregate of the market will not, but we may see some of the undesirable condos go for very low prices. I have a sneaking suspicion we may see a 1990 rollback before this is done. I know, that sounds crazy, but 1990 was the peak of the last bubble, and that puts it on par with 1998 or 1999 prices. A small condo bought in 1990 that wasn’t particularly well cared for might be a 20-year rollback. It could happen, and we will be watching for it.

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I was dreamin’ when I wrote this
Forgive me if it goes astray

‘Cuz they say two thousand zero zero party over
Oops out of time
So tonight I’m gonna party like it’s 1999

1999 — Prince