I have emptied my Reservoir of Schadenfreude. How about you? Are you over it?

Asking Price: $1,069,000

Address: 6002 Sierra Siena Rd Irvine, CA 92603

{book4}

Suckers walk, money talks!
But it can’t touch my three lock box!
Uh! Oh, yeah!
Mysteries of the days of old.
You find the key, you got the gold.

Three Lock Box — Sammy Hagar

I had lunch with a friend yesterday who is not a fan of 3-car garages — can’t touch my three lock box! Perhaps we should ask our guest on Monday if the Irvine Company will be creating more product with 3-car garages (we don’t want them). I don’t believe there are any in the communities of the 00s. Today’s featured property may become rare and valuable….

{book}

The Great Housing Bubble made me angry (see The Reservoir of Schadenfreude). It drove me to write for this blog for 2 1/2 years and put together a
book. Anger can be very motivating, but over the long term, it eats
away at me, so I am letting it go.

In our collective unconscious which
manifests in our dreams and our mythology, water is often symbolic of
our emotions or our emotional state. Have you noticed people are often
categorized as deep or shallow? If you are in debt you often feel
“underwater,” etc.

Anger is much like water: if not given an outlet, it will fill a
reservoir until it reaches a breaking point and is expressed in a flood
of emotional rage. Each encounter with a pathologic, kool-aid
drinking housing bull over the last few years has added to this
reservoir, and reveling in failed flips is an outlet for this pool of
toxic emotional waste.

There is an element of tragedy in every disaster, but financial
bubbles are some of the most interesting because they are completely
man made. They are created by the individual decisions of buyers who
are motivated by greed, foolish pride, and a false sense of security.
Each of these people should have known better. Many of them were warned
of their impending doom and chose to go down the path to the Dark Side.

My reservoir is empty.

I am over it.

Well, I may not be totally over it, but I am ready to move on.

The social media is a fascinating phenomenon. Traditional media outlets are being displaced, and citizen journalists and analysts are stepping into this void and providing real content. Have you been over to Calculated Risk lately? It is amazing the quality of the posts and the speed at which he produces them — and he is unpaid; he is doing it for the joy of the activity. How cool is that?

This blog reaches thousands of people each day. I am a citizen journalist. When we all look back on this era, the bubble blog community captured the Zeitgeist of the Great Housing Bubble. The archives of blogs like this one and Housing Panic encapsulate the Age. Keith walked away from Housing Panic and started a new blog. I am not that radical.

Many people come here for the analysis and information, and I hope I make it fun. 🙂 (we have to cut back on the schadenfreude) 🙁 I like to write about the local real estate market, and you like to read it, so I will carry on. I don’t know what changes you will see, but I have to be who I am.

My new goal when I talk about a property is to be accurate. If I have the time, I may do more in-depth analysis on properties like this one: (IHB Opinion_of_Value_14802_Devonshire_Ave_Tustin,_CA_92780.pdf) I will purchase better data to create better analysis posts. I will stay in Irvine on profiles during the week and make sure the IHB will always be the Irvine Housing Blog.

One of the pleasures of the blog are those moments when I can express myself on a personal level. The social media make that a part of the program. We shared this unique cultural event — the Great Housing Bubble and the ensuing recession — the emotions are part of the cultural experience. Back in December 2007, I put it this way in Balance:

In many ways blogs are uniquely personal things. The personalities
of the contributors and commenters shapes the conversation and gives
the blog a personality all its own. The Irvine Housing Blog is a
community — a community of like-minded individuals (and recovering
kool-aid addicts) who have come together to make sense of the very
unusual events we have witnessed in our housing market.

…

Discussing and expressing the emotional side of the bubble is part
of my mission as a blogger. I know I am not the only one with a Reservoir of Schadenfreude. I must confess that I enjoy going over to Housing Panic and reading the unbridled emotional release you find there. I couldn’t
maintain the level of intensity Keith does and stay sane, but there are
times when letting loose is appropriate, and Housing Panic is a place
to do it.

…. I do not want to ignore my emotions nor do I want to
discard my intellect. More of one side or the other may come out during
any given day, but over the course of time, I hope I achieve a balance
in my posts just as I hope to achieve a balance in my life.

Life is about balance; it is about being aware of your intellectual
and emotional intelligences and being able to manage both. During a
financial mania people allow their emotions to override their
intellect, and the results are not pretty. It is only through the
interplay of the intellect and the emotions that we can gain a deeper
understanding of what really happened in the Great Housing Bubble.

I am over it. It is time to rebalance.

Asking Price: $1,069,000

Income Requirement: $267,250

Downpayment Needed: $213,800

Purchase Price: $380,000

Purchase Date: 11/26/1996

Address: 6002 Sierra Siena Rd Irvine, CA 92603

You know the housing bubble has not deflated yet when you still see homes sporting 300% gains in 13 years. A house should double in twenty not triple in thirteen. There is still a long way to go.

I am not sure how to close on a Friday now. The old catchphrase doesn’t feel right anymore.

I don’t know if this will become a tradition, but I will share an experience I had recently that sent me a message.

I was driving down to Laguna Beach last Sunday morning to meet a friend, have a cup of coffee and talk about life. On the way there, I passed a group of bikes clustered together in a tight pack. As I drove past, I could see one bike in the distance breaking away from the pack and peddling hard. I found myself asking, “Who was that guy?” Then, the more I reflected on it, I realized that I wanted to be that guy.

The message? Be your best and lead the way.

Welcome to the weekend open thread.

I was directed to a realtor in Malibu who has been telling the truth about his local market, Rick Wallace.
I don’t know him, and I have no business relationship with him, and
this post is not compensated. He has written some good stuff, so I
thought I would share it with you.

Rick Wallace: Malibu’s Expert Realtor

The listing below is not one of his.

Asking Price: $9,295,000

Address: 31634 SEA LEVEL Dr MALIBU, CA 90265

I have Mr. Wallace’s permission to share some of his excellent work:

Real Estate Revolves Around Time and Money

Time is money. Money can buy time. In virtually every activity of our day, the choices we make involve a consideration of the cost in time and the cost in money.

The real estate market is founded on these two assets. In fact, all statistics to measure the marketplace involve those principles. During 2007, over the course of 12 months, for example, the median price of a home sale in Malibu was about $3 million. A measure of money over time.

Every individual makes decisions regarding real estate that involve the weight of time and money. That includes many who do not invest or ever buy a home. They are making a decision that the money they have, at least at that time, is not enough to purchase the asset they wish. Instead, they rent, and pay money to a landlord over time.

In negotiations, the weight of time and money is everything. The result of a negotiation, including one that ends with no deal, is the result of the two parties, separately and privately, measuring their time and money threshold and positioning themselves accordingly. A buyer can take their time to decide when to spend the money they have available, which is always in a state of flux, as long as, over time, the values are not moving away from their capability. If a buyer suddenly has extra funds, that may accelerate the moment of decision to pounce on the house or condo they desire.

Most interesting is the behavior of sellers in the real estate market, something I have been studying for my 21 years in the business. My final conclusion is that half the time sellers behave in a smart way. Half the time they are just plain stupid.

Of course, sellers do not know what is going to happen in the future. Nevertheless, the one universal truth of a person or party selling a home is they believe that time will probably work in their favor to bring the most money they can receive. Everyone believes that at first. But it is not always true. In good markets, it makes sense. When the prevailing trend is that the value of property is increasing, a person selling is confident that over more time, more money can be gained. More time equals more money.

When, then, does that person ever sell at all? The obvious reason, that they determine separately and privately, is that they do not have the luxury of time to wait. They need or want to sell soon for whatever private reason they may have – a job change, wanting to scale down, anxious to move to a different lifestyle. In the end, time is such a valuable asset; it trumps the potential of waiting for more money. It is an underrated and undervalued aspect of negotiation. Often, time is more valuable than money.

Hundreds of times, I have seen sellers sell a home for much less money than they should’ve. Or less than they COULD HAVE! How does that happen? It is because for much of the time, money is more important to them. Then, they change their value choice to a preference of time. This is the frequent behavior of a person who puts their house on the market at a ridiculous price, whether by ego, or stupidity or just mere wishing, and when it does not sell over a long time, suddenly they need or want to sell more badly.

The best deals a buyer can make are often from a seller that started too high in price and has lasted on the market a long time. To make up for lost time, that seller may give up the most money in the end. It is a quirky but inevitable fate. The cost of asking too much, unbeknownst to many sellers, is that they grow exhausted over time and their passion for money disappears in the end.

Sellers, before hitting the market, should make a decision of what is important to them, time or money. In the current market, which is clearly demonstrating lowering prices, many sellers HAVE TIME and do not need or particularly want to sell. They won’t, most assuredly. The money is more important and since they will not get the money they desire, they will make use of the time. Other sellers are in the opposite situation. They do not have time. And the longer they take, the less money they will get anyway. In a market like this, as I have advised my clients, the money you get NOW, no matter how disappointing it is, is still better than taking any more TIME, particularly if time is not a luxury. The money later will only be less and time will be lost.

{book2}

Gap widens between number of homes listed vs. homes sold

Realty in Malibu Ignores Reality

Many thousands of people would love to own a Malibu home. Hundreds inquire about the possibility every month. The sideline is packed full of wishful buyers. Malibu is the dream of multitudes who crave beauty, recreation and a small-town feeling for their lives, as well as the ultimate reward for accomplishment. Yet, in 2008, only about two homes per week sold here.

Despite the deep romantic chemistry between the public and our town, the transitive property of equality (if A = B, and B = C, then A = C) is ignored by many Malibu homeowners.

“A” is a real estate market that statewide and in the Los Angeles region has seen values drop more than 40 percent. “B” is the historically proven notion that realty trends in the region similarly occur in Malibu. “C” follows that Malibu is experiencing a 40 percent drop in real estate values, or more. Our town, however, has been in a long period of denial. The assumption of insulation from the market has been dominant. Many listings still come on the market at higher prices than were recently paid for the same house, as if a profit is still expected in this economy. Other listings sit for months with no offers.

The result: almost no marketplace at all; very few sales; a Malibu real estate industry with barely a pulse.

It is true that the lending and home value collapse had a delayed effect on Malibu, as well as on other high-end areas of Los Angeles. Now, however, every price range, including the revered upper-end, is suffering from a harsh lack of willing and able buyers. The discrepancy between the number of active buyers and sellers is large. Many in the industry and the town seem unwilling to face it.

I believe Malibu risks a much greater value decline than necessary unless price stabilization occurs sooner than later. Just as the individual who starts with an aggressively high asking price is often the most motivated seller later on, settling for a much lower than anticipated price, our market as a whole risks a greater decline in the long run because reality is disregarded in the short run.

Only 100 homes sold last year? This is more challenging than any market of the 1990s when we had a prolonged housing slump. Last year was probably the worst year for sales in Malibu history, with only about 2.5 percent of existing homes transacting. Yet many listings are currently priced as though year 2004 appreciation is still in effect when, really, a 2004 sales price now might be fortunate.

The marketplace requires that either a buyer have a good amount of cash, is taking a profit out of their recent home sale, or can get a large loan. All three sources are limited. Investment portfolios are diminishing, home equities have narrowed or been eliminated, and lending market requirements are anything but relaxed.

While banks are operating with the right hand making it thorny for anyone to get a loan, the left hand takes back more properties lost by sellers because buyers cannot get a loan. Only when prices are so low that lenders feel little risk left from the market will they go back to taking chances with borrowers.

That means that competitive pricing is vital. Before a real estate recovery can occur, let alone rising prices, some equilibrium needs to be established. Sales and value data need to be in place. Buyers and sellers (and Realtors) need to be working from some knowledge base. Our community lacks that simple guide at this time.

Individuals can never be expected to put their needs behind those of the community, but this is a time the stars are aligned. All of Malibu will benefit from smart sellers. The best advice now, I believe, is the same as during the past 18 months: “Mr. and Mrs. Homeowner, with values heading downward, you are better off selling sooner than later. And if you don’t need to sell, you are not getting any offers and you decide not to lower your price, it is probably not the right time to be competing in the already saturated market. Unless you’re willing to price your home with the growing number of short sale and foreclosure sale prices (the prices most buyers are watching), just sit back a few years and enjoy your lovely Malibu home.”

Prices are easily forecast for the next six to 12 months, if supply and demand trends are clear. In Malibu, when the annualized sales projection is equal to the current inventory of homes for sale, prices likely remain flat. In good times, yearly sales totals were in the 300s and the inventory was only about 150 homes for sale; prices were going skyward. But now, with a pace of 100 projected homes selling annually and 200 to 250 on the market, prices are guaranteed to keep going down. With the current discrepancy, it may be a steep drop.

Sellers have a choice of burying their heads in the 2006 sands, taking a 2002-2004 number now or looking at a lower, year-2000 price down the road. I hope Malibu’s retreat on the calendar is as brief as possible. Clarity of the market environment may help.

Conversely, Malibu in good cycles has grown in value exponentially better than the rest of the state. To illustrate, in 1972 the median value of a home in Malibu was twice that of the state. By 1990, it was three times greater. By 1997, it had gone up to four times the state median; recent years, five to six times. While prospects for the long term are fabulous for Malibu investors, at the moment the median asking price in Malibu is 14 times the state median sale price. I feel it is out of sync with reality.

Malibu real estate will always be the best that can be found, but this is a time to be cutting losses, not attempting gains. Malibu is not immune from the rest of the world; pricing needs to adapt to conditions. Those who realize this soonest will be rewarded, as will all of Malibu.

Asking Price: $9,295,000

Address: 31634 SEA LEVEL Dr MALIBU, CA 90265

Well, if you can lease it for $50,000 and buy it for $9,295,000, the GRM is 185.9. That actually puts this property at rental parity — assuming someone would underwrite a $7,000,000 loan.

Properties like this and in many special neighborhoods, the traditional math of cashflow valuation breaks down. Next week I am going to explore the reasons for this.

If you want to see single-family detached homes trading below rental parity, you do not have to go far. This one in Tustin is just north of the District.

Asking Price: $449,900

Address: 14802 Devonshire Ave Tustin, CA 92780

But I’m a substitute for another guy
I look pretty tall but my heels are high
The simple things you see are all complicated
I look pretty young, but I’m just back-dated, yeah

Substitute — The Who

All methods of real estate valuation are based on the principal of substitution. A rational buyer — not that we have many of those — will not pay more for a property than a comparable property; instead, the buyer will “substitute” a comparable property for the one they truly desired.

For instance, this property (4592 Abbotswood Cir Irvine,
CA 92604) being offered for $585,000, and this property (14862 RATTAN St Irvine,
CA 92604) being offered for $580,000 are comparable in many ways to today’s featured property. Buyers looking to purchase in Irvine would probably prefer one of these two properties to today’s featured property because they are in Irvine; however, someone looking for properties of this type may substitute today’s featured property and save 25%.

Are the two Irvine properties really worth 25% more? Rental comps suggest there is a premium for the Irvine properties, but it closer to 5% than 25%.

This substitution effect is very real; in fact, it was a reader of this blog that contacted me to analyze today’s featured property. I was quite surprised to find it was trading 10% below rental parity.

The substitution effect is what causes people to commute from Corona or Rancho Santa Margarita or simply cross the city boundary into Tustin. It is the substitution effect that is going to drag down prices in Irvine.

There will always be a premium to live in Irvine. This premium is reflected in the high local rents (which someone will remind me are falling). This rental premium translates into a home price premium. The problem now is that this home price premium is still way too high relative to rents. That will change.

Asking Price: $449,900

Income Requirement: $112,475

Downpayment Needed: $89,980

Purchase Price: about $50,000

Purchase Date: A long time ago

Address: 14802 Devonshire Ave Tustin, CA 92780

For a detailed analysis of this property including sales comps and rental comps to establish rental parity, please click on this PDF file

(IHB_Brokers Opinion_of_Value_14802_Devonshire_Ave_Tustin,_CA_92780.pdf)

Happy 4th of July! I hope you are enjoying this wonderful holiday weekend.

I was featured this week at the Irvine Homes Blog (Blogger: Irvine housing market nowhere near bottom). I will expand on some of those questions in posts next week.

I had business at the Orange County Courthouse this week, and I got to witness some foreclosure auctions taking place. It is a fascinating process. I hope to go back with a video camera and capture some of the proceedings to display here.

It is a little strange when you walk up to the courthouse and you see this group of people huddled around an auctioneer. There are people walking in and out of the courthouse on other business, and the auction takes on a street-performer atmosphere, an unusual sideshow distraction.

I did hear from some experienced auction buyers that some of the professional players have pulled back from their activities recently. Apparently, we are not the only ones paying attention to the news of shadow inventory and ARM resets and recasts. The professionals know they are buying and selling in a declining market, and there is much fear that they will be caught holding inventory in a quick and merciless drop.

{book4}