Category Archives: Price Rollback

Shadow Inventory in Orange County

What Lenders and Our Government Don’t Want You to Know

The Big Lie of 2009

Brace For Impact

I couldn’t decide on a headline…

With a little data and some complex analysis, it is possible to get an accurate picture of the shadow inventory in Orange County. Today, we will explore this catastrophe in the making.

141 Arden 71   Irvine, CA 92620  kitchen

Asking Price: $769,000

Address: 141 Arden #71 Irvine, CA 92620


and I am not frightened of dying, any time will do, i
Dont mind. why should I be frightened of dying?
Theres no reason for it, youve gotta go sometime.
i never said I was frightened of dying.

The Great Gig In The Sky — Pink Floyd

The inventory coming to our market is going to cause a catastrophic collapse of house prices. It will pound them back to the stone ages and wash away any illusions of equity.

Are you frightened? As Yoda would say, “You will be… YOU WILL BE.” I will ask you again at the end of the post.


Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

Robert Frost

In order to discuss Shadow Inventory, we must define it. Shadow Inventory is the total of Preforeclosure Inventory, REO and some other sources. Preforeclosure Inventory includes all mortgages currently 60 days or more behind on their payments that are likely to become foreclosures but not yet REO. To understand these distinctions, review the foreclosure timeline below.

When a mortgage holder gets 60 days behind, they become part of the preforeclosure inventory. Once a property is in preforeclosure inventory, there are two possible outcomes: (1) cure or (2) foreclosure.

Curing the deficiency involves one of three possible methods: (1) selling the house — something that doesn’t happen often when the owner is underwater — (2) paying off the deficiency in cash, and (3) loan modification. The first method used to be the most common, but now with so few mortgage holders with any equity, very few people are curing by a sale.

Few people ever pay off a deficiency in cash because if they had cash, they probably would not be in default.

Despite rumors to the contrary, loan modification programs have been completely ineffective. Very few people actually get the modifications, and most of those people re-default and end up in foreclosure anyway. If these programs were effective, it would show up in high cure rates; 6.6% is not very high.

There should be only five or six months between missing the second payment and a property being auctioned as foreclosure. Properties are not supposed to be warehoused as preforeclosure inventory, but with the various foreclosure moratoria, there is now a significant backlog of homes held in limbo. Preforeclosure inventory is market pergatory.

Mortgage holders are defaulting in large numbers. The current default rate is 10.7%, but it is projected to hit 14% by the end of the year. If you do a little math, you can calculate the number of homeowners currently in default in Orange County.

Number of OC Homes Delinquent on Mortgage Payments

Orange County
Housing Units


OC Home Ownership Rate


Total Owned Housing Units


Percent With Mortgage


OC Homes With Mortgage


Current OC Delinquency Rate


OC Homes Currently Delinquent on Mortgage Payments


(Links to source material provided above.)

Look at how devastating a delinquency rate of 10.7% really is.


If there is any headline from the mainstream media you should take note of, it is the extraordinarily high delinquency rate. It is central to the calculation of Shadow Inventory, and it is the tsunami many here have been waiting for.

The rest of the analysis is built around this calculation.

Cure Rate

When a mortgage holder gets behind on payments, they often “cure” the deficiency — well, at least they used to. The cure rate in early 2007 was 45%; It recently fell to 6.6%.The cure rate is the ratio of the number of loans cured divided by the number of delinquent loans in the system. It is a measure of the percentage of loans each month that leave Shadow Inventory. It is a direct measurement of one of the methods of exiting the system — the other being foreclosure. When a property goes delinquent, what isn’t cured is a foreclosure.

Cure rates are very low right now because there is so much shadow inventory in the system that has no chance of curing. This makes the denominator of the calculation larger than it should be (Loans Cured / Total Delinquent) because delinquent loans are not becoming REO on time. There are about 15,000 loans in Preforeclosure Inventory that should be REO but due to foreclosure moratoria and other policies, Shadow Inventory (Preforeclosure Inventory plus REO) has been growing. This is consistent with anecdotal reports I have heard.

Shadow Inventory Calculation

With a little more math, you can calculate the the number of these defaults that are going to become REO.

OC Homes Currently
Cure Rate 6.6%
Brought Current
Properties Heading to REO 43,214

Note the above calculation determines how many will become REO. To calculate our current Shadow Inventory, the future REO must be shifted six months to allow for processing time. Our current Shadow Inventory is sourced from the projected REOs of six months ago — a time when delinquency rates were lower and cure rates were higher. Six months from now, things will be much, much worse.

I am projecting the delinquency rate to peak at 16% in the second quarter of 2010 about the same time unemployment peaks. It will remain elevated for some time as the lingering effects of unemployment take their toll. Shadow inventory will peak in December of 2010. With the ARM resets coming, peaking in 2010 requires massive capitulation (defaulting before the reset). Orange County may not capitulate on schedule, but the statistics suggest capitulation is already occurring.

Shadow Inventory

Shadow inventory is not the peak of foreclosures, it is the peak of the supply of properties in the foreclosure pipeline. How and when these properties are moved through the foreclosure process is anyone’s guess. When the crisis is finally over, a whopping 40% of all properties with mortgages in Orange County will go through foreclosure. It is the 175,000 pound pig moving through the snake, or the equity tsunami building building strength; you pick the analogy. It is bad.

Projected REO Shadow Inventory

This is the number I am least sure of in this analysis due to the assumptions in the calculation. It should take 10 months for a property to go from being 60 days delinquent to an REO sale in the marketplace (360 – 60 = 300 = 10 months). Lately it has been taking much longer. To calculate the REO total, I have added every 12th month together to avoid double counting. I am assuming it takes on average 12 months to go through the system. If it only takes 10 months, then the total REO number is larger than 175,000, and if it takes 18 months, it is about 33% smaller.

The next step is to calculate REO Inventory and Preforeclosure Inventory. Graphrix was kind enough to obtain data on REO inventory and sales since January of 2007. With that data and the calculations above, the table below was generated.

REO Inventory and Preforeclosure Inventory

REO inventory is not mysterious; it is the sum of all properties that have entered the system minus those that have been removed through final sale to its new owner. When you run the calculation, you discover that REOs have been building up in the system for quite some time (I started with zero in January of 2007 which isn’t accurate. In short, my number is understated.)

If you know Shadow Inventory, and if you know REO inventory, everything left over is Preforeclosure Inventory. Below are a table and charts parsing this data.

The chart above shows the increase in REOs and REO sales over the last two and one-half years. Lenders have been consistently behind in processing REO causing a buildup in the system.

Change in REO Inventory

In 2009, lenders became more serious about selling its REO, and REO inventory has been holding steady at about 6,000 units all year. For the last year, foreclosures have been selling at the rate of about 800 a month in Orange County. This sales rate keeps prices stable, but it is too low to satisfy demand. This rate could increase some without hurting prices too much, but it will take a significant increase in REO sales to work off the inventory on its way.

REO Inventory

The stabilization of REO inventory should be a good sign for the market; however, stabilization occurred by falling behind on the foreclosure process and by creating an enormous Preforeclosure Inventory.

Preforeclosure Inventory

How do we clear the market?

There are so many houses that must go through foreclosure, it is hard to imagine how to dispose of all of them. I tried to create a projection where nearly 100% of a normal sales volume were REOs to see how quickly they can be pushed through the system. I recognize this is not realistic, but it is the best-case scenario for clearing out the inventory problem.

Future REO Inventory and Sales

Even with this aggressive scenario, the foreclosures still haven’t fully worked through the system by the end of 2013. Realistically, this problem will be with us until 2017. Lingering effects will last much longer.

The good news is that kool aid should be fully purged from the system by then….


This is the part of The Great Housing Bubble that still makes me
angry. The powers-that-be know how big this problem is, and yet our
policies and our public relations are all geared toward getting knife
catchers to jump into the equity meat grinder. They know they are
encouraging others to take on the losses the lenders cannot absorb, and they do not care how that impacts you.

Your Government is complicit with the Federal Reserve in an effort to make you pay for their mistakes.

141 Arden 71   Irvine, CA 92620  front 141 Arden 71   Irvine, CA 92620  kitchen

Asking Price: $769,000

Income Requirement: $192,250

Downpayment Needed: $153,800

Purchase Price: $777,000

Purchase Date: 9/25/2003

Address: 141 Arden #71 Irvine, CA 92620

Beds: 4
Baths: 2.5
Sq. Ft.: 2,100
$/Sq. Ft.: $366
Lot Size:
Property Type: Detached, Condominium
Style: Contemporary
Stories: 2
Year Built: 2002
Community: Northwood
County: Orange
MLS#: H09093480
Source: MRMLS
Status: Active
On Redfin: 1 day




Today’s featured property is another 2003 rollback.

Are you frightened?

Consider the following very carefully:

I know many of you reading this are active in this market right now. If
you are not prepared to be underwater on your purchase for 7-10 years,
you should consider waiting another year or two for the clearing
process to take prices down to fundamental valuations.
I will be.

IHB Investor Reports

Cashflow investors require different information than owner-occupants; therefore, we have designed a property valuation report just for investors.

BTW, our new calculator is up and running. Check it out.

Marquee at Park Place at Night

Asking Price: $360,000

Address: 3131 Michelson Dr #301 Irvine, CA 92612


Snow, cement and ivory young towersbruegel-tower-of-babel-ruins
Someone called us Babylon
Those hungry hunters
Tracking down the hours
But where were all your shoulders when we cried
Were the darlings on the sideline
Dreaming up such cherished lies
To whisper in your ear before you die

Tower of Babel — Elton John

Are we the darlings on the sideline dreaming up such cherished lies? Am I crazy to think prices will still fall? Is it all a fantasy?

From Wikipedia’s entry on Tower of Babel — Genesis 11:1-9

And the whole earth was of one language, and of one speech. And it came to pass, as they journeyed from the east, that they found a plain in the land of Shinar; and they dwelt there…. Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth: and from thence did the Lord scatter them abroad upon the face of all the earth.

During the bubble, everyone was of one language and one speech — kool aid; the collapse has counfounded the “real estate always goes up” crowd and scattered them upon the face of the pavement.


As I documented in Equity Inferno, these towers have a special significance to me; “(the) dark tower is
going to stand as the symbol for the height of hubris of the housing
bubble.” To me this property has always been the worst of the worst as far as valuations being detached from fundamentals. The readers of this blog should not be surprised to see properties like the ones I am featuring today are going for 60% off their peak purchase prices. As I will demonstrate, even at these prices, the properties are still greatly overvalued. I will go on record today making a bold prediction:

A condo at the Marquee at Park Place will sell for under $200,000.

That’s right, one of these condos will go for under $200,000, perhaps well under.

To demonstrate why I believe this will happen, we need to look at a different IHB report — one tailored to cashflow investors.

Cover Sheet

Similar to the report we prepare for owner-occupants, the report cover sheet contains summary information including
pictures, the address, and a few identifying characteristics. The first piece of summary data is the asking price, and
this is followed by the Comparable Value, and the Likely Transaction Price. There is no IHB Fundamental Value. Cashflow investors are not interested in how we may value the property, they want to know what rates of return are available, and they can decide their own price based on the cashflow. We provide the necessary data to make this determination.

Capitalization Rate and Cash-On-Cash Return

One key concept for Investment Value of Residential Real Estate is capitalization rate. The Capitalization (cap) Rate is the (yearly) Net Operating Income divided by Asking Price (assumed purchase price). It is the simplest measure of an investment’s financial performance, and it provides a convenient comparison to competing investment alternatives. A cap rate is like an interest rate on a checking account, a mutual fund return, or a bond yield. Cap rates change over time to reflect the perception of risk in real estate as compared to other investments.

The cap rate is inversely related to price; in other words, high cap rates are synonymous with low prices and visa versa. The cap rate an investor will accept varies from person to person. There is no single appropriate rate to apply to value. Instead, we show a range of values at different cap rates to show the current investment return someone can expect from this property.

The Cash-On-Cash Return is similar to a capitalization rate in that it shows a return on investment, but it is measured by comparing the Total Profit and Loss after Expenses, Debt and Taxes to the Total Cash Costs. This is the important rate of return for investors who are not purchasing with all cash. As long as debt is less expensive than the cap rate, the cash-on-cash returns can be magnified by increasing debt. This is an appropriate use of leverage to increase investment returns — to a point.

This property, even with a $360,000 asking price, only reflects a 3.67% cap rate. You would be better off in 10 year Treasuries. Since the cap rate is less than the interest rate (cost of debt), applying a mortgage to the property actually hurts the returns. This very unusual circumstance reflects how low cap rates became and how much the market was depending on appreciation.

IHB Cashflow Investor Brokers Opinion 3131 Michelson Dr 301-1

Rental Income, Operating Expenses and Net Operating Income

An accurate estimate of income and expenses is required to value a property based on cashflow. The Gross Rent is the monthly rental rate pulled from comparable properties. Assuming this rent can be obtained, an allowance for Vacancy and Collection Loss is subtracted to arrive at a realistic Monthly Rental Income. The Operating Expenses are those fees and costs typical of rental properties. This does not include any financing or tax implications.

Many properties are purchased by wealthy individuals looking to diversify their holdings among asset classes. These investors want to deploy capital with safety and obtain a periodic, measurable return on their investment. Under those circumstances, the properties are purchased without debt. The preponderance of all-cash investments creates the need to view the investment on an all-cash basis.

Net Income is Rental Income minus Operating Expenses. The capitalization rate is based on Net Income. It is the rate of return on the investment when no debt is utilized. Once you introduce debt, returns get magnified, but so do the risks. This spreadsheet allows viewing different financing alternatives.

There are a few different line items to consider when the property is a rental investment. The Maintenance and Replacement Reserves are often double the cost of an owner occupied property. Unless you are managing the property yourself, there will be a Property Management Fee for someone to handle tenant issues. There will also be expenses related to your owning the property through tax filings and other Miscellaneous Expenses.

Financing and Taxes

The financing and taxes are considered separately because some owners do not finance the purchase. There are two items of note in this section as it differs from the owner occupant version. (1) The Tax Savings % will be your highest marginal tax rate. The assumption is that an owner of investment property has already given up the personal exemption, so any interest write off would be at the highest marginal rates — there is one caveat — the property must positive cashflow for the write-off to be allowed.

(2) The opportunity cost is ignored. The whole point of calculating the cap rate or the cash-on-cash return is to establish a value to compare to your opportunity cost. To try to adjust for it here would make the results inaccurate. It would be like comparing twice or double counting.

Cash Acquisition Demands

The Cash Acquisition Demands is similar to the owner occupant version except that the emergency cash reserves are removed. Emergency cash reserves is an important financial planning consideration for an owner-occupant, but an investor has other concerns.

IHB Cashflow Investor Brokers Opinion 3131 Michelson Dr 301-2

Comparative Sales Value and Negotiating Range

This table is similar to the owner-occupant version as it shows the recent comps and projects negotiating ranges. When we estimate the Likely Transaction Price, we look at comparables and adjust it for the market trend. In order to see the reasoning behind our determination, I have added the Short Term Direction of Prices.

Capitalization Rates and Property Values

The Capitalization Rates and Property Values section replaces the Cashflow Value and IHB Fundamental Value section. As I said, each investor has their own required rate of return, so rather than present what we believe to be the right value, we show investors a range of values based on the cashflow. An investor who demands higher cap rates will bid more conservatively, and a more aggressive investor will bid higher.

Asking Price and Value Ranges

As with the owner-occupant version, the information is presented in a graphic form. The property values at different cap rates makes for an interesting view of pricing.

IHB Cashflow Investor Brokers Opinion 3131 Michelson Dr 301-3

I base my prediction of a unit in this complex selling for under $200,000 from the chart above. The cap rate values are so low they fall off the bottom of my chart. Cap rates have to stay under 6.5% for this property not to fall below $200,000.

Comparable Sales, Comparable Rentals and Notes

This is the new and improved section based on the feedback from readers asking for the dates of the comparables. The notes are different including a section on the Capitalization Rate and Cash-On-Cash Return.

IHB Cashflow Investor Brokers Opinion 3131 Michelson Dr 301-4

IHB Cashflow Investor Brokers Opinion 3131 Michelson Dr 301-5

IHB Cashflow Investor Brokers Opinion 3131 Michelson Dr 301-6

What were they thinking?

It is obvious that I do not believe these condos are a good investment. Any cashflow analysis at all would have revealed this fact to even the most kool aid intoxicated. The only reason people bought in these towers was to flip the property to an even bigger fool. There is no better example of Ponzi Scheme thinking and behavior than the buyers in the North Korea Towers.

Marquee at Park Place at Night

Asking Price: $360,000

Income Requirement: $90,000

Downpayment Needed: $72,000

Purchase Price: $889,000

Purchase Date: 8/24/2006

Address: 3131 Michelson Dr #301 Irvine, CA 92612

Beds: 2
Baths: 2
Sq. Ft.: 1,520
$/Sq. Ft.: $237
Lot Size:
Property Type: Condominium
Style: Hi-Rise/Mid-Rise Condominimum
Stories: 3+
Floor: 3
View: Park or Green Belt
Year Built: 2006
Community: Airport Area
County: Orange
MLS#: S584611
Source: SoCalMLS
Status: Active
On Redfin: 9 days

This desirable round plan ‘A’unit has 2beds,2baths with 200 degrees of
glass walls,lots of closet,top of the line fixtures. This luxious tower
offers 24 hr concierge,gated parking,pool,spa,fitness,guest
parking,meeting room,theater room & billiard room.It is also close
to HWY 405,55,Airport,world class shops.This unit has one of the
preimer terrace locations so fountain, city view, lush green lawns,
arbours are added bonuns.

200 degrees? Does this seem like an odd measurement to you?

bonuns? luxious? preimer?

OMG!!! 60% OFF!!!

3141 Michelson Dr 502   Irvine, CA 92612  front 3141 Michelson Dr 502   Irvine, CA 92612  inside

Asking Price: $399,000

Income Requirement: $99,750

Downpayment Needed: $79,800

Purchase Price: $829,000

Purchase Date: 8/24/2006

Address: 3141 Michelson Dr #502 Irvine, CA 92612

Beds: 2
Baths: 2
Sq. Ft.: 1,500
$/Sq. Ft.: $266
Lot Size:
Property Type: Condominium
Style: Contemporary/Modern
Stories: 1
Floor: 5
Year Built: 2006
Community: Airport Area
County: Orange
MLS#: S579815
Source: SoCalMLS
Status: Active
On Redfin: 46 days

Beautifully upgraded, light and bright 2 bedroom condo plus separate
Den for guests or office in fabulous Marquee Park Place. Built in 2006,
this lovely condo has a spacious living room and separate formal dining
room. Kitchen with granite counters, Stainless Steel Appliances,
beautiful maple hardwood flooring throughout living area, carpet in
bedrooms, Master Suite with separate shower and spa tub, marble
flooring. Lots of community amenities, close to airport and shopping,
24 hour Concierge, Elegant Lobby, fitness center, community pool, spa,
guard gated entry, guest parking. 2 parking spaces and much more.

How do you upgrade one of these? Gold fixtures?

The Marquee Park Place North Korea Towers are imploding. This was foreseeable. Cashflow analysis is not overly complicated, and it is a powerful to for avoiding catastrophes like today’s featured properties. There are no guarantees in investing, and we can only provide analysis and recommendations. Cashflow analysis has its limitations (you wouldn’t have bought anything after 2002), but these limitations are also its strength; unless you want to speculate in a housing bubble.

Bottom or Bear Rally?

The current rally is being supported by buyers (often foreign) with large downpayments. Both the rally and the foreign investment were foreseen by Rich Toscano at and Voice of San Diego.

8 Orangetip   Irvine, CA 92604  kitchen

Asking Price: $515,000

Address: 8 Orangetip Irvine, CA 92604

Maybe someday (denial and hope)
Saved by zero
(0% interest at the FED)
I’ll be more together
(not in default)
Stretched by fewer (debt service payments)
Thoughts that leave me (where did the money go?)
Chasing after (bubble after bubble)
My dreams disown me (unlimited wealth and spending)
Loaded with danger (foreclosure and bankruptcy)

Maybe I’ll win
(real estate always goes up)
Saved by Zero (the FED created a bottom)
Holding onto (kool aid intoxication)
Words that teach me (read the IHB)
I will conquer (knowledge is power)
Space around me (property in Irvine)

Maybe I’ll win (real estate always goes up)
Saved by Zero (the FED created a bottom)

Maybe I’ll win (real estate always goes up)
Saved by Zero (the FED created a bottom)

Saved by Zero
— The FIXX

I have the greatest respect for Rich Toscano at and Voice of San Diego. When I wrote my first post, I am IrvineRenter (Inventory Cholesterol), I posted links to the foundational work he did in laying out the case for a housing bubble: Evidence of a California Housing Bubble, and Risks of a Serious Home Price Decline. These are great primer’s on the bubble written back in November of 2005.

I have been noticing a great deal of bullishness during this spring rally, and I was planning a post to put things in perspective, but Rich beat me to it. His analysis was so well done, that I want to acknowledge it here and add my own comments.

Perspective on the Home Price Rally

I noted earlier in the week (and incessantly before that) that home
prices have a seasonal tendency to rise in the spring and summer even
during the midst of a multi-year price decline.

That sounds like a good enough excuse to make a chart.

you will find a look at San Diego home prices, as measured by the
Case-Shiller index, from 1990 through 1996. These years encompassed the
entirety of the five-or-so year home price decline visited upon San
Diego after the late-1980s housing bubble.

As you can see, the Case-Shiller index measured a rise in aggregate San
Diego home prices for every single year of the long price decline.
(Although 1993 just squeaked in there with a one-month, .1 percent

I’ll bet that during each of those spring rallies, a
lot of people became filled with hope the housing bust was finally
over. But through five of these head-fakes, it wasn’t.

Here for comparison is a look at the current housing downturn:


After an anemic spring bounce in 2006, the Case-Shiller index fell
unceasingly through 2007 and 2008, only to finally register an uptick
again earlier this year. The lack of spring-summer rallies is a
testament to the brutality of this housing crash.

The next graph overlays the two housing crashes in order to compared duration and magnitude:


The price decline this time around has been substantially larger — an outcome that was unsurprising based on the comparatively vast overvaluation of homes coming into the 2005 bubble peak. But while it may feel to
some like this price decline has gone on forever, it has not yet
endured nearly as long as the 1990s version.

Whether it
eventually does so remains to be seen. Either way, the first graph
should make it clear that a spring-summer home price rally should not
be taken as evidence that the housing bust has come to an end.


If there is one thing you need to take away from the analysis, it is this: housing prices often move against the prevailing downtrend for spring rallies. It doesn’t mean the trend has reversed direction.

You can make the argument that the early 90s was different or that San Diego is not Irvine, but there are more similarities than there are differences. It is very unlikely that we are at a bottom. It is more likely that we will continue to see declines for another two or three years followed by tepid appreciation. For a durable bottom, we need rising employment, an expanding economy, stability at the low end of the market, stable financing, and a host of other conditions we do not currently enjoy. This isn’t over yet.

While we are talking about Rich Toscano, I want to call attention to an old article of his that addresses our other buying phenomenon here in Irvine: foreign cash buyers. Rich wrote a piece called Dumb Money, to describe how foreign buyers end up being the knife catchers.

One argument I hear a lot is that foreign demand for local real
estate has grown substantially in recent years, and that such foreign
demand will be supportive of prices in the future.

Unfortunately, this argument puts the cart squarely in front of the
horse. Investors from other countries are well known to be the very
last participants to arrive at the scene of a financial bubble. They
are the last to hear about all the riches to be made, the last to buy
in, and the last to realize that the party is over.

chart to the right provides an example from the history of bubbles
past. The blue line represents the price of the Nasdaq Composite Index
during its late-1990s flight to the heavens, along with the very
beginning of its eventual journey back to earth. The red line denotes
the dollar amount of U.S. stock purchases made by foreign investors.

can easily be seen that foreign buyers chased the U.S. tech stock
bubble all the way to the tippy top, and that they lagged prices the
entire way. The final onslaught of foreign cash did not even hit our
shores until after the Nasdaq had begun to decline from its final peak.

from being a positive fundamental, a sudden excess of foreign
participation in an asset market is indicative of ill-informed
speculative money at work. When the foreigners really start piling on,
it’s always a good sign that the end of the bubble is nigh.


The activity of foreign buyers with cash is not new or surprising. Rich wrote about what we are seeing today back in December of 2006. This activity will go on until the cash is spent, then prices will resume their decline.

8 Orangetip   Irvine, CA 92604  kitchen

Asking Price: $515,000

Income Requirement: $128,750

Downpayment Needed: $103,000

Purchase Price: $699,000

Purchase Date: 4/25/2006

Address: 8 Orangetip Irvine, CA 92604

Beds: 3
Baths: 3
Sq. Ft.: 1,815
$/Sq. Ft.: $284
Lot Size: 2,525

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Stories: 2
Year Built: 2005
Community: El Camino Real
County: Orange
MLS#: P698434
Source: SoCalMLS
Status: Active
On Redfin: 1 day


  1. All CAPS
  2. *** multiple asterisks ***
  3. multiple exclamation points!!!
  4. Pergraniteel

This property was purchased on 4/25/2006 for $699,000. The owner used a $572,587 first mortgage, a $143,147 HELOC and a -$16,734 downpayment. Apparently, he was approved for cash-out at the closing (he probably was not immediately funded). With no skin in the game, he decided to give up:

Foreclosure Record
Recording Date: 05/26/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000263486

Foreclosure Record
Recording Date: 02/20/2009
Document Type: Notice of Default
Document #: 2009000076573

If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $214,900.

11 Butterfly   Irvine, CA 92604  front 11 Butterfly   Irvine, CA 92604  kitchen

Asking Price: $525,000

Income Requirement: $131,250

Downpayment Needed: $105,000

Purchase Price: $470,000

Purchase Date: 4/16/2004

Address: 11 Butterfly Irvine, CA 92604

Beds: 3
Baths: 3
Sq. Ft.: 1,707
$/Sq. Ft.: $308
Lot Size: 2,720

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Stories: 2
View: Park or Green Belt
Year Built: 1977
Community: El Camino Real
County: Orange
MLS#: P697906
Source: SoCalMLS
Status: Active
On Redfin: 3 days

BRIGHT & CLEAN!!!! Great opportunity to own a 2 story in prime
location of Irvine Groves. Romantic patio & atrium (very private).
Great for entertaining. Granite counter top in kitchen. Ceiling fans
throughout + A/C. Tile floors downstairs, carpet upstairs. Built-in
closet organizers. Recessed lights. Custom interior paint. This model
has one of the most private courtyards in the development. Walking
distance to shopping & restaurants.

The realtor did not write “light and bright,” but she can ditch the exclamation points, and perhaps some of the sentence fragments.

This property was a pure speculative venture.

  • The owner paid $470,000 on 4/16/2004 and used a $376,000 first mortgage, a $94,000 second mortgage, and a $0 downpayment.
  • On 6/16/2005 he refinanced with a $496,000 first mortgage, a $27,000 second, and a $27,000 HELOC.
  • On 12/22/2005 he increased the HELOC to $57,000.
  • Total property debt is $580,000.
  • Total mortgage equity withdrawal is $110,000.

If this sells for its asking price, and if a 6% commission is paid, the property will turn a profit, but the lender will be out $86,500. I bet they wish they didn’t give this speculator that $110,000 they are about to lose….

Power Poker

Could the Irvine Company play “Power Poker” with our local housing market and support prices at inflated levels?

53 Carver   Irvine, CA 92620  inside

Asking Price: $699,000

Address: 53 Carver Irvine, CA 92620



I am the menace in your eyes
The one you cant escape
Your life falls in my grasp
Your know your end is near

I tear your flesh to shreds
Burn holes throughout your mind
Your eyes now filled with blood
A victim of my force
In endless agony
You realize your defeat
Recite my masters chants

Show No Mercy
— Slayer

Have you ever watched the World Poker Tour? I used to watch it often. I remember one tournament where a single player had a significant chip lead over the others at the table. A big chip advantage allows players to overpower their opponents by forcing them to go “all in” just to be able to play. In the event I was watching, the chip leader used a stone cold bluff to force out opponents on a number of occasions. Sometimes the threat of power is power.

Ben Bernanke, the current Federal Reserve Board Chairman, knows how to run a bluff. In his 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here, he presented the “helicopter drop” bluff as a way to bully financial markets.

The conclusion that deflation is always reversible under a fiat money
system follows from basic economic reasoning. A little parable may
prove useful: Today an ounce of gold sells for $300, more or less. Now
suppose that a modern alchemist solves his subject’s oldest problem by
finding a way to produce unlimited amounts of new gold at essentially
no cost. Moreover, his invention is widely publicized and
scientifically verified, and he announces his intention to begin
massive production of gold within days. What would happen to the price
of gold? Presumably, the potentially unlimited supply of cheap gold
would cause the market price of gold to plummet. Indeed, if the market
for gold is to any degree efficient, the price of gold would collapse
immediately after the announcement of the invention, before the
alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars
have value only to the extent that they are strictly limited in supply.
But the U.S. government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to produce as many
U.S. dollars as it wishes at essentially no cost. By increasing the
number of U.S. dollars in circulation, or even by credibly threatening
to do so
, the U.S. government can also reduce the value of a dollar in
terms of goods and services, which is equivalent to raising the prices
in dollars of those goods and services. We conclude that, under a
paper-money system, a determined government can always generate higher
spending and hence positive inflation.

Notice that the threat of printing money has just as much effect as actually doing it. It is Power Poker Federal Reserve style.

Power Poker Irvine Style

So what does power poker have to do with our local housing market? We all know there is one big player with many chips in the Irvine housing market: The Irvine Company. They have full control (within political constraints) of the type, quantity, location and price of new homes in Irvine, they have enormous holdings of entitled land the value of which is strongly influenced by the activities of the resale market, and they have large amounts of cash being constantly generated from their income properties and ongoing operations. In short, they are in a position to play power poker.

Imagine what would happen if the Irvine Company decided to form a vulture fund to buy Irvine REOs. The Irvine Company has the cash to acquire every REO in Irvine, and they have the management company to rent out these properties and hold them off the for-sale market until prices recover. If the Irvine Company formed a fund and decided that all REO will be purchased at auction for $300/SF, they could buy all the REO and prevent an REO tsunami from washing away the value of their extensive holdings.

There are 75,815 dwelling units in Irvine, many of which are apartments. I can’t find the exact number, but there are around 45,000 houses and condos owned by regular people about one in ten of which are defaulting on their mortgages, and about one in three homes are owned with no mortgage. For the sake of running a simple calculation, let’s say that 3,000 Irvine homes will go through the process and become REO before the Great Housing Bubble has run its course.

If 3,000 homes go through foreclosure at an average price of $400,000, it would require $1,200,000,000 to buy them all. That would be a great deal of money to spend if the Irvine Company wanted to buy all the REO, but this is where Power Poker comes in — they don’t actually have to buy the REOs, they just need to credibly threaten to do so, and the market would change.

What would happen if the Irvine Company said it would buy all REOs at auction for $300/SF?

  • If investors believed TIC was serious, many speculators would step forward and buy these properties for $301/SF believing they are backstopped by TIC.
  • Many underwater homeowners would stay and pay rather than walking away because they believe their property values are being supported. This would serve to lower default rates by cutting back on ruthless defaults.
  • Buyers would no longer believe prices would fall further, and they would stop waiting for future price declines.

The combination of these factors would make it unnecessary for the Irvine Company to actually spend $1,200,000,000 to buy the REO; in fact, if the bluff is successful, they may not have to spend anything at all.

As a renter waiting to buy in Irvine, I do not want to see the Irvine Company do this. If I were a homeowner, I would not feel the same way. Of course, there is a risk that the gambit would fail, and the Irvine Company would buy $800,000,000 worth or real estate for $1,200,000,000, but there is also the possibility that prices will hold at $300/SF or above. As I demonstrated in Land Value 101 the value of the Irvine Company holdings are strongly impacted by the value of homes in the resale market. A $1,200,000 bluff may serve to preserve $12,000,000,000 in property value.

53 Carver   Irvine, CA 92620  inside

Asking Price: $699,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Purchase Price: $800,000

Purchase Date: 9/14/2004

Address: 53 Carver Irvine, CA 92620

Beds: 7
Baths: 3
Sq. Ft.: 2,770
$/Sq. Ft.: $252
Lot Size: 4,750

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Stories: 2
Year Built: 1979
Community: Northwood
County: Orange
MLS#: S584525
Source: SoCalMLS
Status: Active
On Redfin: 2 days

Perfect Home For Large Family Within The Best Area Of Irvine. Modified
Plan With Up To 7 Bedrooms. Built In Outdoor Spa. Close To Shopping And
Schools. Don’t Miss This One It Will Sell Fast.

What did they do? finish off the attic?

This property was purchased for $800,000 on 9/14/2004 (which is amazing to me). The owners used a $640,000 first mortgage and a $160,000 downpayment. On 11/18/2005 they refinanced with a $714,750 first mortgage and a $142,950 stand-alone second. The total property debt is $857,700 plus accumulated missed payments. The owners borrowed themselves into oblivion, and they began defaulting back in early 2007:

Foreclosure Record
Recording Date: 07/09/2009
Document Type: Notice of Default
Document #: 2009000364972

Foreclosure Record
Recording Date: 11/12/2008
Document Type: Notice of Rescission
Document #: 2008000530065

Foreclosure Record
Recording Date: 01/04/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000006033

Foreclosure Record
Recording Date: 10/01/2007
Document Type: Notice of Rescission
Document #: 2007000592079

Foreclosure Record
Recording Date: 09/27/2007
Document Type: Notice of Default
Document #: 2007000586776

Foreclosure Record
Recording Date: 05/23/2007
Document Type: Notice of Default
Document #: 2007000334839

This house has been in default as long as I have been writing for the IHB. It looks as if they have received two loan modifications, and they still can’t make the payments. Obviously, the lender was in no hurry to take this one back. The owners are now working on three years without a consistent mortgage payment, so they are also happy with the status quo.

If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $200,640.

Who is going to buy this 7-bedroom house? The Brady’s?

China Grove

Prices in Columbus Grove melted down like The China Syndrome. I believe they will rise from the ashes one day.

20 Honey Locust   Irvine, CA 92606  kitchen

Asking Price: $761,310

Address: 20 Honey Locust Irvine, CA 92606


And the folks are risin for another day
round about their homes

The people of the town are strange
And theyre proud of where they came
Well, youre talkin bout china grove
Oh, china grove

China Grove — Doobie Brothers

In early July, I wrote about Columbus Grove this way:

Columbus Grove was the first Irvine neighborhood to see a collapse
in its mid to high end pricing. There are many theories as to why this
happened, and many readers who believe it is because the neighborhood
is not desirable. I believe it was something else.

Lennar starting building and selling in this community near the
peak. Since these properties were new, they sold at WTF price levels.
Since Lennar did not want to try waiting out the market, they continued
to build and sell during the early stages of the credit crunch. Their
continued production of must-sell inventory drove prices down quickly.

One can argue that prices would not have dropped as much if the
neighborhood was more desirable, but even in desirable neighborhoods,
they are still subject to short-term fluctuations of supply and demand.
Columbus Grove is a classic example of what happens to any neighborhood
when large amounts of must-sell inventory is dumped on the market. This
will be the fate of all mid- to high-end neighborhoods as the defaults
continue and the REO piles up.

In the forums, there is an ongoing discussion of why The Irvine Company did not keep building as prices were going down. IMO, the main reason they didn’t is because they did not want to create another Columbus Grove at Woodbury and Portola Springs. If they had dropped prices to finish out the communities like Lennar did with Columbus Grove, prices in those neighborhoods would be 35% off just like Columbus Grove.

Only time will tell wether or not this strategy made any difference. Prices are going to bottom were the bids are irrespective of the availability of supply. Columbus Grove arrived at this new price equilibrium quicker because the builder wanted to finish out the development.

There are many people on our boards who do not like Columbus Grove. Part of this has been in reaction to a former member we had to ban, and some of it is related to problems of the Columbus Grove site and neighborhood. Many have the opinion that Columbus Grove will never have pricing on par with the rest of Irvine. I think those people are wrong.

IMO, Columbus Grove pricing will find equilibrium with Westpark over time. The property is still in the city of Irvine, and students there go to Irvine Schools. For those who greatly value the Irvine School system — and there are many buyers like that — Columbus Grove presents an opportunity to own a large, relatively new property for the lowest price in Irvine. People will find value there.

Pricing in Columbus Grove will continue to deteriorate, but it is much closer to the bottom than to the top.

20 Honey Locust   Irvine, CA 92606  kitchen

Asking Price: $761,310

Income Requirement: $190,328

Downpayment Needed: $152,262

Purchase Price: $1,349,500

Purchase Date: 8/24/2006

Address: 20 Honey Locust Irvine, CA 92606

Beds: 4
Baths: 4
Sq. Ft.: 2,780
$/Sq. Ft.: $274
Lot Size: 7,628

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Stories: 2
Year Built: 1996
Community: Columbus Grove
County: Orange
MLS#: S583611
Source: SoCalMLS
Status: Active
On Redfin: 2 days

This property in the city of Irvine features 4 bedrooms, 4 bathrooms, a
large open floor plan with a large kitchen, granite counter tops; it is
located near freeways, shopping, entertainment and more. This property
is priced to sell and will not last long, submit your offer today!!

This property was purchased new, right at the peak, for $1,349,500. The owner used a $1,000,000 first mortgage, a $214,000 HELOC and a $135,500 downpayment. The lender took it back at auction for $705,500. If it sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $633,869.

This property is being offered for $44% off its peak purchase price.

And so concludes another week at the Irvine Housing Blog, chronicling the Irvine home market since September of 2006.

Have a great weekend.