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
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,766 |
| $/Sq. Ft.: | $348 |
| Lot Size: | – |
| Type: | Condominium |
| Style: | Other |
| Year Built: | 2004 |
| Stories: | Three or More Levels |
| Area: | Quail Hill |
| County: | Orange |
| MLS#: | P631509 |
| Status: | Active |
| On Redfin: | 3 days |
detached Home. Unit is in rear and affords additional pricacy. 3 levels
with master suite on 3rd floor. seperate guest room/office/play room
detached from main residence above garage. Interior upgrades include
grantie coutners, flagstone private patio and pad laid for a spa. View
of greenbelt. Buyer’s to independently verify all information including
size, shcools, mello-roos, amenities to their satisfaction.
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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.
The greed killing!
Instinct to mistrust,
instinct- the lust.
Their butchery of feelings,
geared for the greed killing.
The greed killing!
Not now, when then?
Not now, when then?
Greed Killing — Napalm Death
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