I apologize for our technical problems. Tomorrow’s post will be delayed until 9:30 AM to allow people to catch up on today’s post.

*** News Flash ***

Next Monday, we will be hosting an open conference call with Daniel Young, President of Community Development for the Irvine Company. This is your opportunity to ask whatever questions you want answers to; it is an open and unscripted call.

Perhaps you could ask about…

When the Irvine Company sold its first phase of Woodbury East, they reset the price structure for all of Woodbury. What are the impacts?

Asking Price: $515,000

Address: 91 Mission Irvine, CA 92620

{book7}

I am unwritten, can’t read my mind, I’m undefined
I’m just beginning, the pen’s in my hand, ending unplanned

Staring at the blank page before you
Open up the dirty window
Let the sun illuminate the words that you could not find

Unwritten — Natasha Bedingfield

When the Irvine Company set pricing in Woodbury east at $280/SF to $295/SF, they effectively reset property values all over Woodbury to a lower value. Why would someone buy a resale for $350/SF when they can get new across the street 25% cheaper?

Obviously, the Irvine Company wants to maintain resale prices at the highest value possible. People are choosing between new and resale, and although resale commands a premium, 10% is about as far as they can reasonably hope to stretch it. The higher the value in resale properties, the greater the revenue for the Irvine Company when they sell New.

So why did they price New so far below comps on nearby resales?

Short term impacts on the market are not their overriding concern. They must establish a pattern of brisk sales at increasing prices in order to keep sales momentum throughout the project. People must not believe they can wait for lower prices, or they will.

In the short term, pricing New properties so low will disrupt the market, but they will steadily raise their prices (to the degree that the market will allow), and fight against the current of the receding tide. They may fight languishing sales at the end of the buildout, but it will not be as problematic as the total freeze on new sales in Woodbury or Portola Springs. Momentum there is zero.

I think The Irvine Company is taking a wise course of action, and it will be a qualified success — it will be as successful as market conditions will allow. New will bottom before resale, but I still believe we have another leg down to revalue the market. I may be wrong.

Is this The Irvine Company calling the bottom? Creating the bottom through force-of-will? They sure hope so….

Asking Price: $515,000

Income Requirement: $128,750

Downpayment Needed: $103,000

Purchase Price: $685,000

Purchase Date: 12/27/2005

Address: 91 Mission Irvine, CA 92620

useable?

This was the least offensive use of ALL CAPS I have seen so far. At least the technique was used to emphasize some important items in the description.

This is one of those sad cases of lost equity. This property was purchased for $685,000, and the owner used a $548,000 first mortgage and a $137,000 downpayment. That money is gone and the owner’s credit is shot. What did this guy do wrong?

{book3}

Daniel Young, President of Community Development for the Irvine Company

Dan Young is president of Irvine Community Development Company LLC
(ICDC), an affiliate of the Irvine Company responsible for all
residential development on The Irvine Ranch®.

As president of ICDC, Mr. Young guides all facets of the Irvine
Company’s community master-planning and development process, which
began more than 45 years ago. From the villages of Woodbury, Northpark
and Woodbridge in Irvine, to the coastal communities of Crystal Cove
and Newport Coast, the residential communities on The Irvine Ranch have
won many national awards and are admired for their unique character and
livability.

Mr. Young came to the Irvine Company in November 1999, after a
20-year career as a real-estate developer and a consultant to the
industry. In his previous role with the Irvine Company, he served as
executive vice president of Entitlement and Public Affairs, overseeing
the company’s entitlement on The Irvine Ranch.

His community involvement includes 11 years on the Santa Ana City
Council, including eight years as mayor. In his official capacity as
mayor, Mr. Young also served on the board of directors of several
regional agencies, including the Metropolitan Water District and the
Orange County Transportation Authority.

Mr. Young received his bachelor’s degree from California State
University, Fullerton, and his master’s degree in public administration
from the University of Southern California.

The Irvine Company is a 140-year-old privately held company known
throughout the world as a best-of-class master planner and long-term
owner, investor and operator of a large and diversified real estate
portfolio. The company also is known as a steward of some of the most
beautiful, permanently preserved land in California. In addition to its
master-planned communities on The Irvine Ranch® in Orange County,
Calif., the company also is known for its portfolio of high-quality
investment properties — office, retail and apartment — it owns in San
Diego, Orange County, West Los Angeles and the Silicon Valley. The
company traces its roots to the 1860s with the assembly of The Irvine
Ranch from Mexican and Spanish land grants. The Irvine Company was
incorporated in 1894.

This is an open invitation to representatives of the Irvine Company to come to the IHB. We want you to be part of our community.

We know you guys read the blog and the forums, and some of you even participate without revealing who you are. It is time the elephant quit hiding in the room. Come out and join us.

Your customers want to know you. They want to know what you are doing and why you are doing it. It affects your customers; it affects us.

We are your customers. We buy your houses, rent your apartments and shop at your shopping centers. When you set out to create a great community, you did it for us. We know what we like and what we don’t like, and here we talk about it.

This is an opportunity for you. Come to the blog and our forums and participate. Identify yourselves as who you are. Don’t try to disguise that you may have a bias or you will eventually get caught and it will be worse. If you speak the truth with authenticity, people will accept that you may be biased, but your information is good and truthful. People are here for good information.

We talk about what you do, and we speculate because we have no other sources of information. If you are not participating in our conversations, or if we do not know who you are, you cannot correct bad information when it gets presented. It is one thing to be damned for who you are, but it is another to be damned for who you are not. Talk to us. Give us good information, and we will be a happier community.

We also provide you a great mechanism for getting feedback directly from your customers and your potential customers. You can go pay for market data and studies, or you could ask questions directly to your customers for free in our forums. People will respond. Sometimes we get so bored that we start silly threads that are the online version of chit chat. If you give us something to talk about, it will be welcomed.

I am sincere in this invitation. No tricks. No agenda. Just an invitation for you to come join our community and make it better.

I also invite each member of our community to be open to anyone from The Irvine Company who identifies themselves on the blog or the forums. Call the BS, but embrace the truth.

If you want to contact us. I can be reached at irvinerenter@irvinehousingblog.com and Zovall can be reached at zovall@irvinehousingblog.com. We look forward to hearing from you.

The housing ATM is closed, and pretenders must pay their bills. They must sell their houses to do it.

Asking Price: $1,089,000

Address: 8 Saintsbury Irvine, CA 92602

{book2}

The ice age is coming, the sun’s zooming in
Meltdown expected, the wheat is growing thin
Engines stop running, but I have no fear

London Calling — The Clash

The people with prime properties in Irvine certainly do not show any signs of fear; denial rules the day. These properties, many of which were purchased in 2002-2004, will ultimately end up underwater, but for now, they are asking double what they paid. Today’s featured properties are both large, single-story homes backing on to major arterials — asking over $1,000,000. WTF?

I have written many screeds on HELOC abuse and the lifestyle of pretending with borrowed money. This lifestyle has become so common and so widely accepted that few people even see it for the pretending it is. If everyone is pretending, doesn’t it take on a reality all its own?

First, I should define what I mean by pretending. Financial pretending is the process of borrowing from potential future earnings to spend today as if you make or have more money than you really do.

To see what I mean, imagine a scene at a local high-end restaurant. Two groups of people come in to eat dinner. One party is being treated by a very wealthy individual, and the other party is being treated by a pretender. At the end of the meal, the wealthy person pays the bill out of accumulated savings or current income; he incurs no liability for his consumption. The pretender pulls out a credit card and pays for the meal with a promise to make enough money to pay the credit card company later. The pretender cannot truly afford the fancy meal, and he is only able to obtain it because the credit card company accepts his veracity on the matter of future payment. What happens if the pretender’s promises are no longer believed?

The wealthy need to convince nobody of their ability to pay; they have cash. The pretenders need others to believe in their willingness and ability to make future payments in order to obtain the objects of their desire. It should be obvious who really has power and who is only pretending.

{book2}

When pretenders go on long term borrowing sprees and continue making their debt service payments, they eventually come to believe that someone, somewhere will always believe in their promise to pay in the future; borrowers believe creditors will always extend them new credit. California Personal Finance: Ponzi Style is born.

From the outside, pretenders look rich and powerful, but in reality, they are weak and dependent — their lifestyle cannot exist without some other party to give them money and power. In times of credit contraction like we are experiencing today, pretenders are exposed for what they are. As Warren Buffet noted, “You only find out who is swimming naked when the tide goes out.”

Asking Price: $1,089,000

Income Requirement: $272,250

Downpayment Needed: $217,800

Purchase Price: $531,500

Purchase Date: 10/24/2002

Address: 8 Saintsbury Irvine, CA 92602

A classic pergraniteel home.

• This property was purchased on 10/24/2002 for $531,500. The owner used a $424,950 first mortgage and a $106,550 downpayment.
• On 1/24/2004 he refinanced with a $530,000 first mortgage and took out his downpayment.
• On 9/27/2004 he opened a HELOC for $169,000.
• On 9/12/2005 he refinanced with a $817,000 Option ARM with a 1% teaser rate.
• On 10/31/2006 he refinanced with a $856,000 first mortgage.
• On 3/9/2007 he opened a HELOC for $105,000.
• Total debt is $961,000 assuming he maxed out the HELOC.
• Total mortgage equity withdrawal is $536,050 including his downpayment.

Anyone “keeping up with the Jones’s” during the bubble had some serious HELOC competition from guys like this one.

Think about what this guy has done. First, he has created a lifestyle where he gets about $80,000 a year in untaxed income to finance his lifestyle. The housing ATM is turned off, so he has doubled his debt load without doubling his wage income (unless you think his wages matched the increase in his mortgage). Now he has to learn to live without that extra $80,000 a year in spending money, AND he has to pay back the loan with a much larger percentage of his income.

Are you surprised that he might want to sell and eliminate that debt? You shouldn’t be. He and everyone like him selling to eliminate their debts is what is going to crash high end prices.

Asking Price: $1,199,000

Income Requirement: $299,750

Downpayment Needed: $239,800

Purchase Price: $612,000

Purchase Date: 10/30/2003

Address: 46 Whitford Irvine, CA 92602

Exquisite single-story Triana home in the gated community of Northpark.
Stunning designer upgrades include travertine flooring, venetian
plaster, beryl wood entertainment center and built-ins. Kitchen
features bull-nosed granite counters and backsplash, thermador cook
top, kitchen-aid built-in refrigerator. All bathrooms designer
appointed to include tumbled marble, travertine and slate.
Professionally designed and landscaped to include a custom fountain and
firepit. Owner spared no expense on this designer model home.

I gotta have those bull-nosed granite counters.

• This property was purchased on 10/30/2003 for $612,000. The owner used a $489,350 first mortgage and a $122,650 downpayment.
• On 9/14/2004 he opened a HELOC for $200,000.
• On 5/8/2006 he refinanced with a $791,000 first mortgage.
• On 6/26/2006 he opened a HELOC for $100,000.
• On 1/31/2007 he opened a HELOC for $225,000.
• Total property debt is $1,016,000 assuming he maxed out the HELOC (sure looks that way).
• Total mortgage equity withdrawal is $526,650.

Both of these owners took out over $500,000 in mortgage equity withdrawal and spent the money.

Purging the kool aid from California is going to be painful. Financial pretending through mortgage equity withdrawal has become deeply embeded in our culture, and it contributes to the desirability of homes and the extreme kool aid intoxication of people who live here. The fact is that lenders are not going to enable another real estate bubble here in California any time soon; they lost too much money. The housing ATM is permanently broken, and people are going to have to get used to living without it.

We hope everyone has a great 4th of July! Enjoy the day, BBQ, watch some fireworks, and be safe!

Picture taken by one of our members on July 3rd, 2009.

We have a new discount record here in Irvine at 59% off. The low end continues to get crushed.

Asking Price: $125,000

Address: 243 Pineview Unit 2b Irvine, CA 92620

Tonight is the night. We will be gathering from 6:30 to 10:00. I look forward to seeing all of you there!

Hey listen here,
Now I got mortgages on homes
I got stiffness in my bones
Ain’t no beauty queens in this locality.

Fat Bottomed Girls — Queen

Ugly, cramped, dingy, old condos are an acquired taste. If you learn to like them, you can save much money on your housing bills — either that, or you will be locked in your prison for years.

The low end of the market must find a bottom before there will be any price stability in residential real estate. Until the low end finds a bottom and begins appreciating, there is no move-up market because first-time homebuyers — the people who buy these properties — have no accumulated equity to help finance a move-up purchase.

In an appreciating market, prices are pushed up from the bottom. Subprime lending and Option ARM loans inflated condo values a great deal, and the equity this created pushed up home values for all market strata. The process also works in reverse. When the low end falls, it pulls down prices of the other market strata because people will substitute by sacrificing some quality for significant price savings.

The low end will eventually find a bottom. Units like those featured today will bottom about 25% below rental parity. At those price levels, cashflow investors will find the prices attractive, and they will buy and hold the properties as true investments.

The fools out there buying these properties as quick flips are going to be very disappointed because these properties will not strongly appreciate anytime soon. When the high end crashes, the substitution effect will work in reverse as people abandon these low end properties in favor of more desirable properties at lower prices. That phenomenon will occur as the mid to high end prices stabilize.

The bottoming process takes much longer than most realize as nothing happens quickly in real estate. Many seem to think our real estate market will but in a “V” bottom and everyone will be priced out again. That is not going to happen. The sequence goes like this: (1) low end stability, (2) mid to high end crash, (3) renewed low end weakness and slight decline, (4) mid to high end stability, (5) low end stability and appreciation, (6) mid to high end appreciation. When appreciation finally returns, it will not be “rapid”; tepid is a better word. It isn’t until we reach stages four and five in my list that the move-up market functions again. I doubt we get there before 2013.

Gary Watts

Many real estate bloggers — me included — have ripped apart Gary Watts’s economic forecasts. Well, he must have been reading our stuff because in Gary_Watts_2009_Economic_Outlook.pdf he actually gets it right:

A Final Perspective

The recession has gone on so long and has been so crippling that any small piece of
economic data that comes out favorably leads one to think that things are finally going to
get better. Unfortunately, this is not so!

Housing has low prices and extremely low mortgage rates. This should have been enough
to turn us around. However, when you balance this against shrinking access to credit,
instability of American workers to receive higher wages and crippling unemployment, the
outlook is not good.

The current increase in foreclosures is beginning to look very similar to what occurred in
early 2007. The difference is that we were reaching a peak in housing prices. This time
around, we have no price buffer for the next onslaught of foreclosures.

Although the low-end of the market is fairly strong, in the past they took their equity and
“moved-up” to the next pricing tier. These sellers are leaving their homes with nothing
and therefore the next pricing tier (over $500,000) has no support coming.

Pent-up demand will soon wane, investor purchases will begin to decline and inventory
will grow. This will put a new round of pressure on an already price-declined market. To
add to the housing woes, the Treasury is issuing a lot of money. The market is beginning
to wonder who is going to buy all these notes and bonds. This will force interest rates
upwards, putting more pressure on our already weak housing market.

Mr. Watts just took his first step toward regaining his credibility. The rest of the report is not bad. There are no “green shoots” or other suggestions that we might be at the bottom. Perhaps everyone will develop a case of selective amnesia, and he can regain is standing as an economic forecaster. Too bad that pesky internet keeps such good records….

Asking Price: $125,000

Income Requirement: $31,250

Downpayment Needed: $25,000

Purchase Price: $305,000

Purchase Date: 3/15/2006

Address: 243 Pineview Unit 2b Irvine, CA 92620

Is a “Lowe Unit” the new realtor code word for being a fixer?

This property was a 100% financing deal near the peak in 2006. The owner paid $305,000 and used a $244,000 GSE insured first mortgage and a $61,000 second mortgage. The US taxpayers are eating much of the loss on this one.

Foreclosure Record
Recording Date: 05/20/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000239587

Foreclosure Record
Recording Date: 02/04/2008
Document Type: Notice of Default
Document #: 2008000051876

The owner quit making payments on this property in late 2007, and it was purchased at auction on 06/19/2008. Now, one year later, it has finally left our shadow inventory. Are you starting to see how much shadow inventory is out there? What was the loan servicer doing with this property for the last year? How big of a loss are the taxpayers really taking on this property considering no payment have been made since 2007?

What a mess.

If this property sells for its current asking price, and if a 6% commission is paid, the total loss you and I are covering will be $187,500. But actually, it is much worse than that. This loan was insured by the GSEs which means some investor somewhere has been receiving payments from the GSEs while the loan was delinquent; therefore, we need to add in the sum of the payments the GSEs made on their insurance policy to the total loss, and this property may need to be discounted further in order to sell.

The original loan the GSEs insured was $244,000; this property may be a total loss.

Asking Price: $169,000

Income Requirement: $42,250

Downpayment Needed: $33,800

Purchase Price: $290,000

Purchase Date: 1/23/2006

Address: 148 Orange Blossom #118 Irvine, CA 92618

That is a well-written description. It is a little cheesy with the “trickling waters” and duck watching, but I think she pulled it off.

The kitchen is definitely “cozy.” Do you think realtors would describe an 8′ x 10′ prison cell as “cozy” too?

This property was also a 100% financing deal from the peak. At least the GSEs did not insure this one and cause the taxpayers to eat the bill. The loans on this property were issued by IndyMac… Oh no! We are going to pay for this one too.

BTW, someone in our forums spotted the most interesting home in Orange County.