Precious Declaration — Collective Soul

There is a group of nervous home sellers who are trying to sell their homes for enough to pay off their mortgages. Some of these were buyers toward the end of the rally that paid too much, and some are owners who bought earlier but mortgaged themselves into the same precarious position. They are wise to try to sell now if they can get enough to pay off their debts and save their credit. Today’s featured property is an owner who extracted much of their equity, but they still have some room to maneuver before they go underwater. In my opinion, there feeble price reductions have not shown the aggressiveness necessary to move this property before the market leaves them underwater, but I guess they don’t want to give it away.

Asking Price: $839,000

Income Requirement: $209,750

Downpayment Needed: $167,800

Monthly Equity Burn: $6,991

Purchase Price: $565,000

Purchase Date: 12/20/2002

Address: 55 Declaration Place, Irvine, CA 92602

Beds:	5
Baths:	3
Sq. Ft.:	2,830
$/Sq. Ft.:	$296
Lot Size:	5,000 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1997
Stories:	2 Levels
Area:	West Irvine
County:	Orange
MLS#:	P639612
Source:	SoCalMLS
Status:	Active
On Redfin:	96 days
Unsold in 90+ days

Title Case… Again…

Plenty of exclamation points!

The owners of this property refinanced in 2006 with a $752,000 first mortgage. They need to sell this place for $800,000 to pay a 6% commission and break even on the deal.

I imagine the 5% reduction in asking price seems like a lot to them, but if they don’t sell this summer, they will probably go underwater. It is difficult to feel too sorry for them considering they have already extracted $187,000 plus their downpayment from the property. Perhaps they have this money sitting in an investment account and could pay off the shortfall at closing. Does anyone think this scenario is likely?

When you look at our current inventory of homes, you see that the composition is very different than what is found in a normal, healthy real estate market. Usually, the number of distressed properties (REOs, short sales and nearly short sales) is very low. In appreciating market conditions, the distressed properties sell quickly, and the vast majority of sellers can get at or above their asking prices because they don’t need to sell. The amount of distressed inventory becomes a larger percentage of the market, sellers become more aggressive (at least the ones who can) and prices stop appreciating. When the percentage of distressed properties gets very high, prices go down. This is what we are seeing now. It becomes a negative feedback loop as price declines distresses more properties which drives prices down even more. Today’s seller would not be distressed if prices had not fallen to close to their breakeven price. They need to sell now because prices are dropping and they probably have difficulty affording the very large mortgage they now have (It is possible their household income rose 70% since 2002, but I doubt it). This is the downward spiral playing out one property at a time.

.

Hitched a ride to the peaceful side of town
Then proceeded where thieves were no longer found
Cant crash now Ive been waiting for this
Wont crash now I found some encouragement
Precious declaration reads
Yours is yours and mine you leave alone now
Precious declaration says
I believe all hope is dead no longer

Once I jumped thru hoops of fire
As high and far as you required
I was blind but now I see
Salvation has discovered me

Precious Declaration — Collective Soul

Time In A Bottle — Jim Croce

Some time ago, I wrote the post Timing Does Matter, to document the financial impact of properly timing the market. Today’s featured property owners show how a family should manage their mortgage, and the benefits that can be obtained in retirement if you sell near the peak of a massive speculative bubble. I commend today’s sellers. They are the role models I will emulate in my own life.

Asking Price: $649,000

Income Requirement: $162,250

Downpayment Needed: $129,800

Monthly Equity Burn: $5,408

Purchase Price: $59,500

Purchase Date: 8/22/1980

Address: 14951 Elm Ave., Irvine, CA 92606

Today’s sellers will have to pardon my irreverence, but “Turkey Homes” and “light and bright” are something I can’t resist.

These people bought this house almost 30 years ago and paid off their original mortgage. They have two small HELOCs which appear to have been used to redo the kitchen and the roof. This should help them sell the property. These people did not participate in the borrowing orgy while everyone around them was. The HELOCs are through a teacher’s credit union, so one or both of the owners are probably teachers. The additional $550,000+ will go a long way toward supplementing a teacher’s pension.

This is how I want to manage my house. They got to live in a nice Irvine property for many years, they paid off their housing debt, they are selling at an inflated price (relative to fundamentals,) and now they can downsize and have some significant cash to enjoy in their retirement. What a great plan!

I don’t intend to make my house my only retirement savings. I set aside money for that purpose irrespective of what might happen with housing. If kool aid intoxication takes over after I buy, I am certainly not above taking advantage of the greed and stupidity of my fellow man — I am not counting on it, but if it should occur, it would be a nice pile of cash to play with when I am ready to stop working.

I salute you Mr. and Mrs. Financially Conservative owners. You have shown the rest of us the way…

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

.

If I could save time in a bottle
The first thing that Id like to do
Is to save every day
Till eternity passes away
Just to spend them with you

But there never seems to be enough time
To do the things you want to do
Once you find them
Ive looked around enough to know
That youre the one I want to go
Through time with

Time In A Bottle — Jim Croce

Party — Boston

Not everyone who took out money on their HELOCs blew it. Some people remodeled their houses or took the money to purchase other assets. And yes, many people took that money and bought other real estate (Right now they wish they hadn’t.) When I first saw today’s featured property, I couldn’t help being drawn in to the fun the owners created. Look at that pool area. To me, it looks like a fun place. Check out the home theater. Another place for good times with family and friends. The thing that really impressed me was that these people did not break the bank creating this playground. Yes, they did add to their mortgage, but looking at the property, it becomes obvious where it went. There is no other history of serial refinancing, so even with the money they spent on improvements, they still have plenty of equity in their property. Which brings me to my last point, they also have seen the light on falling home prices and they have priced it to move in today’s market ($249/SF.) That is one of the luxuries you have when you haven’t spent all your equity.

Imagine yourself sitting on all that bubble equity. Your conservative enough not to HELOC yourself into oblivion, but you do have access to all this cash. What do you do with it? I could see me doing something like this if I were in their shoes. Maybe that’s why I find this property so interesting. Let’s party!

Asking Price: $985,000

Income Requirement: $246,250

Downpayment Needed: $197,000

Monthly Equity Burn: $8,208

Purchase Price: $377,000

Purchase Date: 10/22/1998

Address: 24 Tioga Place, Irvine, CA 92602

Even with the discount from peak levels and the $120,000 they put into the place, if this house sells for its asking price, and if they pay a 6% commission, these owners stand to make $435,900 for living in a party house for 10 years. I could handle that…

.

Well you know I dont get off on workin day after day
I wanna have some fun while Im here
I play the game when its goin my way
And theres nothin like a party when its kickin into gear

Baby
Its a party and nobody cares
What were doin there
Baby, its a party as long as youre there
Its a party, party, party!

Party — Boston

Waiting on the World to Change — John Mayer

The next big psychological change to impact housing will be a change in homebuyers relationship with debt. Equity can be created in a home in two ways: you can pay down the debt, and the house price can appreciate. During the bubble rally, it was not fashionable to pay down debt. It is a slow way to build equity, and it requires sacrifice. During the bubble, appreciation happened much faster, and it required no additional funds to go toward a housing payment. Under those circumstances, only the most fiscally disciplined and conservative paid down their mortgage (and they are the only ones whose houses are not in jeopardy.) As the price decline drags on — which it will for several more years — people will come to realize that equity does not appear magically, but it is only obtained through retiring debt.

An acquaintance of mine bought a house in late 2007. I consider it my greatest failure of persuasion that I was unable to convince him to wait. The purchase was 70% emotional, but the 30% of him that rationalized the decision had convinced him that he could service the debt for 10 years with an interest-only fixed payment. He would then be able to refinance into another interest-only loan, and in 20-30 years when he went to sell it, he could take the profits to fund his retirement. It is thinking like this that will change. Instead of buying a house he could afford, he borrowed 5 times his income with an interest-only, and he has no funds left over to save for retirement (or anything else for that matter.) Since his purchase, an identical floorplan a few blocks away has been offered for sale for 20% less than he paid, and prices will decline another 20% befor they finish dropping. In ten years, he is likely to be still underwater, and he will either lose the home or struggle with a fully amortized payment on a 20-year schedule. If he had simply waited 2 to 4 years, he could have had the house, and he would have had the money left over to save for the future. There was probably no overcoming the emotional desire to have the house today (sadly,) but it is the intellectual rationalization that I found most interesting.

By 2010, people will realize the thought patterns of the bubble, the religion of real estate, are no longer operative. As this slow process of change grinds forward, people will start thinking in terms of taking on manageable debts with an eye toward paying it off to build equity the old fashioned way through retiring debt. This will be a big change for the market. People will be unwilling to put 50% or more of their gross income toward housing, and our economy will benefit because so much of our local wage income will not be going toward debt service. There is a silver lining in a price decline, and the rebalancing of household finances will be a great boost to our economy. Crushing debt service is like a tax that takes income out of our local economy and sends it to investors in far-away lands. When this money stays home, people have more money to spend on local consumer goods. None of this will happen quickly, as the lingering effects of kool aid intoxication will be with us for some time, but in the end, house prices will be affordable, and the local economy will recover — not through a Ponzi scheme of ever-increasing debt, but through working, earning and circulating that money in the local economy the way it is supposed to be. Until then, I guess we will keep waiting for the world to change…

Asking Price: $349,000

Income Requirement: $87,250

Downpayment Needed: $69,800

Monthly Equity Burn: $2,908

Purchase Price: $424,000

Purchase Date: 8/4/2005

Address: 189 Pinewood, Irvine, CA 92620

Beds:	2
Baths:	2
Sq. Ft.:	1,202
$/Sq. Ft.:	$290
Lot Size:	760 Sq. Ft.
Property Type:	Condominium
Style:	Townhouse
Year Built:	1977
Stories:	2 Levels
View:	Lake Front
Area:	Northwood
County:	Orange
MLS#:	P649161
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

NO Short Sale? Not according to the property records.

Great Value? If you want to own your $1,500 a month apartment, and if you are willing to overpay for it, I guess it is a great value. Properties like this will go for under $200,000 to a cashflow investor in a few years.

This property was purchased on 8/4/2005 for $424,000. The owner used a $339,200 first mortgage, a $84,800 second and a $0 downpayment. I don't see how this is not a short sale, unless the seller has $100,000 to bring to the closing table. If this property sells for its asking price and a 6% commission is paid, the total loss to First Franklin will be $95,940. I guess that is one way to retire the debt…

.

me and all my friends

waiting on the world to change

Waiting on the World to Change — John Mayer

Life In The Fast Lane — The Eagles

During The Great Housing Bubble California’s homeowners were living life in the fast lane. Free money was readily available, and people were taking it and spending it with abandon. Some people got lucky and found the greater fool to bail them out, and some people did not. Today’s featured property was purchased with 100% financing at the top of the bubble from a HELOC abuser. Of course, the lender is left holding the bag.

Asking Price: $474,900

Income Requirement: $118,725

Downpayment Needed: $94,980

Monthly Equity Burn: $3,957

Purchase Price: $625,000

Purchase Date: 11/1/2006

Address: 819 Yorkshire, Irvine, CA 92620

Colons and semicolons: fancy.

Corporate
owned? Not according to the records. Perhaps she has a corporate deal where they will make up all the losses. I don’t know.

This property was purchased on 11/1/2006 with 100% financing. Now it is a short sale, and if it sells for its asking price (which it looks like it might,) the total loss on the property will be $178,594. Citibank will lose $125,000, the full amount of their second mortgage, and Wells Fargo will lose the remainder. Perhaps there is a corporate entity willing to pay off these lenders, or perhaps the realtor is making up the part about being corporate owned. Either way, it is a big loss for less than 2 years of ownership.

The subplot here is with the previous owners, the ones who were saved by the current owner. They lived like this:

• The house was purchased on 8/24/2000 for $295,000. There was a $235,920 first mortgage and a $29,200 second, and the owners put 10% down.
• On 9/9/2002 they refinanced for $265,000. No MEW.
• On 10/7/2004 they refinanced for $333,700 pulling out their downpayment plus about $40,000 spending money.
• On 11/21/2005 they opened a HELOC for $100,000.

These people were not as hardcore as some we have profiled, but they probably represent a typical family going about its business during the housing bubble. When they sold their property, they paid off their debts and had around $175,000 to spare. As you can see, the habit of mortgage equity withdrawal was reinforced by the market. I would not be surprised if they continued their somewhat subdued behavior in their next property. Why wouldn’t they? They got to live beyond their means for a time, and there were no repercussions.

There is a price to be paid for living in the fast lane. Californians are having their bills come due, and it appears as if they cannot pay them…

For anyone who believes we are anywhere near a bottom, look at the chart above (courtesy of Bubble Markets Inventory Tracking.) We are nowhere close to a bottom. It looks like we are having quite a rally in foreclosures.

.

He was a hard-headed man
He was brutally handsome, and she was terminally pretty
She held him up, and he held her for ransom in the heart
of the cold, cold city
He had a nasty reputation as a cruel dude
They said he was ruthless, they said he was crude
They had one thing in common, they were
good in bed
She’d say, ‘Faster, faster. The lights are turnin’ red.”
Life in the fast lane
Surely make you lose your mind, mm
Are you with me so far?

She said, “Listen, baby. You can hear the engine
ring. We’ve been up and down this highway;
haven’t seen a goddam thing.”
He said, “Call the doctor. I think I’m gonna crash.”
“The doctor say he’s comin’, but you gotta pay him cash.”
They went rushin’ down that freeway,
messed around and got lost
They didn’t care they were just dyin’ to get off
And it was life in the fast lane
Life in the fast lane

Life In The Fast Lane — The Eagle