Observation of the housing market in the months since last August’s meltdown in the secondary mortage market shows increasing signs of stress among the homebuilders. In addition to numerous further postponements, some builders have started throwing in the towel on certain communities. Here is a summary of what is updated and new since my initial post on this subject in October of 2007.

One source of particular interest and discussion is Orchard Hills. Originally slated for opening in late 2007, this was officially pushed back to 2009, and only a few months later the website is showing 2011.

Although a dissappointment to some Irvine Housing Blog

When the Levee Breaks — Led Zeppelin

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Today’s featured property is another mortgage equity withdrawal casualty. Properties like this underscore the dangers of partaking in the appreciation kool aid of the Great Housing Bubble. Most, if not all, of the people who believed in endless appreciation and serial refinancing took out their equity. Many utilized Option ARMs, and they are going to lose their homes. Think about the ramifications of that belief and the decision it influenced: Homeowners who did not take out their equity and refinance with Option ARMs are not going to be in financial trouble, and they will keep their homes. Those that did take out their equity are going to lose their homes. This is one very important life decision supported by a bevy of fallacious beliefs with very serious consequences. Financial bubbles are only fun when they are inflating…

Mortgage Equity Withdrawal 1991-2007

There could be any of a number of reasons this house is for sale now,
but the fact that the owner took out an Option ARM with a 1% teaser
rate in January of 2006 is likely the reason for the sale. A 2/28
Option ARM would have reset in February, and the payment on a
$1,000,000 mortgage is quite large. There is also a HELOC for $144,500. If the HELOC is tapped, and if the negative amortization has accumulated, the total debt on this property could be approaching $1,250,000. It doesn’t seem likely they owe less than a $1,000,000. Perhaps they invested the money wisely and they can pay down the debt at resale. If so, they would be the exception and not the rule.

Asking Price: $1,129,000

Income Requirement: $282,250

Downpayment Needed: $225,800

Monthly Equity Burn: $9,408

Purchase Price: $584,500

Purchase Date: 5/4/2001

Address: 14 Mar Vista, Irvine, CA 92602

Do you like our new graphic, MaxedOut HELOC?

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If this seller obtains their asking price, they stand to make $476,760. That is a great profit for 7 years ownership. Of course, they probably won’t get their asking price, and it is likely they have already spent their profits, but if they get lucky, someone will bail them out of their debts and buy this property. Let’s assume for a moment this seller gets their asking price and walks away with no debt and no credit damage. So what? If they spent all the money, they don’t have any equity to take with them to buy the next property. Do they have the income and the saved downpayment to afford a similar property in the future? Maybe, but I rather doubt it. Once that money is spent, it is gone forever. There is a price to be paid for that “free” money during the bubble. Many former homeowners will pay the price with a greatly diminished quality of housing. HELOC abusers do pay a price. Nothing in life is free.

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Another song about the housing bubble? Is it raining debt? Is it raining REOs? Will praying for a bailout help? Where is the market going? going down now…

If it keeps on rainin’, levee’s goin’ to break,
If it keeps on rainin’, levee’s goin’ to break,
When The Levee Breaks I’ll have no place to stay.

All last night sat on the levee and moaned,
All last night sat on the levee and moaned,
Thinkin’ about me baby and my happy home.
Going, going to Chicago… Going to Chicago…
Sorry but I can’t take you…
Going down… going down now… going down….

When the Levee Breaks — Led Zeppelin

Just in case any of you forgot, about 1/3 of all loans originated in 2005 and 2006 in California were Option ARMS. Very few if any of the people with those loans will be able to refinance.

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Today’s property is an example of how the market crash hurts ordinary people. This property is owned by a couple, and although I do not know them, I suspect they are a young couple who purchased this as their first home and they were hoping to do a move up later. That is how the real estate game is played around here. I don’t see any data on the first mortgage, but there is a HELOC for $116,850. Assuming this is 20% of the purchase price, I have estimated the purchase price at $584,250 which is consistent with the tax assessment. Therefore, they likely have a first mortgage for $467,400. I can’t feel too sorry for them as they don’t appear to have any money in the transaction. They are priced over the market and praying for a knife catcher to come bail them out. It probably is not going to happen.

Asking Price: $549,000

Income Requirement: $137,250

Downpayment Needed: $109,800

Monthly Equity Burn: $4,575

Purchase Price: $584,250 — I think.

Purchase Date: 3/14/2006

Address: 18 New Season, Irvine, CA 92602

Beds:	3
Baths:	3
Sq. Ft.:	1,479
$/Sq. Ft.:	$371
Lot Size:	–
Type:	Condominium
Style:	Mediterranean
Year Built:	2006
Stories:	Two Levels
Area:	Northpark
County:	Orange
MLS#:	P608073
Status:	Active
On Redfin:	158 days
Unsold in 90+ days

Another CAPS LOCK attack.

Rich Walnut Flooring? Is the walnut wealthy? Can you say, Pergraniteel?

DESIREABLE END UNIT? If you desire being at the corner of the 5 and Culver, then this is very desirable. I hope you like noise and air pollution. And yes, it is LOCATED CLOSE TO
TRANSPORTATION ROUTES.

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There is a time bomb in their neighborhood that is about to ruin the
comps and remove any hope they had of selling this property. The
neighbor at 34 New Season was a flipper, and he let the property go
back to the bank on 4/2/2008 for $360,000.

34 New Season is not listed on the MLS, so I can’t post any pictures
for you. It is one of many bank owned properties in Irvine that are not
offered for sale yet. It is not an exact match for 18 New Season, but
the flipper paid $520,000 back in December of 2005, so the values are
within $60,000. Some quick math says the property at 18 New Season is
worth $420,000 in today’s market not the $549,000 they are asking. The
fact that 18 New Season has been on the market for 158 days strongly
suggests it is overpriced.

Property traders — people who bought and sold stucco boxes without
doing any improvements to add value — drove prices up and priced many
families out of the market. Most of the properties we have profiled,
the ones that have made priced plummet so far, are those being allowed
to go into foreclosure by failed flippers. I would like to say they are
getting their comeuppance, but it is really their enablers — the
lenders — who are bearing the brunt of the destruction. I won’t be
shedding tears for either group.

This leads us back to today’s featured property. The sellers are
going to be ruined financially as they will have either a short-sale or
a foreclosure on their credit. Was this couple a pair of hapless
victims who were just doing what you are supposed to do get on the
property ladder in California? Were they caught up in the whirlwind of
speculation and burned by the market? They likely fit the profile of
the family targeted for the various bail-out programs being discussed:
do they deserve to be bailed out?

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I feel stupid – but I know it wont last for long
Ive been guessing – I coulda been guessin wrong
You dont know me now
I kinda thought that you should somehow
Does that whole mad season got ya down

I feel stupid but its something that comes and goes
Ive been changin – think its funny how now one knows
We dont talk about – the little things that we do without
When that whole mad season comes around

Mad Season — Matchbox Twenty