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 Piggington.com 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 Piggington.com 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.

Below
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
increase).

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:

2000shomepricerallies_may09

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:

2housingbusts_may09

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.

— RICH TOSCANO

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.

The
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.

It
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.

Far
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.

— RICH TOSCANO

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

MOVE IN READY BEAUTIFUL 3 BED 2.5 BATH HOME NEAR IRVINE HIGH
SCHOOL***NOT A SHORT SALE OR REO***NO MELLO ROOS***LOW TAX RATE***LOW
MONTHLY HOA OF $185.00 INCLUDES 2 POOLS, 2 TENNIS COURTS AND CLUB
HOUSE. BEAUTIFULLY UPGRADED WITH GRANITE COUNTER TOPS, WOOD FLOORS,
STAINLESS STEEL APPLIANCES AND RAISED PANEL CUSTOM CABINETRY…MASTER
SUITE HAS DOUBLE SINKS, JACUZZI TUP AND WALK IN CLOSET…FORMAL AND
CASUAL DINING AND CHECK OUT THE BONUST LOFT / OFFICE!!! VACANT READY TO
MOVE IN…BRING YOUR FUSSIEST BUYER…

All CAPS

*** multiple asterisks ***

multiple exclamation points!!!

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

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….

Climate Value

Everyone wants to live in California, right? Well, we do have the best climate in the Country if not the World, so we do have something rare and valuable here. Does it create value?

104 Capeberry Irvine, CA 92603 kitchen

Asking Price: $1,399,000

Address: 104 Capeberry Irvine, CA 92603

Rollin’ down Imperial Highway
With a big nasty redhead at my side
Santa Ana winds blowin’ hot from the north
And we was born to ride
Roll down the window, put down the top
Crank up the Beach Boys, baby
Don’t let the music stop
We’re gonna ride it ’til we just can’t ride it no more
From the South Bay to the Valley
From the West Side to the East Side
Everybody’s very happy
‘Cause the sun is shining all the time
Looks like another perfect day
I love L.A. (We love it)
I love L.A. (We love it)
We love it

I Love L.A. — Randy Newman

I drive a convertible; I rarely put the top up. When my family makes weekend plans, we don’t worry about the weather. The climate in Coastal California is nearly perfect, and I enjoy it every day.

Weeks ago I wrote Rental Parity and Beyond to describe the value created beyond rental cashflow. The narrow coastal band of properties in California have a unique and very high quality climate.

Cold

I grew up in Central Wisconsin. Like much of the country, there are four distinct seasons there, but in Wisconsin, the winters are particularly brutal. I remember one full week in February of 1985, the high temperature never got above zero degrees. Each day, the high would be -8 to -2, and the lows would drop down well below -20. One morning, it was -38 when I went outside to start my car. That is cold.

It is difficult to describe just how cold thirty-eight degrees below zero really is. Everyone knows how warm 80 degrees feels, and most know how much colder 40 degrees feels. That same change in feeling accompanies the drop from 40 degrees to zero degrees, and it happens again when dropping from zero to minus 40. Zero degrees is a very chilling cold. Any exposed skin is immediately “bitten” by Jack Frost. Forty degrees below zero is beyond cold. Exposed skin feels like it is on fire at those temperatures as the cold “freezer burns” your skin. Prolonged exposure results in a bone-chilling cold where the surface layers go numb and the chill penetrates deeply into your body.

There is no escaping cold weather. There is no time of day when you can go outside and be comfortable. You have to bundle up with layers of clothing, heavy coats and boots, and you rush from one artificially heated environment to another. Whenever you are exposed to the cold, you hate it — and you can’t help being exposed.

It is never cold in Irvine.

Hot

I lived in Las Vegas for a while, and I have spent much time in hot, arid climates. Someone described Las Vegas to me as “living in a hair dryer.” The deserts in inland California are much the same. There is good weather in these areas for 8 months of the year, but the summers are very hot and nearly unbearable. Extreme heat is very draining, and exposure can result in heat stroke and dehydration. I prefer heat to cold because when it is really hot, at least you can go outside in the mornings or evenings and the temperature is bearable.

It is never hot in Irvine.

Humid

I lived in Florida for 7 years, and I lived in humid areas of Arkansas and Texas for much longer. Humidity sucks. The moment you step outside, you begin to sweat. It is uncomfortable, particularly when it is also very hot. One thing that always bothered me about living in a humid climate is that you can never open the doors and windows of your house and let the air circulate; your house is hermetically sealed — like a coffin. (We aired out our place last weekend. Most of the day there was a dry 74-degree breeze blowing through.)

It is never humid in Irvine.

Wet

We get very little rain in Southern California, so we rarely have to change our plans due to the weather. When I lived in other areas, I always had to make back-up plans in case the weather changed. I spent far too many weekends watching rented movies as the cold and the rain ruined my plans for fun. Also, the lack of rain means fewer molds, pollens, mosquitoes, and other problems and pests of excessive rainfall.

I have always thought Eugene, Oregon, looked like a nice place. I caught part of a football game played there recently. It was cold and overcast, and there was a light mist. The announcers of the game said it had rained for 18 consecutive days there. WetTF! So much for Eugene, Oregon.

It rarely rains in Irvine.

Storms

I have lived in areas where tornadoes, hurricanes, intense thunderstorms and dramatic changes in temperature were common. I can remember one afternoon in Texas when a cold front came through and reduced the outdoor temperature by about 40 degrees in a few hours. I have evacuated to avoid hurricanes, hid in the basement to escape tornadoes, and experienced thunderstorms so intense that water seemed to fall in sheets from the sky.

We don’t get big storms in Irvine.

California Perfect

Coastal California has a narrow band of temperature variation with highs ranging from the 60s in the winter to the 70s in the summer. The closer you are to the ocean, the narrower this band of temperatures becomes. We have low humidity and little rainfall, and the closest we come to a storm is the Santa Ana winds that occasionally blow hot air out of the deserts.

The daily weather experience is fantastic. The mornings here are beautiful as we generally get a cozy blanket of clouds that keeps the morning cool. It isn’t a depressing overcast (except for May Gray and June Gloom) because we all know the clouds will burn off by late morning, and we will be bathed in sunlight the rest of the day. If you live close enough to the water, there is a sea breeze that takes the edge off a sunny summer day. The evenings are generally cool and crisp often requiring warmer clothing. I don’t own a heavy winter coat or boots anymore.

The best thing about living in a perfect climate is getting out to enjoy it. We have year-round outdoor activities with little worries about seasonality or bad weather days. I can’t remember the last time we had to change the family’s plans due to the weather.

You do get very sensitive to small changes in temperature when you live in a perfect climate; eighty degrees is hellish hot, and sixty degrees is an Arctic blast. It is the Goldilocks climate.

As I mentioned in the opening, I own a convertible, and I rarely put the top up. There are times I will run the heater in the morning or the AC in the afternoon to take the edge off, but I still greet the morning air in January or the afternoon air in August with the top down and the wind in my hair. I couldn’t do that living anywhere else.

Add Value?

Does this great climate add value to Coastal California real estate? Indirectly, it certainly does. Many wealthy and powerful people make our area their home because of the weather, and they build companies and stimulate the economy by their presence. This raises everyone’s standard of living through higher wages, higher rents, and higher home prices.

Are home prices higher because “everyone wants to live here?” No, but believing that is true makes people feel good and perhaps feel a bit superior. Many people really would like to enjoy our climate, but without a good job, the cost of living is so high that being here wouldn’t be very fun or desirable.

The climate is one of the main reasons I live here, and I am not alone. I knowingly sacrifice my standard of living to be here (there are plenty of McMansions I could afford elsewhere). Perhaps the effect of people like me adds some value to real estate, but the phenomenon would be very difficult to measure.

Added value or not, I plan to stay here and enjoy this climate as long as I can.

We have perfect weather in Irvine.

104 Capeberry Irvine, CA 92603 kitchen

Asking Price: $1,399,000

Income Requirement: $349,750

Downpayment Needed: $279,800

Purchase Price: $976,500

Purchase Date: 12/15/2004

Address: 104 Capeberry Irvine, CA 92603

Beds:	4
Baths:	5
Sq. Ft.:	3,050
$/Sq. Ft.:	$459
Lot Size:	6,680 Sq. Ft.
Property Type:	Single Family Residence
Style:	Tuscan
Stories:	2
View:	Hills
Year Built:	2004
Community:	Quail Hill
County:	Orange
MLS#:	S584010
Source:	SoCalMLS
Status:	Active
On Redfin:	6 days

Beautiful Tuscan style home in desirable Chantilly. Located near the
end of a quiet cul-de-sac street, this home features a bright, open
floor plan w/high ceilings, designer paint colors, rich crown moulding,
gorgeous porcelain tile downstairs & patterned nylon carpeting up.
Custom drapery & window treatments give a very elegant look.
Gourmet kitchen has lrg center island w/veggie sink, 6 burner gas range
w/hood, upgraded SS appliances, dark wood cabinetry & granite
countertops. Spacious great room has built-in ent center, speaker
system & elevated stone fireplace. Large formal dining room &
attached 2 room+bath guest suite w/int & ext french doors. Outer
room (office) can also be an opt 5th bedroom. Gorgeous wrought iron
stair rails lead upstairs to master suite & 2 spacious secondary
bedrooms w/upgraded private baths. Master bath has marble tile counters
& surrounds, separate shower, jetted tub, & walk-in closet.
Spectacular park-like back yard features elevated

Everything is gorgeous…

These WTF listing prices are evidence that the housing bubble has not played itself out yet. As long as there are homeowners who really believe their properties have appreciated 40% since late 2004, we are not at a bottom. A spring rally brings out the clueless dreamers.

At least they get to enjoy the great weather….

HELOCs as Risk Mitigation

Eliminating equity requirements and encouraging cash-out refinancing shifted all financial risk from borrowers to lenders. For borrowers it became a wise method of risk mitigation — much to the dismay or our bankrupt banks.

12 MISTY SHADOW 1 IRVINE, CA 92603 kitchen

Asking Price: $419,999

Address: 12 MISTY SHADOW #1 IRVINE, CA 92603

We’ve been here for too long, please let me out
You’ve caused me so much trouble and you’ve really let me down,
You’ve broken all your promises,
all that’s left are broken feelings, I’m still healing

I can’t believe that you deceived me for so long
I fought for us but I can’t trust you anymore
It won’t be easy to make up for what you’ve done
I see a chance in all of this, but do I dare to take the risk?

The Risk — Lovehatehero

Do I dare take the risk? It was easy during the late stages of the housing bubble because all you were risking was a credit score; the lenders assumed the real risk. They didn’t know that, of course, but they also believed they had no risk because real estate prices always go up.

The way our residential real estate finance system worked during the Great Housing Bubble, it was financially prudent for borrowers to max out their borrowing and transfer their market risk to a lender. Nothing has changed.

I am starting to have my doubts that the Government is going to do anything on the regulatory front to make sure we never inflate another damaging housing and credit bubble. If left to it’s own devices, the free market will inflate another bubble once the institutional memory of the losses from our recent credit bubble fades. Monopolies and Ponzi Schemes are the seedy underside of unfettered capitalism.

I studied the S&L disaster during the aftermath while living in College Station, Texas. The commercial overbuilding in Texas during the 1980s was truly astonishing; it was so bad the expression “see through building” came from the overbuilt glass office buildings in Houston. Glass skyscrapers were the Pergraniteel of the age.

The biggest similarity between the Great Housing Bubble and the S&L Crisis is the shifting of risk and the subsequent underpricing of it that lead to lowering of equity requirements to the point where you could cash-out refinance with nothing but a proforma. In the Great Housing Bubble, the cash-out refinancing caused a shifting of risk away from the borrower onto a lender. As lenders and investors encouraged more and more cash-out refinances, they created a system that encouraged predatory borrowing. Financially, it was more prudent to borrow and shift risk than it was to be conservative and manage cashflow.

IMO, this is bad. If these incentives do not change, we certainly will inflate another housing bubble; we just need to wait for lenders and investors to get stupid again. I give it 20 years.

12 MISTY SHADOW 1 IRVINE, CA 92603 kitchen

Asking Price: $419,999

Income Requirement: $105,000

Downpayment Needed: $84,000

Purchase Price: $535,000

Purchase Date: 12/15/2004

Address: 12 MISTY SHADOW #1 IRVINE, CA 92603

Beds:	2
Baths:	2
Sq. Ft.:	1,090
$/Sq. Ft.:	$385
Lot Size:	–
Property Type:	Condo/Co-op
Community:	IRVINE
County:	Orange
MLS#:	09-389765
Source:	TheMLS
Status:	Active
On Redfin:	1 day

This teriffic town home is located in a well mantainedc complex. It
features a large kitchen with granite counter tops, spacious living
room with fireplace, two large bedrooms. Direct access from the garage
and a small patio. Unit is nice and bright.

mantainedc?

This property was purchased for $535,000 on 12/15/2004. The owner used a $428,000 first mortgage, a $107,000 second mortgage, and a $0 downpayment. On 11/1/2006 he refinanced with a $549,000 first mortgage, took out all his equity plus $14,000, and shifted all the risk to the lender.

It isn’t a paragon of personal ethics, but this behavior makes complete sense financially.

If this house sells for its current asking price, and if a 6% commission is paid, the lender stands to lose $140,201. The borrower took no financial risk, and he has already made off with $14,000. Given the system, is this behavior surprising?

What has changed that will prevent this behavior from recurring? Other than the lenders current state of fear, I see nothing stopping this from happening again. Do you?

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

{book2}

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?

Open Thread 8-8-2009

I looked out this morning and the sun was gone
Turned on some music to start my day
I lost myself in a familiar song
I closed my eyes and I slipped away

So many people have come and gone
Their faces fade as the years go by
Yet I still recall as I wander on
as clear as the sun in the summer sky

More Than A Feeling — Boston

I hope you are enjoying the beautiful Southern California summer sky. I will probably be at Wild Rivers this weekend enjoying an Irvine amenity. I hope they develop a suitable replacement before they knock that park down for more offices. The office market will be down for a few years, so perhaps there is still time to get a new water park built.

Matt Padilla wrote a great post this week on the foreclosure problem: Foreclosure wave gathers momentum. I am seeing a great deal of misplaced bullishness lately. The market is tight due to government manipulation, but they can only hold back the tide so long.

Marilyn Kalfus wrote Surf City home offered for $2.3 million reverts to the bank as a update to the post I did on HELOC Abuse Huntington Beach Style.

Beautiful Boy — John Lennon