If you want to see single-family detached homes trading below rental parity, you do not have to go far. This one in Tustin is just north of the District.
But I’m a substitute for another guy I look pretty tall but my heels are high The simple things you see are all complicated I look pretty young, but I’m just back-dated, yeah
All methods of real estate valuation are based on the principal of substitution. A rational buyer — not that we have many of those — will not pay more for a property than a comparable property; instead, the buyer will “substitute” a comparable property for the one they truly desired.
For instance, this property (4592 Abbotswood Cir Irvine, CA92604) being offered for $585,000, and this property (14862 RATTAN St Irvine, CA92604) being offered for $580,000 are comparable in many ways to today’s featured property. Buyers looking to purchase in Irvine would probably prefer one of these two properties to today’s featured property because they are in Irvine; however, someone looking for properties of this type may substitute today’s featured property and save 25%.
Are the two Irvine properties really worth 25% more? Rental comps suggest there is a premium for the Irvine properties, but it closer to 5% than 25%.
This substitution effect is very real; in fact, it was a reader of this blog that contacted me to analyze today’s featured property. I was quite surprised to find it was trading 10% below rental parity.
The substitution effect is what causes people to commute from Corona or Rancho Santa Margarita or simply cross the city boundary into Tustin. It is the substitution effect that is going to drag down prices in Irvine.
There will always be a premium to live in Irvine. This premium is reflected in the high local rents (which someone will remind me are falling). This rental premium translates into a home price premium. The problem now is that this home price premium is still way too high relative to rents. That will change.
Tustin Meadows: Diamond In The Rough! This is the 4 bedroom, 2 bath,
2-car garage with built-in pool that needs your touch for remodeling
and best of all it is Priced To Sell. It has 1,684 square feet to make
your own. Brief walk to Centennial Park and the new Clubhouse being
built.
For a detailed analysis of this property including sales comps and rental comps to establish rental parity, please click on this PDF file
Some of the knife catchers from 2007 and 2008 are changing their minds about their great investments. This former REO buyer from last year is looking to get out at even.
Yesterday, All my troubles seemed so far away, Now it looks as though they’re here to stay, Oh, I believe in yesterday.
Suddenly, I’m not half the man I used to be, There’s a shadow hanging over me, Oh, yesterday came suddenly. Yesterday — The Beatles
Knives can be very dangerous, but they also can be a useful tool in the hands of the right person. It can be used to trim away the excess and leave a lean and useful core; however, it can also cause serious harm.
The foreclosure and bankruptcy process works like a knife cutting away at excessive debt. We still have a large amount of unsustainable debt held by many homeowners in the mid- to high-end of the housing market. There are only two realistic scenarios where these debts are cut down to size: (1) property sale, and (2) loan modification.
Current incomes do not support current debt loads under stable loan terms. Many people are trying to blame the foreclosure crisis on the bad economy and unemployment, but we would have had a huge foreclosure crisis even if the economy had remained sound. The implosion of subprime had nothing to do with the bad economy, nor was it the borrower class that created the default problems; it was the loan terms. The ARM reset and recast problem we are now facing is just like subprime. Remember, It’s not the Borrowers; It’s the Loans.
Many people would like to sell to cut loose of the mortgage payments they cannot maintain. As long as the market has owners in this situation, there will be pressure to sell and excessive home inventory. We are not seeing this inventory yet for reasons discussed on many occasions (most recently in The Lenders Are the Market), but this inventory is on its way. (see also this article in the LA Times: Another wave of foreclosures is poised to strike)
Loan modifications have failed to make a significant dent in the problem, nor is it likely that it will in the future. These programs help a few on the fringe, but they don’t do much for the hopelessly underwater and those who simply cannot afford their debt service under any loan conditions. There will be No Forgiveness of principal.
Even if loan modification programs were to work, it may be good for the lenders, but it will do little for borrowers or the economy. The payments under loan modification programs are still onerous, so people will not have much money left over to enjoy their lives. It isn’t likely that lenders will be giving out HELOCs to those people with loan modifications any time soon.
Much of the homebuying population seems to think that the free money from HELOCs will be available in a year two. Once prices go back up, won’t lenders be giving out this free money again? It doesn’t seem very likely that lenders or investors would put their money into loans that defaulted and cost them a trillion dollars. Would you?
{book6}
I first featured this property back in July of 2007 in the post Sumac Attac. It has been two years since this house began its quest for a stable homeowner. So far it has managed to find a knife catcher. Will the next owner be stable?
FAVORITE FLOORPLAN IN COLLEGE PARK WITH 5 BEDROOMS AND 2.5 BATHS ,
BONUS ROOM CONVERT TO BEDROOM WITH 2 CLOSET. REFINISHED CABINETS
,GRANITE COUNTERTOP, STAINLESS STEEL APPLIANCE ,CELLING FAN ,SECTIONAL
GARAGE DOOR , RECESSED LIGHTING , NEW PAINT IN & OUT , NEW FLORRING
, GAS STOVE ,ROSE GARDEN AND FRUIT TREES,CLOSE TO PARK , SCHOOL , FWY ,
SHOPPING .
ALL CAPS
FLORRING?
FAVORITE? Whos favorite?
This property was originally purchased on 10/28/2005 for $795,000. The owner used $636,000 first mortgage, a $159,000 second mortgage, and a $0 downpayment. He defaulted in late 2006, and the property was purchased by U S BANK NA, ; HOME EQUITY ASSET TRUST 2006-1HOME EQUIT, ; SELECT PORTFOLIO SERVICING on 05/22/2007.
Foreclosure Record Recording Date: 04/27/2007 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2007000272756
Foreclosure Record Recording Date: 01/25/2007 Document Type: Notice of Default Document #: 2007000052690
The lender did not waste any time in the foreclosure process, but they held the property for 9 months before they sold it.
The property was purchased by the current owner knife catcher on 2/28/2008 for $600,000. He used a $417,000 first mortgage, a $128,000 second mortgage, and a $55,000 downpayment. If he gets his current asking price, and if a 6% commission is paid, he stands to make $11,000. Basically, he has enough room to negotiate without losing any money. Do you think he will get out without a cut?
People who are buying in today’s market in Irvine are paying more to own a house than it costs to rent it. This has been the case since the turn of the millennium, and few people outside the readership of this blog think that will ever change. Why do they believe that? And why do we believe prices will get so low that renting is more more expensive than owning? It it all a matter of faith?
Historically, when prices crash, they fall until it is cheaper to own than to rent because there is no speculative investment value in an asset with a declining price; therefore, there is no real reason to buy until ownership saves you money over renting — unless you believe the market has bottomed. This fact keeps would-be buyers on the sidelines until prices are reasonable. This phenomenon has happened in the two previous busts, but without the fanfare of a blog like this one.
There are two features of this bust that are different than the last one that may have an impact on prices: (1) the strength of the kool aid, and (2) the internet providing greater access to information.
Since there were so many people that were so rewarded by owning houses during the bubble, there are still large numbers of people in the market that will pay nearly any price to own. These are the knife catchers buying homes on faith — faith that appreciation will return. If there are enough of these people, it may become a self-fulfilling prophesy. If the past is any indicator of the future, the kool aid intoxicated will be the knife catchers providing liquidity on the way to the bottom.
The other big change this time around is the presence of blogs like this one to serve as a voice of reason in a kool aid intoxicated world. By presenting history, reason, fact-based arguments and a conceptual framework for understanding how and why prices rise and fall, the readers here have guidelines that will help them establish what reasonable valuations are when when house prices are approaching that range of bottoming values. In the past, this information was not widely available.
Will either of these differences impact the market? I doubt it; the housing market is much too large. If house prices do not reach rental parity across Irvine, many will claim it is because Irvine is so desirable that houses here represent a “reservoir of value.” The reality is that this reservoir is akin to a Holy Grail; it is an ordinary cup given special significance due to the faithful.
Our house prices are being supported by the zeal of Irvine buyers. Are there enough of them to sustain the market indefinitely? I doubt it.
*********************NORTHPARK COMMUNITY******************** Beautiful
and spacious 3 Bedrooms, 3 Full Bath, 2 Attached Garage W/ Extra
Storage Space. Main Floor Bedroom W/ One Full Bath. Master Bedroom Has
Walk-In Closet W/ Huge Bathroom.Many Upgardes, Built -In Entertainment
Center. Just Steps To Elementry School & Beckman Highschool and
very close to freeway.
Did the realtor use enough asterisks?
This property was purchased on 12/1/2003 for $520,000. The owner used a $389,925 first mortgage, a $77,985 second mortgage, and a $52,090 downpayment.
On 11/2/2004 he opened a HELOC for $145,000.
On 4/15/2005 he refinanced with a $487,500 Option ARM with a 1.25% teaser rate.
On 6/24/2005 he opened a HELOC for $102,900.
Total property debt is $590,400 if he maxed the HELOC.
Total mortgage equity withdrawal is $122,490.
In late 2008, he stopped paying on his mortgage.
Foreclosure Record Recording Date: 03/16/2009 Document Type: Notice of Default Document #: 2009000121341
If this owner did max out the HELOC, if this sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $121,340.
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.”
Gorgeous Rutherford one-story home! Beautiful maplewood floors and
berber carpet throughout. Spacious family room with granite-face
surround fireplace and built-in entertainment niche. Gourmet oversized
kitchen with a large granite countertop island, upgraded cabinetry and
top-line stainless steel appliance. Romantic master suite with Corian
countertop & walk-in closet with organizer. Custom paint, epoxy
coating on garage floor, custom draperies and french door.
Professionally designed front landscape with iron gates, private
backyard with ponds, custom fountains and tropical plants. Convenient
inside laundry with lots of cabinets. Association features pool, spa
and Gym.
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.
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.
An insiders view on the pricing policies and inner workings of the Irvine Company. This post is from multiple sources, but I claim no first-hand knowledge of what is written. I think you will find it interesting.
Whether you’re a brother or whether you’re a mother, You’re stayin’ alive, stayin’ alive. Feel the city breakin’ and everybody shakin’, people, Stayin’ alive, stayin’ alive.
Have you ever wondered how prices on The Irvine Ranch evolved? Why are they higher than other Orange County communities? I have recently had long conversations with a few people familiar with the process, and today I am going to share it with you. Much of what is written below came from former company insiders who declined to be named for this post.
First, it may we worth reviewing Land Value 101 to provide a conceptual framework for how land is valued. Some of the concepts in this post build on the foundation of that one.
Land planning is a process whereby the elements of community are woven together in a framework that maximizes land value based on proximity to major sources of jobs. On the Ranch, The Irvine Company defines the lot sizes/density, product type, approximate price range, buyer profile, number of homes, etc. for each planning area (and parks, schools, etc.). Efforts are made to try to position the product array such that builders are not competing with each other head to head. That is part of the process of good land planning.
The Irvine Company selects a few builders to develop a line of floorplans, exteriors, financial proforma, etc. to be presented to TIC — at the builders expense. TIC project managers have a number in their mind as to what that financial proforma causes the price of the land to be and they work toward that end. It’s an easy formula that takes into consideration all the elements necessary, including builder’s overhead, their cost of financing, building materials, profit, etc. (see Land Value 101).
It’s no coincidence that the builders who present financial proformas with the highest residual land values are the ones selected. Rarely does design, style, excellence of architecture — except as a function of density — win out over high cost of land. Architectural competition becomes a race for higher density, not excellence in floorplan. But all the builders know if they don’t play the game, they won’t be invited to the party again, so they get creative with features such as bonus rooms, garage space conversions, spec levels, and other techniques. For more detailed information on this process, please visit our Architecture Forum.
Builder profits on the Ranch were often in the 4-6% range, if that (builders usually make 12% in a stable market). Building costs were a bit high, even early in the bubble, with the amenity level in homes on the Ranch, those costs were closer to $125-$145/sq.ft instead of the $85 found elsewhere. Sales staff (except for the custom lots) varied from builder to builder, but were either a flat rate (“box rate”) with small commissions for selling options ($50 for Air Conditioning, etc.) or up to.05%. The higher the sales price, the lower the commission. Sales managers were salaried (so came out of overhead) with bonuses. But even small builders rarely got anything close to 6% and that had to cover on-site people compensation (often without a draw), some level of management oversight, some level of advertising/marketing/sales training.
Back to the process…. Once the builders are selected, they close escrow on the land. In Woodbury, land prices got up to $5M/acre (see Land Value 101). A single family home on a 50 x 90 lot yields about 5 homes per acre when you take out streets, etc. So you begin with land cost of $1M, add overhead, materials, etc. to arrive at a final selling price.
Then, (it may be 2 years until they are ready to open for actual sales) before they can offer anything for sale, the builders must first present their individual lot prices (base prices and lot premiums) to TIC for review. The reason for this is that TIC, in addition to the price already garnered for the land, also participates in the builder’s profit when the home closes escrow with Joe Lunchbox/original consumer. Thus, in a rising market, TIC actually gets more for the land they sold 2 years ago.
In a declining market, the builders often make little or no profit, but they will be invited to The Irvine Company’s party again. Often builder’s profit levels are less than what they could achieve if the same money was invested in simple CD’s. To make the most of their investment in Irvine, they bought much less expensive land in Riverside, San Bernardino, Temecula, Arizona, etc. and used the same floorplans again, and again. But they were convinced that they needed a presence on the Ranch.
The builders did this because being on the Ranch brought in bus loads of developers from other companies and other states/countries and enhanced their image. Like in retailing — a loss leader — something you sell cheap hoping to make it up later. All those same builders built projects in Rancho Santa Margarita, Los Flores, Ladera Ranch, etc. Many of those projects debuted in Irvine.
Occasionally, the sequence was reversed; new product debuted in RSM, came into Westpark II at 12% higher prices. With all the same players; Standard Pacific, William Lyon, Brookfield, Richmond American, RGC, Baywood, K.Hovnanian, Taylor Woodrow…on and on. Same products, community specific themed exteriors, advertising, etc. We looked at community specific pricing and compared them — Irvine always came out on top — access to jobs locations was key (and still is). The theory was that a mid-level manager who worked in Irvine would travel a bit of a distance to buy what he perceived as a home nearly as nice as his boss who lived in Irvine. Therefore, price discounts were defined.
IMO, this process is a brilliant example of a powerful landowner leveraging their power to extract maximum profit out of the deal. The demand for housing puts pricing at a certain level, and The Irvine Company wants to extract whatever profit it can out of that demand. I wish I could set up a system whereby every new resident of Irvine gives me $400,000 cash profit (at least at the peak). That’s how you get a net worth of $12,000,000,000.
PRIME WOODBRIDGE PROPERTY , WALK IN DISTANT TO BEAUTYFUL LAKE AND
SHOPPING CENTER , SCHOOLS, RESTAURANT, MASTER BEDROOM IS ON MAIN FLOOR
,OWNER HAS A R/E LICENSE
This property was purchased by a relocation company then deeded to the current owners. The owners put 20% down, so this does not look like it will be a short sale. Of course, they are asking for enough to make a profit, but I rather doubt this property has appreciated over the last two years.
Exquisite single-story Triana home in the gated community of Northpark.