I know the breakdown Everything is gonna shake now someday I know the breakdown Tell me again am i awake now maybe You can find the reason that no one else is living this way
I wanted to profile this property because I find this listing phenomenon amusing; typical homeonwers who have borrowed themselves to oblivion offer their homes for sale at a prices that would pay off their debts and advertise that it is not a short sale.
It is a nice bit of denial fantasy, but most of these properties will not transact at price levels where they will not be short sales, particularly as these mid to high end properties when prices really start to drop. This property and others like it do not show up as distressed inventory, but this property will be sold in the next 24 months either as an open market sale, a short sale, or a foreclosure. The owners spent their bubble equity by doubling their debt. It is likely that they cannot afford the debt service, and they will eventually give up. This is must-sell inventory, so it is just as distressed as those properties that fit the traditional definition.
Not a short sale or foreclosure! Traditional sale! Beautiful two-story
home nestled in a quiet cul-de-sac in the sought after community of
Woodbridge. Very well maintained & clean. Laminate floors
downstairs & Berber carpet upstairs installed only 2 years ago. New
stovetop & dishwasher. Vaulted ceilings with skylight in living
room. Atrium with fountain adjacent to family room. Landscaped
wrap-around backyard with small pond. Minutes to 5 & 405 freeways.
Walking distance to North Lake.
This property was purchased on 7/26/1991 — near the peak of the last bubble — for $350,000. They endured being underwater for about 8 years before we inflated the Great Housing Bubbble. When prices started going up, they finally got to enjoy the fruits of their homes labor: HELOC money.
On 07/06/1999 they opened a HELOC for $50,000.
On 06/06/2003 they took out a new loan for $277,000. This may have been a refinance of their first mortgage. The records are not clear.
On 4/20/2004 they opened a HELOC for $275,000.
On 3/10/2006 they opened a HELOC for $250,000. At this point, there is no conclusive evidence of MEW.
On 8/3/2007 they refinanced with a $630,000 with a 1-year ARM. OK, now we know they took out the money.
Total debt is $630,000.
Total mortgage equity withdrawal is $280,000 plus their downpayment.
These owners more than doubled their mortgage just as most homeowners I see who are selling their homes now. In fact, as prices start to fall, the percentage of distressed properties will pick up quickly because there will be fewer and fewer of these properties who think they can ask for an amount that will pay off their mortgages.
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….
Lowe Unit… 1 Bedroom condo with view of the community lake from the living room. Great Starter Home..
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.
Adorable one bedroom, one bath condo on the lake. Listen to the
trickling waters and watch the ducks swim by from your livingroom &
private deck overlooking this beautiful water feature. Upgraded end
unit. The cozy kitchen has a bar seating area and features, grey
granite countertops, stainless steel sink, free standing gas range
w/hood, G.E. Profile dishwasher & newer disposal. Adjacent is a
closeted stackable washer/dryer. Neutral designer paint and carpet,tile
entry. Bedroom has an included wardrobe for additional storage and
custom window coverings; granite counter top in bathroom. Unit has
central air & heat. Lake Condos have two community pools, spa, gym,
basketball court, tennis court, playground and clubhouse. Great complex
near Irvine Valley College.
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.
One of the most important “big picture” lessons of The Great Housing Bubble is that when people believe they have no risk, they behave in very foolish ways. One of the most destabilizing impacts on our financial system was the development and widespread use of credit default swaps that convinced lenders and investors that they had no risk in large financial transactions. The people originating and pricing these instruments did not property analyse and price the risks they were taking on, and the resulting collapse destabilized our entire financial system and created the financial debacle we are enduring today.
This foolish belief that there is such a thing as a no-risk financial transaction filtered down to individual buyers of residential real estate. With the easy money being supplied by the fools on Wall Street, the greater fools on Main Street were able to bid prices up on residential real estate to mind-boggling levels. There is an important concept to note with regard to this phenomenon:
The degree to which people believed neighborhoods were immune to price drops is the degree to which these neighborhood prices became inflated.
There is a direct correlation to the acceptance of the price immunity idea and the degree of price inflation; therefore, there is a direct correlation between the price immunity idea and the degree to which prices will collapse. I want to share three anecdotes with you today as indirect evidence of this phenomenon.
In early 2008, I remember looking at properties in Newport Beach that were both for rent and for sale. I saw one property that was a small 3/2 ranch that needed updating. It was for rent at $2,700, and it was for sale at $1,400,000. WTF? A GRM of 518? One of our astute observers at the time was Surfing in Newport, and he said he had been researching properties like this for quite some time, and GRMs over 400 were the norm. That really opened my eyes. Best case scenario for these neighborhoods is that prices only cut in half.
Back in 2007, we had a guy come into our forums and ask about
properties in Newport Beach across the 73 from Turtle Ridge. When we
suggested to him that these properties may decline significantly in
value, he was incredulous. He said, “But this is practically in Corona
Del Mar?” The implication of his statement was that there is some place
on the planet where prices cannot go down, and this property is very
close to it. Do you see the mentality? This is what drove prices so
high.
At the OC Register Blog, there is one of the long time bulls who lives near the water in Newport Beach. He has expounded his brilliant investment philosophy on a number of occasions; the gist of it is that you buy the most desirable properties in the most desirable neighborhoods because you will get the most appreciation, and your house values cannot go down. So far, this idea seems to be correct. That will change. Since this investing idea is not exactly unique or novel, many people acted on the same belief, and their actions drove prices up to unsustainable levels. I know a property owner in Corona Del Mar who purchased a home for $500,000 in 1995. That property appraised in 2007 (they were doing a renovation and needed to refinance) for $2,400,000. Does anyone think incomes have gone up nearly 500% since 1995? Realistically, the property is worth $800,000 at the bottom. Getting there from 2007 comps will require a 66% drop in prices; that is what’s coming.
Think how you would behave in a financial transaction if you really believed you had no risk of loss? Is there any price that is too high? I wrote a post in early 2007 titled How Sub-Prime Lending Created the Housing Bubble. The text of that post made it into the book. Below is an excerpt that may help you understand how the belief that there is no risk impacts a financial market:
Imagine a room with 100 people representing the pool of subprime borrowers. These are new entrants to the market. They were previously unable to buy due to bad credit, lack of savings, and other reasons. All of them are told they are going to bid on an asset that never goes down in value, [this is where the belief that there is no risk takes over] and they will be given the ability to borrow unlimited funds (stated-income “liar loans”) The only caveat is the borrowed money must be paid back when the asset is sold (not that they care, they already have bad credit). Imagine what happens?
People start to buy the asset, and prices rise. Others in the room seeing the rising prices come to believe that the value of the asset never declines, and they join in the bidding. As the bidding drives prices even higher, a manic quality takes over the bidding and people compete with each other, often bidding higher than the asking prices. Nobody wants to be left out. There are fortunes to be made. Greed drives prices upward at a staggering rate. As the last of the 100 people buy, prices are very high, everyone has made money, and it looks as if prices will continue to rise forever . . .
Then something strange happens: there is nobody left to make a purchase. (A key indication of the end of a speculative mania is a huge decline in sales, as was witnessed over 2006 and 2007). Transaction volume drops off dramatically, and prices stop their dizzying ascent. Nobody is particularly alarmed at first, but a few of the more cautious sell their assets to pay off their loans. Since there are no more new buyers, the first selling actually causes prices to drop. This is unprecedented: prices have never declined! Most ignore the problem and comfort themselves with the history of rising prices; however, a few are spooked by this unprecedented drop and sell the asset. This selling drives prices even lower. Now those who still own the asset become worried, some continue to deny that there is a problem, and some get angry about the price declines. Some of the late buyers actually owe more than they paid for the asset. They sell the asset at a loss. The lenders now lose some money and refuse to loan any more money to be secured against the asset. Now there are even fewer buyers and a large group of owners who all want to sell before prices drop any lower. Panic selling ensues. Everyone wants to sell at the same time, and there are no buyers to purchase the asset. Prices fall dramatically. This asset which was sought after at any price is now for sale at any price, and there are few takers. People in the market rightfully believe the asset will continue to decline. Owners of the asset have accepted the new reality; they are depressed and despondent.
In any group of people, there are always a few who do not believe the “prices always rise” narrative. Some recognize that asset prices cannot rise indefinitely and cannot stay detached from their fundamental valuations. These people witness the rally and the resulting crash without participating. They wait patiently for prices to drop back to fundamental values, and then these people buy. As these new buyers enter the market, prices stop their steep descent and market participants start to hope again. It takes a while to work off the inventory for sale in the market, so prices tend to flatten at the bottom for an extended period of time; however, just as spring follows winter, appreciation returns to the market in time, and the cycle begins all over again.
What is written above is true of any asset whether it be stocks, bonds, houses or tulips. In this case, it is the local housing market, and the room of new buyers represents subprime borrowers, but the concepts are universal. One phenomenon somewhat unique to the housing market is the forced sale due to foreclosure (stocks have margin calls). Even if the psychological factors at work during the panic could somehow be quelled, the forced sales from foreclosures would drive down prices anyway. True panic is not required to crash a housing market, only dropping prices and an inability to make payments. Subprime lending was one of the leading causes of the Great Housing Bubble, and its implosion exacerbated the market decline.
When you track the psychology of the market, you can see the low end is reaching capitulation. There is no more denial and fear, there is only acceptance of their fate. The mid- to high-end of the market is starting to feel fear, but their is no capitulation — yet. The very-high-end in the “immune” areas may never capitulate. Like some of the crazy bulls that come and go, they may maintain their denial in the face of the obvious. The next couple of years will be an interesting market train wreck; we will all be watching.
3 bedroom 2 bath home. Many upgrades throughout. Kitchen with granite
counters, custom cabinets, pantry, and built in range. Master bedroom
with private balcony and walk in closet. 2 car attached garage. Living
room with fireplace. Property is missing carpet and some speakers etc,
great opportunity to customize!
The quintessential no-risk neighborhood in Irvine is Turtle Ridge. This neighborhood was overpriced from the beginning, and prices went into the stratosphere from there. Things are not as crazy there as they are in coastal areas, but prices at the peak were still very inflated. When you look at some of the WTF asking prices in this neighborhood, it is easy to imagine those numbers coming down by 60%. Rents in Turtle Ridge have gone up a great deal, so unless rents crash there as well, the carnage may be somewhat muted. As with other areas in Irvine, it is the low end that is seeing distress first.
Today’s featured property was purchased for $636,500 on 6/10/2004. It was originally purchased with a $508,850 first mortgage and a $127,650 downpayment. Not to worry though, the owner extracted all their equity in late 2006 with a $720,000 refinance.
Foreclosure Record Recording Date: 12/08/2008 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2008000564646
Foreclosure Record Recording Date: 08/14/2008 Document Type: Notice of Default Document #: 2008000388593
The property went back to the lender on 04/16/2009 about 11 months after the owner quit making payments. If this sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $123,100.
I found a few interesting cartoons to share this weekend. I guess brutal represssion is getting harder to hide these days, and blogging can be dangerous.
There are a some interesting blog posts for you to check out:
Former model home in the exclusive area of Lombard Court in Woodbury!
Hard to find single level home full of upgrades including an open floor
plan featuring a large kitchen with granite counters, pull outs,
breakfast bar, custom window treatments, custom built-ins, crown
moldings, rich wood flooring, truly a must see! Enjoy entertaining your
guest in the relaxing courtyard, take a dip in one of the many
association pools, roast marsh mellows in the fire pit, wind down with
a soak in the association spa at sunset! Close to parks, shopping,
freeways, and Award winning schools! Wheelchair accessible, Don t miss
this opportunity!
Don’t miss this opportunity to get trapped in a one bedroom apartment for a decade…
I hope you are having a good time this beautiful weekend. I am finally going to take my son to Wild Rivers and enjoy the waterpark.
You can spend all your time making money You can spend all your love making time
So put me on a highway And show me a sign And take it to the limit one more time Take It to the Limit — The Eagles
When sellers price their homes, most want to take it to the limit and list at the highest possible price the market could possibly bear if a buyer with more money than brains fell in love with the property. Even then, many sellers price well above that price level and enter into the WTF-are-you-thinking category. There are many properties in Irvine price 30%-50% over comps. The inventory in Irvine is very low, and in a market rally, prices may transact 10%-15% over comps, but there is no market where a house price 30%-50% over comps will sell.
To be fair to today’s featured property owner, this one is not priced that far over comps, but it is not a bargain either. If it were a few doors down where there are views of the canyon and golf course, there might be some justification for a high price, but this one looks at rooftops through a screen of trees.
Perhaps this neighborhood is special? Most of Irvine is struggling to maintain 2004 prices, and the low end is crashing through 2003 price levels. Despite this fact, today’s featured property has more than doubled in value since it was purchased in late 2003. Hmmm… I like Turtle Rock, but not that much. It will be interesting to see what happens to prices in neighborhoods like these as the high end collapses.
Charming and Spectacular at the same time!Oversized windows that look
out to storybook, country gardens and the view beyond. This home has
been extensively upgraded both inside and out. The attention to detail
is remarkable. It has been remodeled to include granite counters and
newer updated cabinets and appliances. The bathrooms have been redone
with marble and granite. The floors in the main living area are
porcelain tile. New sliding doors in Living,Dining and Family Rooms.
Custom crown moldings in most rooms.Custom shutters in all bedrooms
with added design features. Closet systems in all bedrooms. The garage
has been remodeled to include Newer garage doors, tough granite looking
floor coating. Sheet Rock on walls and ceiling to give the garage that
‘Finished’ look. Newer heating and A/C. Added heavy duty insulation in
attics. Second floor reinforced and insulated for strengh and sound
atenuation. Driveway and patios have custom pavers. One of only 86
homes in Ridgeview.
Charming and Spectacular at the same time! That comment is both meaningless and irritating at the same time!
The attention to detail granite
is remarkable.
Sheet Rock on walls and ceiling to give the garage that
‘Finished’ look. You mean they did finish the garage, so it does look finished. I guess most of these older properties do not have finished garages, or this would not be mentioned.
strengh? atenuation?
This property was purchased on 9/11/2003 for $450,000. The owner used a $300,000 first mortgage and a $150,000 downpayment. She did open a small HELOC in early 2008, but for the most part, she was a responsible borrower. If she can manage to sell this for its current asking price, she will make a fortune. Hopefully, she is wise enough to discount the price until she sells it while there is still some bubble equity left.
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.
🙂
Remember, this coming Tuesday is our IHB Block Party.
