Renovations are not Riches

Changes – Yes

Many people during the bubble took out HELOCs and extensively renovated their properties. Historically, interior property renovations add $0.70 for every dollar spent. Exterior renovations add $0.50 per dollar. It was not uncommon to see property listings touting $200,000 in renovations to justify a $500,000 price increase. It isn’t the renovations that were adding value to property; it was the financing that was inflating it. There were several properties in Irvine that were torn down to a single wall and rebuilt from the ground up. Those that attempted this kind of extreme home makeover in 2007 did not fair to well.

We first profiled 2 Angell, Irvine, CA 92612 in February of 2008 when it first came on the market. The flippers who were trying to sell this property took a $600,000 house, rebuilt it, and asked $1,469,000 for it. I was thinking they might get lucky to get $1,000,000. Now the property is back on the market for $1,199,000.

Today’s featured property is another total redo. It is an interesting story of renovation gone awry.

Asking Price: $999,000

Income Requirement: $250,000

Downpayment Needed: $200,000

Monthly Equity Burn: $8,333

Purchase Price: $640,000

Purchase Date: 4/7/2005

Address: 1 Whitney, Irvine, CA 92620

Beds:	5
Baths:	5
Sq. Ft.:	3,990
$/Sq. Ft.:	$250
Lot Size:	7,020 Sq. Ft.
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	2007
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	S504153
Source:	SoCalMLS
Status:	Active
On Redfin:	375 days
Unsold in 90+ days

Absolutely gorgeous Tuscany styled home. Must sell……

For someone who really must sell a property, they didn’t put much effort into the MLS listing.

This property was purchased for $640,000 on 4/7/2005. The original structure was completely replaced by a new, much larger home. On 6/9/2006, the owner opened a HELOC for $170,250. This probably did not cover the full cost of the renovation. On 1/12/2007 he refinanced the first mortgage for $1,200,000. He promptly put the house on the market for $1,789,000 and watched it sit there for a year.

Listing Price History

Date	Price
Sep 06, 2007	$1,789,000
Dec 10, 2007	$1,699,900
Mar 07, 2008	$1,450,000
Apr 24, 2008	$1,200,000
Sep 11, 2008	$999,000

Every 90 days, this seller lowered the price another $200,000 and chased the market as it fell even faster. He might have got out for enough to pay off the debt if he had cut the price early, but this was supposed to be a ticket to riches, not a backbreaking labor for chump change. Of course, now, he is either going to have to write a big check at the closing table or accept a serious credit hit. If this is the man’s primary occupation, it is a very difficult choice to make…

. yes

Im moving through some changes
Ill never be the same
Something you did touched me
Theres no one else to blame

The love we had has fallen
The love we used to share
Weve given up pretending
As if you didnt care

Change changing places
Root yourself to the ground
Capitalize on this good fortune
One word can bring you round
Changes

Changes – Yes

$1,000,000 REO

The Long and Winding Road — The Beatles

The course of a financial market, particularly the real estate market, is a long and winding road full of twists and turns and unexpected outcomes. It was certainly foreseeable that banks and builders might fail and the GSEs might need to be bailed out, but the how and when of these occurrences are always unpredictable and newsworthy.

We have all seen this road before. This is the third real estate bubble in California since the 1970s. Each one seems to reverberate causing the next one to be even larger and more painful than the last. The drop in prices always leads to the market entry door of affordability. It is possible that history may not repeat itself for a third time, but this seems unlikely. There was good reason for prices to retreat to this level: it doesn’t make much sense to overpay for a depreciating asset. There doesn’t seem to be any reason this will not happen again (wishful thinking by those who do not want it to happen is not a reason).

You would think that million dollar REOs would be very rare. Aren’t $1,000,000 homes the exclusive enclaves of the rich and famous. The many pretenders who paid more than $1,000,000 for tract homes in Irvine would undoubtedly like you to think so, but most of these houses were purchased by high-income (or high stated-income) individuals and families utilizing exotic financing. Irvine may have been the center of the subprime lending universe, but it was the also the center of the Alt-A borrowing universe. Very few of the loans issued in Irvine were conforming loans because during the bubble rally, the cap was far too low to be a viable financing alternative (good thing for the GSEs and taxpayers who do not have much exposure here). Also, since people in Irvine do not make the money necessary to support home prices — particularly peak prices — many, if not most, of the loans were stated-income, liar loans. In order to get the monthly cost down to manageable levels, many borrowers used Option ARM loans and have only been making the teaser-rate payment. In short, most of the loans issued in Irvine were Alt-A and jumbo loans. It is not a matter of if these loans will blow up, it is only a matter of when.

50 Winding Way Front 50 Winding Way Kitchen

Asking Price: $1,175,000

Income Requirement: $293,750

Downpayment Needed: $235,000

Monthly Equity Burn: $9,791

Purchase Price: $1,360,000

Purchase Date: 6/23/2006

Address: 50 Winding Way, Irvine, CA 92620

Beds:	5
Baths:	4
Sq. Ft.:	3,500
$/Sq. Ft.:	$336
Lot Size:	5,968 Sq. Ft.
Property Type:	Single Family Residence
Style:	Other
Year Built:	2006
Stories:	2 Levels
Area:	Woodbury
County:	Orange
MLS#:	S547214
Source:	SoCalMLS
Status:	Active
On Redfin:	3 days

Beautiful two story home in Irvine. This home features 5 spacious
bedrooms, 4 bathrooms, a kitchen with granite counter tops and an
island, a living room with a fireplace, a formal dining room,
individual laundry room, wood flooring, an enclosed patio, and corner
location. Home has access to the wonderful association amenities. Truly
a MUST SEE!!

Here is today’s challenge. Identify the objects in the picture of the kitchen and speculate on how each of these objects ended up there…

Today’s property was purchased by the Bank of America through Wells Fargo for $1,076,882. I don’t know why both banks are involved. The original first mortgage balance was $1,000,000 but with the skipped payments added on, the balance due on the date of the auction was the amount paid. There were two HELOCs for $223,600 and $100,000 respectively. It is unclear whether or not either one of these HELOCs was used. If not, the original owners lost $360,000, so it is likely that these two HELOCs were used to extract their equity. If this property sells for its asking wishing price, and if a 6% commission is paid, the total loss on the property will be $255,500. It looks as if the lenders will absorb most of this, and the actual loss will probably be quite a bit larger as they discount this property to sell it.

The long and winding road
That leads to your door
Will never disappear
Ive seen that road before
It always leads me her
Lead me to you door

The wild and windy night
That the rain washed away
Has left a pool of tears
Crying for the day
Why leave me standing here
Let me know the way

Many times Ive been alone
And many times Ive cried
Any way youll never know
The many ways Ive tried

But still they lead me back
To the long winding road
You left me standing here
A long long time ago
Dont leave me waiting here
Lead me to your door

But still they lead me back
To the long winding road
You left me standing here
A long long time ago
Dont leave me waiting here
Lead me to your door
Yeah, yeah, yeah, yeah

The Long and Winding Road — The Beatle

Open Thread 9-13-2008

I am in the final stage of the publication process. I will be receiving my proof from the publisher this week. Once I approve it, the book will be available through the publisher’s website. Shortly thereafter, it will be available on Amazon.com.

I would give you a teaser of the content, but you have already seen most of it. It is scattered throughout this website in the various analysis posts. The readers and commenters on the IHB were instrumental in making this book possible. The daily feedback on the ideas and the presentation of opposing views has forged this work into an exhaustive review of the housing bubble. Thank you, thank you all.

If the sun refused to shine, I would still be loving you.
When mountains crumble to the sea, there will still be you and me.

Kind woman, I give you my all, Kind woman, nothing more.

Little drops of rain whisper of the pain, tears of loves lost in the days gone by.
My love is strong, with you there is no wrong,
together we shall go until we die. My, my, my.
An inspiration is what you are to me, inspiration, look… see.

And so today, my world it smiles, your hand in mine, we walk the miles,
Thanks to you it will be done, for you to me are the only one.
Happiness, no more be sad, happiness….I’m glad.
If the sun refused to shine, I would still be loving you.
When mountains crumble to the sea, there will still be you and me.

Thank You — Led Zeppelin

So who is going to go under first, WAMU or Lehman? Will either one of them survive the week?

What do you think is going to happen now that the government owns Freddie Mac and Fannie Mae?

You must admit, we live in interesting times. Major financial institutions are imploding or being bailed out by the government. It isn’t something you see every day…

Big Wedge

Big Wedge — Fish

Are we selling out tomorrow for today? The takeover of Freddie Mac and Fannie Mae has opened the door for a massive government bailout. Since we are already running a large budget deficit, any bailout would be debt financed. As such, we are borrowing from future tax receipts to pay today for the sins of lenders, speculators and others who foolishly bought more house than they could afford.

The whole mortgage market bailout is yet another false hope for troubled homeowners. The bulls are somehow convinced that the problem of insolvency can be rectified through even more borrowing. People have too much debt already. That is the problem. Giving them more is not the answer. I believe you are going to see two things happen with the government in control: 1. There will be more workouts and refinancing of existing debt. 2. Credit standards will continue to tighten and interest rates and fees will continue to rise for new mortgages. There is not much the government can do with the existing toxic loans it must now make good on. It will do what workouts it can, and it will foreclose on the rest. It has a great deal of control over the new mortgages it writes going forward. It seems unlikely to me that the government would suddenly embrace all the practices that proved so disastrous during the bubble in order to prop up prices. It is one thing to minimize the losses you have, it is quite another to create new losses through foolish lending practices.

The cynics (and the bulls) believe the government will lower credit standards and write a plethora of new bad loans simply to support current price levels. This would amount to a huge, direct government subsidy to homeowners. The Government is stupid, and they do have political pressures to deal with, but they are not that stupid. Right now the focus is on limiting the damage and letting the bubble unwind without losing the secondary mortgage market causing a complete seizure of our credit markets. The government is not concerned with resale house values in Irvine, California. Everyone knows prices must come down, the only issue is how can this occur with the least amount of disruption to our financial system. Prices will stabilize, they will just do so at a much lower price level — A price level supportable by incomes where the borrowers are solvent and not prone to default on their loans.

Today’s featured property is a short sale that has been garnering a lot of attention in Northwood. Apparently there are multiple offers. After 47 days on the market, I guess everyone just discovered it… Or perhaps the realtors are lying…

10 Wedgewood Kitchen

Asking Price: $525,000

Income Requirement: $131,250

Downpayment Needed: $105,000

Monthly Equity Burn: $4,375

Purchase Price: $720,000

Purchase Date: 6/17/2004

Address: 10 Wedgewood, Irvine, CA 92620

Beds:	3
Baths:	3
Sq. Ft.:	1,561
$/Sq. Ft.:	$336
Lot Size:	4,096 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1997
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	S541612
Source:	SoCalMLS
Status:	Active
On Redfin:	47 days

Upgraded Wood Floor throughout, Wooden Shutters in Master Bedroom and
Living Room. Excellent Location at the End of Cul De Sac! Walking
Distance to Elementary School. Move in condition in Fabulouse Gated
Community….

Fabulouse?

This is a deep rollback of a 2004 price: 27%. We have been seeing many properties almost 30% off the peak, but nearly 30% off a 2004 price is more rare. Is it a bargain? Would it rent for $3,281? It may not be far from breakeven for an owner-occupant. I can remember seeing nearby comparable property for rent in early 2007 for $2,800 (on Bristlecone), so I don’t think we are quite down to rental parity, but this one is certainly closer to the bottom than to the top.

This was a conservative speculation by recent blog standards. The woman who bought this as her sole and separate property paid $720,000 on 6/27/2004. She used a $576,000 first mortgage, a $72,000 second and a $72,000 downpayment. There were no refinances. If this property sells for its asking price, the total loss will be $226,500. The seller will lose her $72,000 downpayment, and the lender will lose the remaining $154,500.

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.

🙂

I found a new religion yesterday, I’d just cleared immigration jfk
A priest got in a cadillac, the shoe shine boy sang gospel
As God and his accountants drove away.
You’ll see him coast to coast on live tv, in a stadium
Rocked by satan just the night before
The collection from the faithful is tax free
It’ll pay for his presidential campaign and his yacht

And we all bow down, we bow down to the big wedge
And we’ll buy ourselves some heaven on earth
We sell our souls, sell our souls for big wedge
Are we selling out tomorrow for today?

A surgeon checks your plastic on the telephone
A casio concerto entertains you while you hold
Your credit rating’s good for a madonna or a bardot
A dali or a picasso for his wall.

You’re looking good, looking good with big wedge
Are you holding back tomorrow for today?
They’re driving in, driving in with big wedge
Are we selling out tomorrow for today?

Big Wedge — Fish

Mandrake

Mandrake Root — Deep Purple

You have the power. It is A Buyer’s Market. Did you ever think you would see properties under $200/SF again? How about $162/SF? Today’s featured property caused one commenter yesterday to opine, “This must be bottom.” Is it? The price drops have been so dramatic and come so fast on many properties that people can’t get their mind around the valuations. A property selling for 26% off its peak purchase price of just two years ago seems cheap. When viewed through the lens of 2006 prices, it is. However, when viewed through from the perspective of fundamental valuations, a property like today’s featured property is still overpriced. People did not put much effort into understanding prices when they were rising, after all, prices always go up — not. People assume that market prices are fair value and any discount from that price a bargain. When viewed from a broader perspective of valuations based on rents and incomes, the degree of price inflation becomes clear, and the amount prices have yet to fall also becomes apparent. Today’s featured property is probably closer to the bottom than to the top, but at $559,900, it still requires a rental rate of $3,500 a month to reach a breakeven threshold for an owner-occupant. Does this look like a $3,500 a month property to you?

3 Mandrake Kitchen

Asking Price: $559,900

Income Requirement: $139,975

Downpayment Needed: $111,980

Monthly Equity Burn: $4,665

Purchase Price: $760,000

Purchase Date: 2/9/2006

Address: 3 Mandrake, Irvine, CA 92612

Beds:	4
Baths:	3
Sq. Ft.:	3,448
$/Sq. Ft.:	$162
Lot Size:	3,200 Sq. Ft.
Property Type:	Single Family Residence
Style:	Traditional
Year Built:	1967
Stories:	Split-Level
View:	Park or Green Belt
Area:	University Park
County:	Orange
MLS#:	S546847
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

One of the largest 4 bedroom homes in University Park with some great
features……..includes a fancy spiral staircase, large livingroom
separate family room, formal dining and added den. If you like to
entertain you have to see this house………separate but open and
flowing rooms. Don’t forget to take a look at the kitchen……and the
view!!! This home is in a great location surrounded by greenbelts and
overlooks a park. Walking distance to the association pools, spa,
tennis courts, basketball courts, volley ball courts and racquet ball
courts.

Fancy spiral staircase? It looks like it was recycled off a naval ship.

Apparently, they really like their pool table… and their dog…

Why is there a giant flat screen in the corner of the dining room?

I think they bought out the local Persian Rug store.

The stool prominently displayed in the kitchen is a nice touch as well. Why would you put a stool there?

They definitely have some serious computing power. I can’t criticize it too much as I have a similar setup…

With the way they raved about the view, you would think the Pacific Ocean was out back…

This property was purchased on 2/9/2206 for $760,000. The owner used a $608,000 first mortgage, a $76,000 HELOC and a $76,000 downpayment. On 10/22/2006 he refinanced with a $675,000 Option ARM and opened a HELOC for $135,000 raising his total debt to $810,000. $50,000 for 8 months ownership: not bad. Of course, now that values have dropped, he is leaving the lender holding the bag. If this sells for its asking price, and if a 6% commission is paid, Paul Financial LLC stands to lose $283,694. The owner will walk away with his $50,000. Perhaps the new buyer can go borrow from Peter to pay off Paul…

I’ve got a Mandrake Root
It’s some thunder in my brain
I feed it to my babe
She thunders just the same
Food of love sets her flame
Ah, stick it up

I’ve got the Mandrake Root
Baby’s just the same
She still feels a quiver
She’s still got the flame
She slows down, slows right down
I’ve got the power

Mandrake Root — Deep Purple