Vintage Wine — Moody Blues

Isn't real estate supposed to be like vintage wines that get better with age? Rare vintage wines can get very expensive, and unless they turn to vinegar, their prices do always go up. Well it appears the 2006 vintage homes are all turning to vinegar now because they certainly are not appreciating in value.

Today I want to relay a story to you that was told to me by a real estate developer currently buying property in one of our most blighted California bubble markets. His company is purchasing this particular property from the bank for far less than the original loan amount. Do you remember the residual land value calculations from Land Value 101? This particular property was ready for the construction and sale of houses in 2003. The original prices were $400,000 in this particular market. By 2006, houses were selling for $700,000. When sales volumes plummeted, the builder gave up and let the property go back to the bank. The developer ran a proforma using a $275,000 house price. As you can imagine, this did not leave a large residual land value. The bank took the offer. This developer knows he can build and sell houses profitably for $275,000 in this particular market. If prices increase, he stands to reap a windfall. His only real concern is the competition from the REOs, particularly all the previously built homes in this subdivision he is undercutting by over 50%. He knows he is probably going to cause more walkaways, but prices are what they are, and as long as he can build and sell $275,000 houses, it isn't his problem.

Fortunately, for those living in Irvine, the developer is financially stable, and it is concerned about long-term house prices and probably will not cut prices over 50% to move homes. As we noted with the problems in Columbus Grove, those who are off the Ranch are not so lucky. Today's featured property is another of the bad 2006 vintage properties in Woodbury. This seller is really being hosed by his competition as he owes $184,000 more on his property than his comparable neighbor is asking for sale.

Asking Price: $489,000

Income Requirement: $122,250

Downpayment Needed: $97,800

Monthly Equity Burn: $4,075

Purchase Price: $554,500

Purchase Date: 10/12/2005

Address: 142 Vintage, Irvine, CA 92620

Beds:	3
Baths:	3
Sq. Ft.:	1,526
$/Sq. Ft.:	$321
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2005
Stories:	3+ Levels
Floor:	1
View:	Hills, Mountain
Area:	Woodbury
County:	Orange
MLS#:	S529072
Source:	SoCalMLS
Status:	Active
On Redfin:	133 days
Unsold in 90+ days

That is a well written description. It is so rare, I thought it necessary to comment on it.

This property was purchased on 10/12/2005 for $554,000. The owners used a $443,000 first mortgage, a $110,700 second mortgage and put $300 down. On 3/21/2007 they refinanced their second for $141,000 pulling out a quick $30,000. Now that prices are dropping and they got all they could out of the property, they see no need to keep paying the big debt, so they are walking away. Does anyone blame them? Does anyone think we won't be seeing a lot more of this?

.

I remember the taste of the vintage wine

It sounds so good to me

Vintage Wine — Moody Blue

The Art of War — Sabaton

Speculation is a battle. The forces of greed and fear drive the financial markets, and the speculator attempts to profit from these moves. Speculation is not investment, although most do not understand the distinction. Speculation is the battle of the individual against the herd. For those who understand it and have learned to move against the emotional forces of fear and greed, there is opportunity to profit. For those who follow the herd, there are brief moments when profits are available, but few have the discipline to take them. Most speculators are slain by the market.

Like many others, I have a disdain for pure speculative flips.
People who buy properties, make no improvements, and attempt to resell
it for a profit simply inflate market prices. There is no value added.
People who rehab old or run down properties do a community service, and
they earn the money they make. However, flippers are merely financial
parasites profiting by constricting supply at reasonable price points.
Of course, flipping is a dying art, and those who are attempting it now
are losing money which makes for great schadenfreude.

Flipping is much more difficult now, not just because prices are
dropping, but because the constriction of credit and the tightening of
financing terms makes it much more costly and difficult to do. The
Option ARM with 100% financing was the ideal tool for the flipper. It
allowed him to enter the market with none of his own money, it
greatly reduced the carrying cost of the property, and it gave him downside protection in the event prices fell. With these conditions in
place, it is no wonder speculative flipping became the pastime of every
would-be Donald Trump in California.

Another behavior enabled by loose credit during the bubble was
cash-out serial refinancing. With the ability to get access to cash
from the property without selling it, there was no need to sell the
property, and many speculators held their properties and withdrew their
cash as needed. Houses were treated like savings accounts earning a
very high return. Of course, they were not withdrawing free money, they
were adding huge amounts of debt, but since the debt service costs were
low, and since nobody thought they would ever have to pay this money
back out of their income, cash-out refinancing became the rule rather
than the exception.

Today’s featured property is an example of a speculative cash-out
serial refinancing flip-flop. The speculator bought the property with
100% financing using a 1-year ARM, took out some cash, refinanced with
an Option ARM, took out some more cash, and now they are walking away.

Asking Price: $599,000

Income Requirement: $149,750

Downpayment Needed: $119,800

Monthly Equity Burn: $4,991

Purchase Price: $740,000

Purchase Date: 7/9/2004

Address: 23 Muir, Irvine, CA 92620

fantistic, seperate, celing, granit?

If the “forth” bedroom is really a den, then it should be advertised as a 3/2.

This property is sporting a 20% discount off its 2004 purchase price and represents a significant discount from neighborhood comps.

• It was purchased on July 9, 2004 for $740,000. The owner used 100% financing — kind of. She obtained a $592,000 first mortgage, when she bought the property and put down $148,000.
• One month later on August 27, 2004, she obtained a second mortgage for $173,000 and cashed out $25,000 (I wonder how much she kicked back to the appraiser?)
• On 5/5/2005 she opened a $58,900 HELOC and got some more cash.
• On 9/27/2005 she refinanced with an Option ARM with a 1% teaser rate for $640,000. She opened another HELOC for $80,000 at the same time.
• On 11/10/2005 she opened a stand-alone second for $173,000.
• And finally on 10/27/2006 she opened another HELOC for $250,000.
• The total of the first and second mortgages is $813,000. If the HELOC was used to pay off the second mortgage, the total debt rises to $890,000. If the HELOC was an add on, the total debt on the property is $1,063,000. I doubt Washington Mutual gave the huge HELOC without paying off the second, but you never know.
• Total mortgage equity withdrawal was $250,000 not including the recapture of her downpayment.

When speculation pays that well, it isn’t a surprise many people were doing it. Of course, she has to deal with the consequences to her credit, but for $250,000 in free money…

.

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

That’s the Art of War
That’s the Art of War

The Art of War — Sabaton

Columbus Stockade Blues — Brother Oswald

One of the myths about Christopher Columbus and his voyage to discover a quicker trade route to the East was that he had difficulty getting crewmen to serve because they believed the world was flat, and if they sailed far enough, they would fall off. Similarly, one of the myths about residential real estate is that prices always go up, and if they rise too high, they will not fall off. The people who bought in Columbus Grove did so right at the peak, and the continuing activities of the builders finishing off the community pushed their resale prices off the edge of the flat earth. The drop there has been remarkable.

The Columbus Grove experience shows what happens when large amounts of must-sell inventory is concentrated in one place. When prices become extremely inflated, and the market finally starts to fall, it creates a downward spiral that does not abate until prices are at fundamental valuations. However, the rate of decline is largely dependant upon the amount of must-sell inventory in specific areas. So far, the areas that have fallen the quickest have been those with large percentages of subprime loans (Santa Ana,) large numbers of new homes (Columbus Grove,) or both (Riverside County). This does not mean that the neighborhoods like those in Irvine are immune from the crash, it will just take longer here, and since it will take longer, they may not fall quite as far on a percentage basis because rents and incomes will be increasing as prices fall (we hope). Irvine and other neighborhoods will fall in time, most likely when all the Alt-A and Prime ARMS reset.

Asking Price: $880,000

Income Requirement: $220,000

Downpayment Needed: $176,000

Monthly Equity Burn: $7,333

Purchase Price: $1,226,000

Purchase Date: 8/31/2006

Address: 22 Honey Locust, Irvine, CA 92606

IMO, the front elevation is ugly and boxy.

This property is being offered for 28% off its peak purchase price. Since fundamentals have not caught up much in the two years since this was purchased, it is probably only a little more than half way to its bottom value. This property was at least 100% overvalued at the top, so a full 50% haircut is in order to get the price back to sanity. Maybe in 2 or 3 years if incomes have gone up, this property might be worth $700,000, but on a breakeven cashflow basis today, it is probably only worth $600,000.

The owner actually put some of his own money into this deal. The property has a $980,700 first mortgage and a $184,000 second mortgage leaving a 61,300 downpayment. That loss probably stings a bit, but it is the lender who is getting really hosed. If this property sells for its asking price, the total loss will be $398,800 after a 6% commission. Greenpoint Mortgage originated the loan. There is no telling who owns that toilet paper now.

In many ways, this former loanowner is one of the lucky ones, he has escaped his debtor’s prison. The rest of the neighborhood is trapped, and 15-25 years from now when values get back up to the peak prices they paid, they might be able to get out…

.

Way down in Columbus, Georgia
Want to be back in Tennessee
Way down in Columbus Stockade
Friends all turned their backs on me

Many a night with you I’ve rambled
Many an hour with you I’ve spent
Thought I had your heart forever
Now I find it’s only lent

Columbus Stockade Blues — Brother Oswald