How to Make Your Neighbors Hate You

Sittin’ on a Fence — The Rolling Stones

We have profiled informal neighborhood cartels where a group of neighbors get together and set WTF asking prices. As with all cartels, they are unstable arrangements because each participant has an incentive to cheat at the expense of the others. Today’s featured property was one of two neighboring properties asking WTF prices. One of the two decided it was time to sell and lowered his price accordingly. The neighbor has got to be really angry as not just will the neighbor sell first, it will also set a comparable price that will make it nearly impossible for the other property to get its asking price. We are not talking about $5,000 or even $50,000, we are talking about $500,000!

9 Paso Robles Kitchen

Asking Price: $1,299,900IrvineRenter

Income Requirement: $324,975

Downpayment Needed: $259,980

Monthly Equity Burn: $10,832

Purchase Price: $1,668,000

Purchase Date: 4/5/2006

Address: 9 Paso Robles, Irvine, CA 92602

Short Sale

Beds: 4
Baths: 5
Sq. Ft.: 4,335
$/Sq. Ft.: $300
Lot Size: 7,020

Sq. Ft.
Property Type: Single Family Residence
Style: Mediterranean
Year Built: 2001
Stories: 2 Levels
Area: Northpark
County: Orange
MLS#: S521077
Source: SoCalMLS
Status: Active
On Redfin: 123 days

Unsold in 90+ days

Gourmet Kitchen Award

Located in one of the best areas of Irvine. Guard gared community.
Great family community & schools. This home offers 4335 sq ft with
an iron gated courtyard enterance. Boast a large sunny & tranquil
atrium. Gourment Kitchen 5 burner gas cook top, Butler’s Pantry. Huge
master Suite Featuring His/Her walk in Closets. 4 Large bedrooms each
with private bath. Huge bonus room. Main floor suite or office plus
seperate bedroom with walk in closet and private bath. Cozy Living room
with fireplace, formal dining, Kitchen, Seperate Casual Dining and
Family room with large fireplace. Features travertine floors. Perfect
Private backyard for entertaining. Built in BBQ, over sized covered
patio. 3 car tanden, Gym room or office. Close to Tustin and Irvine
Market Place, fwy & toll road.

Guard gared community? enterance? Gourment? seperate? tanden?

3 car tanden, Gym room or office. That could be read “tan den, gym room, or office.” It would be cool to have your own tanning bed den.

I am starting to wonder if realtors believe poor spelling and schizophrenic use of punctuation is a positive. It does make their listings stand out. If realtors believe all publicity is good publicity, they should continue writing like that so we will bring attention to their listings. Perhaps they do not mind that we ridicule them.

Wow! It comes with a Butler’s Pantry. I hope I get to use that graphic again 😉

This is a seller who knows how to lower his price to reach the market:

Listing Price History

Date Price
Feb 09, 2008 $1,799,900
Apr 18, 2008 $1,599,900
Jun 06, 2008 $1,299,900

He has dropped his price $500,000 in two big drops. Compare that to his neighbor a 15 Paso Robles:

WTF

Listing Price History

Date Price
Mar 01, 2008 $1,949,000
Apr 12, 2008 $1,888,800
May 22, 2008 $1,825,000

At the rate he is lowering the price, the property will sell in about 10 years. Based on the equity burn the market is dropping $11,000 to $18,000 a month. The $60,000 price drops will get there eventually, but since the market is at least $500,000 below his asking price today, it will take a very long time to catch up. Plus, if you remember the post Financing in a Declining Market, the new comparable sale will limit the financing. In short, for someone to buy 15 Paso Robles for asking price, they will need about $800,000 cash.

For the record, if the featured property sells for its asking price, and if they pay a 6% commission, the total loss on the property will be $446,094. It looks as if the owner is going to take a significant equity loss. There is a refinance for $1,334,000, but I see no other HELOCs or second mortgages. Of the $446,094 total loss, $334,000 came out of the owner’s pocket. I guess the WAMU can breathe easy, they will only lose $112,094 on this one.

When you see losses like that, does it inspire you to keep sitting on the fence? The knife catcher that buys this place will probably lose a similar amount. With those dollar figures, they really are a chainsaw catcher…

.

Rolling StonesSince i was young i’ve been very hard to please
And i don’t know wrong from right
But there is one thing i could never understand
Some of the sick things that a girl does to a man, so
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
All of my friends at school grew up and settled down
And they mortgaged up their lives
One things not said too much, but I think it’s true
They just get married cause there’s nothing else to do, so
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
The day can come when you get old and sick and tired of life
You just never realize
Maybe the choice you made wasn’t really right
But you go out and you don’t come back at night, so
i’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence

Sittin’ on a Fence — The Rolling Stone

428 Days on the Market

Think for a Minute — Housemartins

Have you noticed how silent the bulls have become? The ones that used to hold their heads high now hang their heads in shame. Perhaps, if they had thought for a minute about paying double for real estate, they wouldn’t have so many troubles now. Today’s featured property has been on the market since April 10, 2007 — a whopping 428 days. It is a story of a year of stress and wishful thinking about the market.

963 Somerville Kitchen

Asking Price: $530,000IrvineRenter

Income Requirement: $132,500

Downpayment Needed: $106,000

Monthly Equity Burn: $4,416

Purchase Price: $628,000

Purchase Date: 1/12/2006

Address: 963 Sumerville, Irvine, CA 92620

Rollback

Beds: 3
Baths: 3
Sq. Ft.: 1,481
$/Sq. Ft.: $358
Lot Size: –
Property Type: Condominium
Style: Contemporary/Modern
Year Built: 1999
Stories: 2 Levels
Area: Northwood
County: Orange
MLS#: S482981
Source: SoCalMLS
Status: Active
On Redfin: 427 days

Unsold in 90+ days

** Large Yard ** Premium Lot ** Feel like detached home ** Spacious
Living and Dinning w/ Recess Light, Ceiling Fan, Cozy Fireplace,
Netural Wood Floor and Berber Carpet, Custom Paint, Large Kitchen w/
Breakfast Nook, Inside Laundry Room, Walk to Canyon View and Northwood
High ** The Best Location and The best Price ** w w w.9 6 3 s o m e r v
i l l e.i n f o

It looks like the realtor put together a nice website.

Perhaps English is not her native language. We have this sentence-ender we call a period. I don’t know where the double asterisk comes from.

When I looked through the records on this property, I was struck by the stress this property must be causing the owners. It was purchased by a married woman as her “sole and separate property” on January 12, 2006. The property was put into a family trust in August of 2006, and the husbands name was on the property. In January of 2008, after 8 months of the property failing to sell, the husband removed his name from the title. I speculate this was done in an attempt to save his credit in the event of a short sale. I can just imagine the conversations these two must have had as she purchased the property without him, then he was brought into the deal, and then he wanted out. Most family arguments are about money. Add a white elephant like this to the mix, and there are bound to be issues. I hope I am wrong. I would not wish that on anyone. Through situations like this one, the housing crash is going to have a detrimental impact on families everywhere.

When this property was purchased for $628,000, the owner put 10% ($62,800) down. They didn’t HELOC out their equity, although I imagine they wished they would have at this point. This property was first listed for $645,000. The seller was going to lose a bit of their downpayment at that price due to the sales commission, but the loss would have been minor. It didn’t sell. After 90 days, they lowered the price to $599,980. At this price level, their equity would have evaporated, but they would have received enough from the sale to pay off the debt. For obvious reasons, the price did not budge for another 10 months. Even the stubborn and intractable give up eventually. Last month, they accepted that their equity was gone and their credit is shot, and they lowered the price to $530,000 were it sits today. Unfortunately, the market has moved down even faster than their price, and they are still grossly overpriced. The property still is not going to sell. If it did sell, and if the sellers paid a 6% commission, the total loss on the property would be $129,800. The seller would lose $62,800, and the lender would lose $67,000.

Perhaps 2006 was not a great time to buy…

Something’s going on, change is taking place,
Children smiling in the streets have gone without a trace.
This street used to be full, it used to make me smile,
And now it seems that everyone is walking single file

And many hang their heads in shame
That used to hold them high.
And those that used to say hello
Simply pass you by

Think for a minute, stop for a minute
Think for a minute, stop for a minute

I always said it could they never thought it could
The people look so pitiful I’m thinking that it should
and now it’s almost here, now it’s on its way
I can’t help saying told you so and have a nice final day

And nothing I could say
Could ever make them see the light.
Now apathy is happy that
It won without a fight

Think for a minute, stop for a minute
Think for a minute, stop for a minute

Think for a Minute — Housemartin

Will the Market Panic?

Don’t Panic — Coldplay

Prices are sinking like stones, and we are all done for. It it time to panic?

People will not panic this year. This will be the last year of denial. Only the weakest of speculators have been flooded from the market at this point, and there are many, many more who will be hopelessly underwater and drowning in debt as time goes on. Most of the buying this year has been by foolish knife-catchers who still believe in the fallacies of kool aid intoxication and bought now that they are no longer “priced out.” (Of course, now they are “priced in” forever…) There is still the widespread belief among the general public that house prices will return to the peak in a couple of years and everything will be like it was during the bubble rally. That is not going to happen. This fall and winter, prices will make another big drop just as they did last fall and winter. That drop will put fear in the hearts of everyone who owns speculative real estate (which means almost everyone who bought since 2002.) By next year, we will see real fear and possibly some capitulatory selling. Remember, the speculators we have profiled to date have only been the trickle of water that breaks the dam. This problem is much larger than what we have seen to date.

There is a funny mathematical truth few understand: drawdowns are asymmetrical. If prices fall 50%, it takes more than a 50% increase to get them back up to the peak. In fact, after a 50% drop, prices must go up 100% to get back to where they started. Even now, with prices down 20%, prices have to go up 25% to get back to the peak. The deeper the price drop gets, the harder it will be for prices to recover. This is also why timing the market is important. (I will post on this concept in more detail at a future date.)

Today’s featured property was purchased in 2004, and now it is selling for significantly less than its purchase price as REO.

14921 Yucca Ave Kitchen

Asking Price: $649,900IrvineRenter

Income Requirement: $162,475

Downpayment Needed: $129,980

Monthly Equity Burn: $5,415

FB Purchase Price: $730,000

FB Purchase Date: 12/22/2004

WAMU Purchase Price: $610,000

WAMU Purchase Date: 4/2/2008

Address: 14921 Yucca Ave, Irvine, 92606

REO

Beds: 4
Baths: 3
Sq. Ft.: 2,650
$/Sq. Ft.: $245
Lot Size: 5,000

Sq. Ft.
Property Type: Single Family Residence
Style: Other
Year Built: 1972
Stories: 2 Levels
Area: Walnut
County: Orange
MLS#: U8002616
Source: SoCalMLS
Status: Active
On Redfin: 2 days

Fixer-upper

Large two story pool home in a great interior tract location in the
College Park neighborhood.4 bedroom plus big bonus room upstairs.Lots
of area downstairs with living/dining rooms and family off the kitchen.
Custom oak stair railing, crown mouldings and nice wood cabinets in the
kitchen. Upgrades thru out but will need a little TLC.Low HOA dues and
no MELLO ROOS.

nice wood cabinets in the
kitchen? I have had better in apartments. Did you notice how they were cropped out of the picture?

When this house was purchased, the buyers put 10% down. I don’t know if they abused their HELOCs after that. The data service we have been using has been scrubbing their records after a property goes REO. We are looking for a new one. In any case, if this property sells for its asking price, the total loss on the property after a 6% commission will be $119,094. It is interesting to see how WAMU prices their REO. They have marked up their auction price by 6% to cover the cost of the commission. If this sells for asking, and assuming they bought it for the outstanding balance on the first mortgage, they will recover their cost. Of course, the second mortgage is a total loss, and if they were any HELOCs or other debt, that is gone too. It may be that our 2004 buyer is losing $73,000, but I doubt it…

.

Oh, we’re sinking like stones,
All that we fought for,
All those places we’ve gone,
All of us are done for.

We live in a beautiful world,
Yeah we do, yeah we do,
We live in a beautiful world,
Oh, we’re sinking like stones,
All that we fought for,
All those places we’ve gone,
All of us are done for.

We live in a beautiful world,
Yeah we do, yeah we do,
We live in a beautiful world.

Oh, all that I know,
There’s nothing here to run from,
And there, everybody here’s got somebody to lean on.

Don’t Panic — Coldplay

A Brief History of Kool Aid

What a Fool Believes — The Doobie Brothers

Kool Aid intoxication is synonymous with irrational exuberance as I outlined in the post What is a Bubble.
It has not always been part of the culture here in California as people have not always believed such foolish ideas. Kool Aid
intoxication is a pathology that infected the populace of California in
the 1970s. Up until the mid 1970s, California had a median home sales
price of approximately three-times income just like the rest of the real
estate markets in the country. (Data: Median Income of Households by State: 1984 to 2006, Median Family Income by State: 1959, 1969, 1979, 1989, and 1999, California median home price since 1968.)

Median Home Prices 1968-2006

Median Home Prices 1986-2006

In the late 1970s, the country was in the grips of a wage/price inflationary spiral.
Under those conditions, people began to bid up the value of real estate
partly as a hedge against inflation, and partly because rising wages
made fixed payments more affordable. If you expect your wages to go up
10% every year, even a debt-to-income ratio over 50% becomes affordable
after just a few years. During the late 1970s, prices were bid up very
high, very fast, and many people made fortunes in real estate. It was
during this time that residents of California learned they could bid up
the price of real estate, and they could make money from it. This
realization spread like a virus throughout the state. The bust of the
early 80s did impact specific properties in various markets, but the
median only leveled out and did not fall. As Robert Shiller noted in
his paper in 1988 (Warning, big PDF file,) this taught people that after a big boom, prices do not fall.

Inflation Adjusted Median Home Prices 1968-2006

Median Home Prices 1968-2006 Inflation Adjusted

By 1985, incomes had risen to where house prices were at four-times
income. This became the new floor beneath prices, and it was the
beginning of the “sun tax” here in California. The combination of lower
interest rates and strong employment started people buying again. By
this time it had been over 10 years since prices were at three-times
income, and it looked as if they would never get down there again. Thus
the fear of being “priced out forever” was born. At this point, people
believed in rapid appreciation, they did not fear a decline in prices,
and now they had the fear of being priced out. Kool aid intoxication
had gripped the society, and people began buying real estate and created the first real bubble in California real estate. Prices rose dramatically, but when the limit of affordability was reached with the loan products of the time, prices stopped rising, and it looked like there was going to be another leveling off period like there was in the early 80s. However, this time, prices were bid up much higher than incomes could support, and the median actually fell across the state by almost 20%. Just as in the first crash, prices of individual properties fell more than the median, and in fringe markets the decline was spectacular.

Affordability as Measured in Debt-To-Income Ratios 1986-2006

Debt-To-Income Ratio 1986-2006

The long decline of the early 90s might have been the end of kool aid intoxication. Prices of individual properties dropped below four-times income, and a relative level of affordability had returned. After 6 consecutive years of falling prices, some of the core beliefs of kool aid intoxication had fallen out of favor and a degree of sanity had returned to the California real estate market. Prices began rising in 1997, and there was solid appreciation for 3 straight years as the market recovered from its slightly oversold condition. However by 2000, prices were high relative to incomes, and it looked as if the market might be at a top. Of course, prices did not top in 2000, and with a dramatic drop in interest rates engineered by the Federal Reserve, the conditions were created for another housing bubble. The beliefs of kool aid intoxication crept back in to the California psyche, and the rest of the story is The Great Housing Bubble (Warning, big PDF file.)

It is my greatest hope that people see that there is nothing special about California real estate. Prices here go up and down because we make them do so. The fallacious beliefs of Kool Aid intoxication makes people behave foolishly and buy properties not because they are a good value but because prices are going up. This price crash is going to be very, very painful to a great many people, and Kool Aid intoxication may fall from favor again. However, As long as this behavior is not seen for what it is, people will continue to repeat the mistakes of the past, and we will have another painful housing bubble crash.

Doobie BrothersHe came from somewhere back in her long ago
The sentimental fool dont see
Tryin hard to recreate
What had yet to be created once in her life

She musters a smile
For his nostalgic tale
Never coming near what he wanted to say
Only to realize
It never really was

She had a place in his life
He never made her think twice
As he rises to her apology
Anybody else would surely know
Hes watching her go

But what a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
And nothing at all keeps sending him…

Somewhere back in her long ago
Where he can still believe theres a place in her life
Someday, somewhere, she will return

What a Fool Believes — The Doobie Brother