Turtle Ridge is a beautiful community, and although the houses are ridiculously overpriced, it does look like a nice place to live. I know one family who lives there, and they are exceptional people. There are undoubtedly others.
What is in a name? Does “Turtle Ridge” mean more than just a name. I suspect many who bought there believe the name carries prestige and the envy of the lower classes. Personally, I associate Turtle Ridge with pretense, nouveau riche conspicuous consumption, and the embodiment of all things housing bubble — granite tops, stainless steel appliances, Pergo floors, stone facades, gourmet kitchens, etcetera. Do you ever wonder if the residents have giant Roman banquets to impress the world with their wealth?
This may come as a foreign concept to some, but it is possible to feel contempt for conspicuous consumption without feeling envy. I would not feel envious of watching an ancient Roman citizen consume 10 pounds of meat in a single meal. The measure of a person’s character has nothing to do with the contents of their pocketbook, and being showy with money is revelatory of character — what it reveals does not impress me. There is nothing wrong with spending money and enjoying yourself. I do. It is spending money to impress other people that is an enormous waste, particularly when there are people like me on whom it has the opposite effect. I suspect some of the more pretentious residents would convince themselves everyone who claims not to be impressed is secretly envious. There are two types of people in their world, those who are envious, and those who pretend they are not envious. So be it.
So why is it so delightful when the vainglorious fall on hard times? Why is it so pleasing to see an REO in Turtle Ridge? Probably for the same reasons so many were contemptuous of the couple in the CNN article posted in the comments yesterday. You tell me…
BANK OWNED !!! Stunning floorplan with a main floor master suite. Kitchen with center island, limestone flooring, stainless steel appliances, family room with wood flooring, media room, wine room plus a seperate Casita with private entrance and bath. Outdoor entertainment includes spa, built-in grill and a fantastic fireplace !
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Does anyone remember the fun we had with this property last summer? It was one of our most widely read posts of the year.
It appears the high end is not immune, it is just late to the party. Interesting that it took the bank 8 months to ready this property for sale. I wonder how many other empty, bank-owned properties are sitting out there waiting to be sold or rented? I can’t tell for sure how much money the bank will lose on this one. The owner who was foreclosed on had a $1,000,000 first mortgage and a $935,000 HELOC on the property. You have to think the guy took out most of it, or the property would not have gone into foreclosure. If this borrower took out the full amount before walking, and if Countrywide can get their asking price and pay a 6% commission, the Countrywide stands to lose $525,940. That is a half a million dollar loss on one property in Irvine, California. Last night when I checked their REO website, they owned 4,505 properties in California.
Angelo Mozilo will take his golden parachute from Countrywide and end up on the Greek island of Lesbos having gluttonous orgies. Justice will not be served.
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Are you ready for the new sensation?
Well, here’s the shot heard ’round the world.
All you backroom boys salute when her flag unfurls.
Well, guess who’s back in circulation?
Now, I don’t know what you may have heard
but what I need right now’s the original goodtime girl.
She’s a vision from coast to coast,
sea to shining sea.
Hey, sister, you’re perfect host.
Show me your bright lights and your city lights, all right.
There must be a stealth rally happening in the Irvine housing market because I sure don’t see it. Perhaps it has just been a stealth market crash because today’s seller didn’t seem to notice. If you took the rally that lead up to 2006’s peak pricing and projected it forward into 2008, you might be able to come up with today’s asking price, but in our current market? WTF?
Most Spectacular Home in the Woodbridge Reserve. Attention to detail throughout this incredibly gorgeous Home. Living Room with Fireplace and Cathedral Ceilings. Gourmet Kitchen with Granite Counters, Recessed Lighting, Tile Floors, and Custom Backsplash behind professional grade cook top. Formal Dining Room with Chandelier. Family Room with Media Niche and Second Fireplace, and One Downstairs Bedroom. Master Suite and Three additional Bedrooms upstairs. Oasis like extra deep Backyard with sparkling Pool, Spa, and Fountains. Covered Outdoor BBQ Area with recessed lighting, custom built granite and stone counters, and ceiling fan. Outdoor Fireplace with sitting area perfect for entertaining. One of the newest developments in Woodbridge by Standard Pacific Homes and NO MELLO ROOS!
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When I first saw this listing, I figured it was just a vanity listing. By putting the house for sale for $2,000,000, some homeowner can believe their house is worth $2,000,000. Perhaps it makes everyone else in the neighborhood feel good as well, or perhaps a homeowner just wants to tell all his neighbors that his house is better than theirs.
However, when I looked at the mortgage data, I was astounded by the activity on this property. I can’t determine how much this homeowner really owes because the total of all the listed loans is $4,631,380. Hopefully, on one of the many refinances, some of these old loans were paid off. His mortgage broker must love him with all the fees this guy has generated. Apparently, he can handle the payments as there has been no activity since late 2004. This doesn’t appear to be a distressed sale, but it doesn’t appear this seller would get a $1,153,060 check at the closing either. Of course, at this WTF price, there will be no closing, but it makes for a nice fantasy.
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You were the girl that changed my world
You were the girl for me
You lit the fuse I stand accused
You were the first for me
But you turned me out baby
You dropped a bomb on me, baby
You dropped a bomb on me.
But you turned me on baby.
You dropped a bomb on me, baby
You dropped a bomb on me.
You were my thrills, you were my pills
You dropped a bomb on me
You turn me out, you turn me on, you turned me loose
In retrospect, it is easy to see how many people who bought late in the bubble were chasing fool’s gold. The rainbow lead to a pot of gold for many, but many others have been left chasing the rainbow and wondering where their pot of gold lies. The map was easy to follow: you took out a large loan, waited a few months, then sold the property to someone else — the greater fool. The fool who was also chasing their fool’s gold. Everyone is still weighing out their gold as the rest of us watch them sink. The gold is always just around the corner, but in reality a breakdown is just around the bend. We all know where the market is going — down, down, down.
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I’m no clown I wont back down
I don’t need you to tell me whats going down
Down down down down da down down down
Down down down down da down down down
I’m standing alone
I’m watching you all
I’m seeing you sinking
I’m standing alone
You’re weighing the gold
I’m watching you sinking
Fools gold
These boots were made for walking
The marquis de sade don’t wear no boots like these
Today’s property demonstrates the distress of Woodbury. This property has been on the market for over a year, and the owners have managed to lower the asking price about 25%, and they still haven’t sold it. We have profiled this street in Woodbury before: here, here, here and here. Today’s seller is not the only failed flipper around.
‘Pride of Ownership’ shows from the moment you enter from your own private courtyard. Your first floor has a ‘Great Room’ feeling with a gourmet kitchen, casual eating area and spacious living room with fireplace. Master suite with walk-in closet, secondary bedroom plus laundry area complete the second floor. Two car tandem garage features extra storage and has direct access. Sliding ‘hidden’ front door screen, wood window shades, security system are just a few of the upgrades.
‘Pride of Ownership’ — I am sure they are proud of the $100,000 they lost.
Do you get the impression they would have been happier if they had bought a boat?
This is probably the only kitchen in Woodbury without granite counter tops, but yet, this is a gourmet kitchen. I guess if the”gourmet” only needs about 4 square feet of white tile countertop space…
“Two car tandem garage” Always love those.
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Today’s sellers put $975 down on the property, so I think we can call it 100% financing. This property has been on the market since October of 2006, and the initial asking price was $579,500. If these sellers obtain their asking price today of $449,900, their lender stands to lose $108,619, and our sellers stand to lose their $975.
I bet the lender is looking for the pot of gold too.
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Since this is April Fool’s Day, I thought I might share with you the best April Fool’s joke ever played on me.
When my son was a baby, my wife called to me from the other room and said she thought my son might be sick. I went into his room to see what I could do. When I got there, my wife and my mother-in-law (I think they thought this one up together) were standing over my son who was lying down on the changing table. My wife said, “Come look at this.” I walked over to see my son’s diaper filled with a thick, brown gelatinous mass. The first words out of my mouth were, “What did you feed him?” My wife looked at me, looked down at the gigantic glob of goo, stuck her finger in it, and put it in her mouth.
My mouth dropped open…
I couldn’t believe what just happened…
OMG! Are you crazy?
Then my wife and my mother-in-law started to laugh. I stood there dumbfounded trying to figure out what was going on. Then the truth was told…
While I was not paying attention, they had made a warm batch of chocolate pudding, cleaned up my son really well, then filled a clean diaper with the chocolate pudding and positioned him over it as if he had been wearing the diaper and filled it himself. We all had a big laugh, including my son who had no idea what was going on. I remember that joke every year on April Fool’s Day, and I probably will for the rest of my life.
The United States Department of Labor Bureau of Labor Statistics measures the Rent of primary residence (rent) and Owners’ equivalent rent of primary residence (rental equivalence). They make this distinction because a house has both a consumptive purpose and an investment purpose. The consumptive value is measured by rent or rental equivalence. There is legitimate financial reason pay more than the rental equivalence price. The normal rate of house appreciation – not the unsustainable kind witnessed during the Great Housing Bubble – can provide a return on investment. The source of this added value is the leverage of mortgage financing and the hedge against inflation obtained through a fixed-rate mortgage. The investment premium, which is about 10%, is less than most people think.
The rental equivalence value is the fundamental value of real estate, and it is also its consumptive value. This value can be easily measured as demonstrated in the post Rent Versus Own. There is an independent investment value that can also be measured and added to the consumptive value to arrive at the maximum resale value of the property. Investment value is derived from two sources: the increase in property value through appreciation and the long-term savings over renting caused by inflation. These two components are measured separately to demonstrate how they function and how much each of them is worth.
Since the return on investment generated from residential real estate occurs in the future, a discounted cashflow analysis is required to determine the net present value of the future returns. Calculating net present value sounds complex, and manually going through the calculations is quite cumbersome, but electronic spreadsheets make this an easy task. The concept is simple: how much money would an investor put money in an investment today if they knew the rate of growth and the cash value to be realized in the future. For instance, if an investor put $100 in a bank earning 5% interest, they would have $105 at the end of the year. Net present value looks at the situation in reverse. If the investor knew they would receive $105 at the end of the year and the market interest rate was 5%, they would be willing to pay $100 for it today. Similarly, the investment value of residential real estate is the value today of an amount of money to be received in the future either through sale or savings on rent.
Discount Rates
The investment value of a property can only be measured against other investment opportunities available to an investor. If an investor can earn 4.5% in government treasuries, they will demand a higher return to invest in an asset as volatile and as illiquid as residential real estate. The rate of return an investor demands is called a “discount rate.” The discount rate is different for each investor as each will have different tolerances for risk. During the Great Housing Bubble discount rates on most asset classes were at historic lows due to excess liquidity in capital markets. The discount rate used in the analysis is the variable with the greatest impact on the investment value. Because of the risks of residential real estate, a strong argument can be made that a low discount rate is unwarranted and investors would typically demand higher rates of return for assuming the inherent risks. A low discount rate exaggerates the investment premium and makes an investment appear more valuable, and a high discount rate underestimates the investment premium and makes an investment appear less valuable.
The US Department of the Treasury sells a product called Treasury Inflation-Protected Securities (TIPS.) The principal of a TIPS increases with inflation, and it pays a semi-annual interest payment providing a return on the investment. When a TIPS matures, they buyer paid the adjusted principal or original principal, whichever is greater. This is a risk-free investment guaranteed to grow with the rate of inflation. The rate of interest is very low, but since the principal grows with inflation, it provides a return just over the rate of inflation. Houses have historically appreciated at just over the rate of inflation as well; therefore a risk-free investment in TIPS provides a similar rate of asset appreciation as residential real estate (approximately 4.5%.) Despite their similarities, TIPS are a much more desirable investment because the value is not very volatile, and TIPS are much easier and less expensive to buy and sell. Residential real estate values are notoriously volatile, particularly in coastal regions. Houses have high transaction costs, and they can be very difficult to sell in a bear market. It is not appropriate to use a 4.5% rate similar to the yield on TIPS or the rate of appreciation of residential real estate as the discount rate in a value analysis.
Another convenient discount rate to use when assessing the value of residential real estate is the interest rate on the loan used to acquire the property. Borrowed money costs money in the form of interest payments. A homebuyer can pay down the loan on the property and earn a return on that money equal to the interest on the loan as money not spent. Eliminating interest expense provides a return on investment equal to the interest rate. Interest rates during the Great Housing Bubble on 30-year fixed-rate mortgages dropped below 6%. An argument can be made that 6% is an appropriate discount rate; however, 6% interest rates are near historic lows, and interest rates are likely to be higher in the future. Interest rates stabilized in the mid 80s after the spike of the early 80s to quell inflation. The average contract mortgage interest rate from 1986 to 2007 was 8.0%. If a discount rate matching the loan interest rate is used in a value analysis, it is more appropriate to use 8% than 6%.
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Investors in residential real estate, those who invest in rental property to obtain cashflow, typically ignore any resale value appreciation. These investors want to receive cash from rental in excess of the costs of ownership to provide a return on their investment. Despite their different emphasis for achieving a return, the discount rates these investors use may be the most appropriate because it is for the same asset class. Cashflow investors in rental real estate have already discounted for the risks of price volatility and illiquidity. Historically, investors in cashflow producing real estate have demanded returns of near 12%. During the Great Housing bubble, these rates declined to as low as 6% for class “A” apartments in certain California markets. It is likely that discount rates will rise back to their historic norms in the aftermath of the bubble. If a discount rate is used matching that of cashflow investors in residential real estate, a rate of 12% should be used.
Once money is sunk into residential real estate, it can only be extracted through borrowing – which has its own costs – or sale. Money put into residential real estate is money taken away from a competing investment. When a buyer is facing a rent versus own decision, they may chose to rent and put their downpayment and investment premium into a completely different asset class with even higher returns. This money could go into high yield bonds, market index funds or mutual funds, commodities, or any of a variety of high-risk, high-return investment vehicles. An argument can be made that the discount rate should approximate the long-term return on high yield alternative investments, perhaps as high as 15% or 18%. Although an individual investor may forego these investment opportunities to purchase residential real estate, it is not appropriate to use discount rates this high because many of these investments are riskier and more volatile than residential real estate.
The discount rate is the most important variable in evaluating the investment value of residential real estate. Arguments can be made for rates as low as 4.5% and as high as 18%. Low discount rates translate to high values, and high rates make for low values. The extremes of this range are not appropriate for use because they represent alternatives investments with different risk parameters that are not comparable to residential real estate. The most appropriate discount rates are between 8% and 12% because these represent either credit costs (interest rates) or the rate used by professional real estate investors. The examples in this section will use these two rates to illustrate the range of values rational investors in residential real estate would use to value an investment premium.
Appreciation and Transaction Fees
The portion of investment value caused by appreciation can only be evaluated by an accurate estimate of appreciation during the ownership period. The general public grossly overestimates the rate of home price appreciation . Historically, houses have appreciated at a rate 0.7% over the general level of inflation. From 1983 to 1998, a period of low inflation and declining mortgage interest rates before the bubble, the rate of house price appreciation was 4.5% nationally which was 1.4% over the rate of inflation. Appreciation rates are tied to income and rents because this is the fundamental value of residential real estate.
Profiting from house price appreciation requires getting more money from the sale of a property than was originally paid for it. Buying and selling residential real estate incurs significant transaction costs that are not reflected in the price. It is quite common for properties to sell for more than their purchase price and still be a loss for the seller. When people purchase residential real estate they pay numerous closing costs including title insurance, recording fees, document stamps and taxes, mortgage application fees, survey fees, inspection fees, appraisal fees, et cetera. These fees often total between 2% and 4% of the purchase price not including any prepaid interest points on the mortgage. When people go to sell residential real estate they generally go to real estate broker who will charge them a 6% commission. There is an increasing popularity in discount brokers, but the National Association of Realtors has done a remarkable job of keeping brokerage commissions at 6% despite market pressures to lower them. These transaction costs are part of every residential real estate transaction, and they take a substantial portion of the profit on properties with short holding periods, and if the holding period is not long enough, transaction fees create losses.
The negotiating abilities of buyers and sellers and the overall market environment greatly impact the profits from real estate. Sellers almost universally believe their properties are worth more than the market will bear. People become emotionally attached to their houses, and because it is very valuable to them, they assume it is just as valuable to a person who is not attached to the property. Sellers always hope to find the buyer who will appreciate their home as much as they do and thereby pay top dollar for it. All homeowners have unrealistic expectations of appreciation. The combination of emotional attachment and unrealistic appreciation expectations cause sellers to believe their house is more valuable than it is, and when it comes time to sell, they price it accordingly. Sellers usually are forced to discount a property from their perceived value in order to sell it. In raging bull markets, sellers can sometimes get more than their asking price, and in bear markets, they may have to discount the property significantly in order to sell it. Bear markets are the most difficult because sellers have difficulty lowering their prices, particularly if they must sell at a loss. Sometimes the difficulty in lowering price is caused the amount of debt on the property, and sometimes it is caused by seller’s emotional issues. No matter the cause, the inhibition to lowering price often results in a failure to sell the property. Since this process of discounting to sell is already reflected in the historic appreciation rate, no further adjustment is required to account for it.
The key variables for the calculation of the portion of investment value due to appreciation are the rate of appreciation, the investment discount rate and the transaction fees. In the calculation that follows the rate of appreciation is 4.5%, the discount rate is 8%, and transaction costs are 2% for the purchase and 6% for the sale. There is a 20% downpayment, and the loan is assumed to be an interest only to avoid the complications of a decreasing loan balance in the calculation and isolate the appreciation premium.
Appreciation Premium and Holding Period using an 8% Discount Rate
Due to the high transaction costs, the property does not reach breakeven until two full years of ownership. In a discounted cashflow basis, the property does not break even until after 4 full years of ownership. It is these high transaction costs that compel many with short-term housing needs to rent rather than own. Assuming an 8% discount rate and a term of ownership of 10 years or more, there is a premium for ownership of approximately 10%. This means the owner could pay up to 10% over the rental equivalent value and still obtain an 8% return on their money – assuming they can sell it for 10% over rental equivalent as well.
There is a tendency in the general public to assume the leverage of real estate provides excessive returns. It does magnify the appreciation, but since the historic and sustainable rate of appreciation is a low 4.5%, the leverage is applied to a small growth rate resulting in less than stellar investment returns. In the previous examples, if the downpayment is lowered to 10%, the investment premium at an 8% discount rate rises to 15%, and with a 12% discount rate, there are some ownership periods justifying a premium. If the downpayment is dropped to 1%, the ownership premium rises as high at 20%. At its most extreme with 100% financing, any positive return becomes infinite because the investor has no cash investment. Ownership premiums of 10% to 20% sound large, but in coastal markets during the Great Housing Bubble, buyers were paying ownership premiums in excess of 100%. There is no rational justification for these price premiums.
Appreciation Premium and Holding Period using a 12% Discount Rate
Larger discount rates eliminate the appreciation premium on residential real estate. The money tied up in a 20% downpayment on residential real estate appreciating at 4.5% provides a rate of return less than 12%; therefore when the gains from appreciation are discounted at 12%, the net present value never goes positive. When investors demand returns equal to or greater than 12%, there is no investment value from appreciation in residential real estate.
Inflation Premium
Residential housing does have a cash-saving value, if financed with a fixed rate mortgage. Over time, the growth in income and rents increases the cost of housing for renters. The inflation of housing costs for renters is not experienced by homeowners using a fixed-rate mortgage because their housing costs are effectively frozen at the rate of their ongoing mortgage payment. Over time, the savings accruing to homeowners can be quite substantial. Applying the same technique of discounted cashflow analysis, this savings over time can be evaluated. Since the savings grow every year, the value of the inflation premium grows as the term of ownership is extended, and this premium is not as sensitive to changes in the discount rate as is the appreciation premium.
Inflation Premium from Rental Savings
The premium accruing from the savings on rent can be substantial, but ownership periods vary, and the national average is less than 7 years; therefore, if a buyer pays this premium up front by paying more than the rental equivalent value, they may do not reach breakeven for several years. In the early years of the mortgage, the owner who paid in excess of the rental equivalent value actually falls behind the renter in terms of out-of-pocket cash outlays for housing. Over time, as the renter faces yearly increases in rents, the homeowners will eventually be paying less, and the savings will make up for the earlier period of deficit.
Inflation Premium from Rental Savings with 7 year Ownership Period
The above analysis assumes renters face the full brunt of increasing rental rates. For many apartment dwellers, this is true as landlords will raise rents every year knowing that if a renter moves out, there will be another to replace them at market rates. The circumstance is a bit different for private landlords. Most private individuals that rent out investment properties are far more concerned with the loss of cashflow resulting from the property sitting vacant than they are about maximizing income through raising rents each year. Most long-term landlords have conventional, fixed-rate financing on their properties, and because their costs are not increasing, and because they do not want to endure vacancy loss, they seldom raise rents, and when they do, they do not tend to raise them to market for fear of the tenant moving out. The result of this is that housing costs are somewhat fixed for long-term renters who rent from private individuals. These renters get to enjoy the same benefits of fixed housing costs as homeowners. The implication of this landlord behavior is that homeowners do not necessarily see the dramatic savings over renting suggested in the calculation of the inflation premium.
The investment value for home ownership is a combination of the appreciation value and the inflation value. Both accrue to the homeowners for different reasons. The appreciation value is caused by the general tendency of house prices to increase over time with the inflation of income and rents. The inflation value is a cashflow savings accruing to owners as rental rates increase while their cost of ownership is fixed. There are many variables that influence the investment value, and much depends on the assumptions behind the variables selected. Based on a typical ownership period of 7 years, and an investment environment adhering to historic norms, residential real estate has an investment value of approximately 10% the fundamental value of the property. Buyers who pay this 10% premium will see a return on their investment if they stay in the property long enough. Buyers who pay premiums in excess of this amount or who own the property for shorter timeframes do not see a return on their investment. Buyers in the Great Housing Bubble paid well in excess of the fundamental and investment value of real estate primarily due to unrealistic expectations for appreciation. If a buyer believes properties are going to appreciate at a 15% rate every year forever, paying a 100% premium over fundamental value is justified; however, since house prices cannot rise at that rate in a sustained manner, such premiums are ill advised.
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Well I hope I make more money than this in the next world.
I hope there’s a lot more in it there for me.
I’d like my trousers pressed and my shoes
shined up by a rich girl,
who’s only care in the world is me.
“But are these all the brains I’m entitled to have?
Don’t try to make me happy, when I’m happy feeling bad.
I’ve got no manners or a hand you shake,
and when I won’t tell the truth it’s easier to fake.”
So….Give, Give Give, Me More, More, More
I’d like it all.
Is the bank big enough?
coming ready or not to the next world.
I hope there’s a whole lot more in it there for me.
I’d like my friends to be rich and I’ll never do a stitch,
in the next world, and my only care in the world is me.
Yup, IHB is growing up! In order to add more features in the future, we’ve decided to upgrade the site. We’re planning for the upgrade to take place next Saturday (4/5/08). During the upgrade, IHB will not be accessible. The estimate is for ~4 hours of downtime that day.
The plan is to move as much content as possible to the new system. Your existing forum username/password will continue to work. One item to note is that Forum Whispers will not be part of the migration. So if you have any important info in your Whispers, please copy it out before next Saturday.
We’d like IHB to be a resource for all things related to Irvine Housing. If you have ideas for how IHB can be more useful, please send them in. If you are a Real Estate Agent or work in New Home Sales, we’d love to hear from you too.
It appears the high end is not immune, it is just late to the party. Interesting that it took the bank 8 months to ready this property for sale. I wonder how many other empty, bank-owned properties are sitting out there waiting to be sold or rented? I can’t tell for sure how much money the bank will lose on this one. The owner who was foreclosed on had a $1,000,000 first mortgage and a $935,000 HELOC on the property. You have to think the guy took out most of it, or the property would not have gone into foreclosure. If this borrower took out the full amount before walking, and if Countrywide can get their asking price and pay a 6% commission, the Countrywide stands to lose $525,940. That is a half a million dollar loss on one property in Irvine, California. Last night when I checked their REO website, they owned 4,505 properties in California.
Are you ready for the new sensation?
Unsold in 90+ days
