One of the remnants of kool aid intoxication is the overwhelming desire to own a house. There is an undeniable human need for people to have a place to call their own: there is an instinct to nest; however, when this natural desire for permanence in an ever changing world is coupled with the greed-induced delusion of a financial mania, the desire to possess real estate moves beyond basic human instincts into the realm of gluttony, greed, envy, and pride. As the price crash grinds on, people will become less desirous of real estate. Some will lose interest simply because prices are not going up; some will come to revile real estate because they are trapped in one of America’s Debtor Prisons; some will be sickened by the lingering memory of financial distress, foreclosure and bankruptcy. The slow grind of declining real estate prices will have these effects on people, and over time, the mass psychology of the market will shift from the bubble rally mentality of “all real estate is good real estate” to the bubble crash mentality of “all real estate is a ball-and-chain.” Think about what it must be like to spend 5-10 years paying 50% of your gross income on a property worth less than your mortgage. If prices ever did come back to get you out at breakeven, you would sell in an instant, but until prices came back, you would spend your time thinking, “We gotta get out of this place.”
Excellent location on the greenbelt w/ mountain view, all living space on one level, three full bedrooms w/ retreat-perfect for home office, elegant hardwood floor rotundra opens to great room with wall of windows, custom built-in entertainment center, fireplace, crown moulding, surround system throughout, ceiling fan, open kitchen w/ walk-in pantry, hardwood floor, step-up breakfast counter, corian countertops, maple cabinets, G. E. profile appliance package, recessed lighting, lovely master suite w/ French door access to private/large eat-in covered view balcony, finely designed drapery, ceiling fan, corian countertops, separate glass enclosed shower, deep oval soaking tub, dual vanity, large walk-in mirrored wardrobe closet w/ organizer, convenient interior laundry room, garage w/ vertical & overhead storage/work bench, resort life-style amenities: pools, parks, spas, meandering greenbelts, gazebos w/ fountains, clubhouse, tennis/sports courts
rotundra?
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Would anyone be surprised if I said this was a 100% financing deal? It also appears that the asking price is $4,000 below the original amount of their first mortgage. The second mortgage is going to be a total loss. If this sells for its asking price, the total loss on the property is going to be $178,228, assuming a 6% commission. I have to wonder why people are bothering with these short sales? The vast majority end up as foreclosures, and either circumstance hurts their credit tremendously. I suppose it gives them the feeling they are doing something, albeit wasted effort.
Today’s post is part II in an analysis series. Part I was yesterday’s post: Structured Finance 101. If you do not fully understand structured finance, this post may be difficult to follow. I will answer any questions you might have in the comments section.
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Systemic Risk in the Housing Market
Credit rating and analysis of collateralized debt obligations and all structured finance products are part of the smooth function of the secondary market for mortgage loans. A credit rating agency is a company that analyzes issuers of debt and debt-like securities and gives them an overall credit rating which measures the issuer’s ability to satisfy its debt obligations. There are more than 100 major rating agencies around the world, and three of the largest and most-important ones in the United States are Fitch Ratings, Moody’s and Standard & Poor’s. A debt issuer’s credit rating is very similar to the FICO score of an individual rated by the Fair Isaac Corporation widely used in the United States by institutional lenders. Of greater importance to the housing market, the credit rating agencies also analyze and rate the creditworthiness of the various tranches of collateralized debt obligations traded in the secondary mortgage market.
Credit ratings are widely used by investors because they provide a convenient tool for comparing the credit risk among various investment alternatives. The analysis of risk is crucial in determining the interest rate a syndicator will need to offer to attract sufficient investment capital, or from the other side of the transaction, it is important to the investor who is comparing the interest rates being offered by various investments. The ratings agencies provide this critical, third-party analysis both sides of the transaction can rely upon for unbiased, accurate information. When the ratings agencies are doing their job well, there is greater efficiency in capital markets as syndicators of securities are obtaining maximum market values, and investors are minimizing their risks. This efficiency in the capital markets leads to better resource utilization and stronger economic growth.
Unfortunately for many investors in collateralized debt obligations during The Great Housing Bubble, the ratings agencies did not provide an accurate or credible rating of many CDO tranches. When the housing market pricing declined, many CDO tranches were subsequently downgraded. In defense of the agencies, they were providing an analysis of risk based on existing market conditions. Their reports contained caveats concerning downside risks in the event market conditions changed, but this list of risks is standard in any analysis and widely ignored by investors who are counting on the rating to be a market forecasting tool rather than the market reporting tool it really is. Credit rating agencies are not in the business of market forecasting or evaluating systemic risks.
Risk Synergy
One of the major failings of the credit markets in The Great Housing Bubble was the failure to take a holistic view and evaluate the systemic risks involved. A typical credit analysis reviews various risk parameters and attempts to rate the impact of each. The implicit assumption is that the total risk is equal to the sum of the parts; however this is not necessarily the case. Synergy is when the whole is greater than the sum of its parts, and there is a strong synergy in default risk in collateralized debt obligations that became apparent during The Great Housing Bubble. The credit rating agencies failed to identify this risk synergy until after the fact.
The risk of default in a tranche of a collateralized debt obligation is directly related to the default risk in the underlying mortgage notes. There are six general areas of credit default risk that may be evaluated independently, but their interactions are often synergistic in nature: creditworthiness risk, high combined-loan-to-value default risk, high debt-to-income ratio risk, fraud and misrepresentation risk, investment perception risk, and market valuation risk. Of these general areas of risk market valuation is most responsible for creating synergistic effects and amplifying default rates. Since many of the more “innovative” loan programs entered the market during a time of rising prices, there was no history of performance of these securities in other market conditions making it very difficult to assess the impact a down market would have on default rates. As it turns out, exotic loan programs do not perform very well in any conditions other than a raging bull market.
Creditworthiness Risk
Every mortgage loan that is originated contains an evaluation of the creditworthiness of the borrower who is responsible for making timely mortgage note payments. The most common evaluation tool is the FICO score. Prime borrowers have the highest FICO scores, they are considered the lowest default risk, and they receive the lowest interest rates as a result. Subprime borrowers have the lowest FICO scores, they are considered the highest default risk, and they receive the highest interest rates. This is the best documented and most carefully evaluated risk parameter. Before many of the loan programs were introduced during the Great Housing Bubble, FICO scores strongly correlated with default rates. This correspondence broke down in the price decline when the bubble popped because the other risk factors proved to have a greater influence.
High CLTV Defaults
The combined-loan-to-value (CLTV) is the total debt of all mortgage obligations as a percentage of the appraised value of a particular property. A high CLTV generally corresponds to a low downpayment, but as resale values fell in the market crash, the CLTV rose for many borrowers as a consequence of falling prices. Although all borrowers with high CLTV loan balances show high default rates, it is important to distinguish between those borrowers who had a high CLTV because of a low downpayment and those who had a high CLTV because of falling values. Even though downpayments are a sunk cost and irrelevant to the market value of a house, it does have a strong psychological impact on the behavior of homeowners. People who put little or no money of their own money into the purchase of real estate exhibit greater default rates because they are not losing much of their money. Most people really do not care if the lender loses money, particularly if they will not have to repay the lender for the loss. When a borrower has less of their money in a transaction they are less likely to sacrifice to stay current on their mortgage note obligations, and they are more likely to default if resale values decline, particularly if their payments are greater than the cost of a comparable rental.
Fraud and Misrepresentation Risk
Most purchasers of collateralized debt obligations did not realize there was a huge amount of fraud and misrepresentation in the underlying loans they were purchasing. High CLTV financing, particularly the widely offered 100% financing, became the ideal tool for fraud. A fraudulent transaction required a “straw buyer” willing to sacrifice their credit for a fee, an appraiser willing to inflate the houses value, and a realtor and a mortgage broker either willing to go along with the transaction for cash or too ignorant to see the truth. In the transaction, the straw buyer purchased a house for greater than its true market value, and the excess payment was used to pay off the corrupted parties. Fraud was much easier to commit with 100% financing because the bank loaned the full amount of an inflated appraisal. It is much harder to commit fraud when the bank only loans 80% of a property’s value. Most often the seller was in on the scam and was using the transaction to get out of a bad deal, but sometimes sellers were also innocent victims. The straw buyer had no intention of repaying the loan from the start, and the property quickly went into foreclosure.
A more common problem was misrepresentation of income. Stated-income loans, also known as “liar loans,” were very common during the bubble rally. People would simply make up a number that qualified them for a loan and state it on their mortgage application. One of the assumptions purchasers of CDOs made was that the originators of the underlying loans made sure the borrowers really made enough money to pay back the loan. Often times the extent of the loan originators due diligence was examining the borrower’s signature on the loan application and hoping they were telling the truth. This was a very serious problem for valuing an interest in a CDO because there was no way to accurately determine the viability of the income stream when the income of those responsible for paying the underlying mortgage notes was in doubt.
High DTI Defaults
The debt-to-income ratio is the total amount of payments compared to gross income expressed as a percentage. A lender evaluates the DTI of the mortgage loan as well as the total DTI of all borrower indebtedness when making a determination of creditworthiness. Historically, a borrower could not have a mortgage DTI in excess of 28% and a total DTI greater than 36% to qualify for a loan because debt burdens in excess of these figures proved to have high default rates. Despite the proven history of default of high DTIs, lenders widely ignored these guidelines in The Great Housing Bubble in the quest for more customers. During the rally, few of these people defaulted because they were offered even more debt through home equity lines of credit from which they could make mortgage payments, and the few who did get into financial problems simply sold their house to pay off the mortgage. During the rally, people were keen to take on mortgage debt because interest rates were low, and it was a necessary tool for obtaining real estate and its commensurate appreciation benefits. It did not matter if 50% of more of a borrower’s gross income was going toward debt service if the property itself was providing the additional income necessary to sustain the borrower’s lifestyle. Of course, this only works when prices are increasing rapidly. Once prices stopped rising, the property could no longer provide additional income, and the borrower had to make the crushing payments out of their work income. Without the benefits of appreciation, borrowers quickly found the burden of a high debt-to-income ratio overwhelming, and many borrowers defaulted because they payments were too much to handle – just as past history said they would be.
Investment Perception Risk
One of the biggest fallacies pushed on the general public was the notion that residential real estate was a great investment. This idea caused people to view houses as an investment and treat them accordingly. When the participants in a housing market perceive houses as an investment, they will more easily default on the loan than if they viewed the house solely as a family home. People develop emotional attachments to their family homes, and they will sacrifice much in order to keep it. People behave in a more businesslike manner when they view a house as an investment, and they are willing to give up the house if the investment does not perform as planned. Many people when faced with the reality that house prices were not going to go up and payments were going to continue to cause losses decided to stop making payments and let their investment go into foreclosure. Financially, it was the correct decision given the alternative of continuing to make payments on a losing investment. When the “Great American Dream” of home ownership was tainted by investment motives, it became a nightmare for all concerned.
Market Valuation Risk
The biggest risk faced by buyers of collateralized debt obligations is the default risk of the underlying mortgage when the collateral for the mortgage (the house) is overvalued in markets characterized by low affordability. The greatest risk of default is based on changes in the resale value of homes. All other default risk factors are masked when prices are increasing, and they are amplified when prices decline. Valuation risk is the ultimate synergistic factor.
There are three methods of appraising the resale value of residential real estate: the sales comparison approach, the cost approach, and the income approach. The sales comparison approach uses recent sales of similar properties in the market because comparable sales reflect the behavior of typical buyers in the marketplace. The cost approach determines market value by calculating the replacement cost of an identical structure plus the cost of the land or lot upon which the house would sit. The income approach determines market value by analyzing market rents of comparable properties and applies the gross rent multiplier of expected rents. Most lenders give the greatest weight to the comparable sales approach when establishing market value before applying any loan-to-value limitations to the loan amount. The income approach is generally only considered for non-owner occupied homes. The three-test approach to appraising market value as used during the Great Real Estate Bubble is fraught with risk and seriously flawed.
The comparative sales approach reinforces delusive behavior and irrational exuberance of a financial mania. If everyone is overpaying for real estate, the comparative sales approach simply enables greater fools to continue overpaying for real estate. Since market prices for houses which serve as loan collateral fall to fundamental valuations based on income after the financial mania runs its course, mortgages originated based on the comparative sales approach have a great deal of market risk not reflected in the pricing of collateralized debt obligations based on the underlying mortgage loans.
The cost approach has an even greater level of market risk. The cost of a structure may represent a relatively small percentage of the market value of real estate in high-value markets. In some of the most overvalued markets during the bubble, the replacement cost of the structure may have been $250,000 while the value of the underling land was $450,000; however, since the market value of land is a residual calculation based on the market value of the property, the value of the land cannot be determined independently of the house situated on it. Either the comparative sales approach or the income approach must first be applied to establish the market value of the property before any calculation of the market value of the land can be determined. In short, since the cost approach is dependent upon another valuation method, it is not useful as an independent method of property valuation. Also, since the valuation of land is extremely sensitive to small changes in the valuation of the property, the cost approach is misleading with respect to the valuation of residential real estate.
The only reliable method for the valuation of residential real estate is the income approach, and it is the only approach that is widely ignored by the lending community. It has been demonstrated in previous residential market bubbles in California and in major metropolitan areas in other states that once a price decline begins, prices fall to fundamental valuations based on income and rent. The reason for this is once the speculative investment incentive is removed from the market, buyers do not support prices until there is a new reason for them to buy: they save money versus renting. Comparative rents are the fundamental valuation of residential real estate. Mortgage default risk is low only when market prices are in line with comparative rents or when market prices are increasing. Default risk is low when prices are in line with rents because a property can be converted from owner-occupied to a rental unit and the payment can still be covered. Default risk is low when prices are rising because a borrower experiencing financial difficulty can always sell the property to repay the loan. Unfortunately, once market prices increase beyond the level of comparative rents, they will go through a period of decline back to comparative rent levels; therefore, if lenders continue to use the comparative sales approach, they will enjoy a temporary period of low market risk while prices increase and another painful period of losses when prices decrease. As was demonstrated in the aftermath of The Great Housing Bubble, these periods of lender losses can imperil the entire banking and financial system. The only way to prevent the pain of loss is to recognize the end-game risks when prices are increasing and choose not to participate in that lending environment. Many lenders did not participate in the crazy lending of The Great Housing Bubble, and they were not damaged in the aftermath; however, the hunger for mortgage loans from the CDO market compelled many lenders to join in or get buried by their competitors. The only real market-based solution to the problem of originating bad loans must come from the CDO market.
The CDO Market Solution
The solution to preventing future bubbles in the residential real estate market lies in the market for collateralized debt obligations. The government sponsored entities created the secondary mortgage market in the 1970s, and the CDO market is the extension of this market bringing large amounts of investment capital to residential real estate. During the Great Housing Bubble the CDO market did not properly evaluate the risk of default on the underlying mortgage notes they pooled. If the CDO market evaluates mortgage default risk based on the income approach rather than the comparative sales approach, the performance of CDOs will be greatly improved, and investor confidence will return to the market. It is only after the risks are properly evaluated that capital will return to this market. If the CDO market evaluates risk based on the income approach, the lenders that originate loans hoping to sell them to CDOs will be forced to do the same. If lenders originate loans based on the income approach, the irrational exuberance that creates financial bubbles will not be enabled. People would still be free to overpay for houses with their own money, but the scope and scale of financial bubbles will be limited to the funds of buyers, and the banking system will not be imperiled by the foolishness of the market masses when prices fall to fundamental valuations based on rent and income.
Today’s post is the first of a two part analysis series describing the mixture of magic and alchemy that is structured finance. Part II, Systemic Risk in the Housing Market will be posted tomorrow. I will answer any questions you might have in the comments section.
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Structured Finance
Structured finance is an innovation of the finance industry on Wall Street. It is a method of redistributing risk based on complex legal and corporate entities such as corporations, limited liability companies or some other kind of legal entity capable of entering into contracts. The shares or other interests in structured financial entities are derivatives that obtain their value from an underlying asset. Any asset that has a regular cashflow can be pooled through structured finance to create an asset-backed security. This cashflow can be split among various parties and valued based on the risk of repayment.For instance, the most common form of structured finance utilized to inflate the Great Housing Bubble was the collateralized debt obligation or CDO. A CDO derives its value from the underlying, asset-backed securities which in the Great Housing Bubble were generally bundles of mortgage loans. Mortgage loans have a steady cashflow stream as each homeowner pays their mortgage obligation, and these loans are collateralized by residential real estate. In the event of default on the mortgage held by a CDO, a house can be put through foreclosure to satisfy the mortgage debt and thereby return capital to the CDO.
In any asset-backed security, assets are bundled together to reduce risk and make the asset more attractive to investors. In contrast, if an individual buys a mortgage loan from a lender in order to receive the interest payments, this investor assumes all the risk of default. The default risk might be low, but if one party must bear this risk, the investor significantly discounts the security to compensate. However, if this individual investor buys a small share of a large pool of mortgage loans, the investor reduces their risk exposure significantly and thereby their discount for purchasing it. The value of the security is increased by pooling and thereby lowering the risk. Also, for an individual investor to purchase a mortgage loan requires a significant equity investment as mortgage loans are often in the hundreds of thousands of dollars. If a number of mortgage loans are pooled and sold off to many investors as shares or interests in a financial intermediary like a CDO, the equity requirement can be lowered considerably thus opening this type of investment to a broader investment community. It is the spreading of risk and the lowering of equity thresholds that makes structured finance such an appealing investment tool.
Collateralized debt obligations, like other asset-backed securities, are divided in segments known as tranches (rhymes with launches.) These tranches are typically titled: senior, mezzanine and equity based on their risk exposure. There is no single structure or formula for a CDO, and many contain numerous subdivisions resulting in more segments than the three described. Similar to the lien order of mortgage obligations, these tranches are paid in order of priority. The senior tranche is paid first, the mezzanine tranche is paid next, and finally the equity tranche is paid any remainder. Since these obligations are paid in order, the senior tranche has the least risk exposure and lowest returns, and the equity tranche has the highest risk and greatest potential for return. To further lessen risk (and make the transaction even more complicated) insurance policies are often issued to insure the buyer of a senior tranche against loss. These policies known as credit default swaps were a very lucrative business during the Great Housing Bubble. It was such good business that many insurers took excessive risks and lost a great deal of money when house prices declined.
The real magic of structured finance is its ability to take assets of low investment quality and turn it into something viable. George Soros aptly titled his book, “The Alchemy of Finance.” Like the alchemists of medieval Europe, modern investment bankers try to turn lead into gold. The syndicators who create and manage collateralized debt obligations assess the risk of loss on the underlying asset and break it down into three categories corresponding to the three tranches. The equity tranche in a CDO assumes the expected risk of loss. For example, if subprime loans expect an 8% loss from defaults, then the equity tranche will be 8% of the CDO. The syndicator typically keeps this equity tranche as part of their incentive fee, but practically speaking, the discount would be so steep it is hardly worth selling. If defaults losses are less than 8%, they see tremendous profits, and if it is over 8%, they see nothing. The Mezzanine tranche assumes the risk beyond the expected risk. If the average default loss is around 8%, and the highest default loss ever recorded is 24%, the mezzanine tranche exists to take on this risk. There is a very good chance they will see most or all of their money because the average default loss is being absorbed by the equity tranche. The senior tranche is supposed to have no risk from default loss. The line between mezzanine and senior is at or beyond the highest default loss rate ever recorded. This is not to say there is no risk, but it would take an unprecedented event to see any losses in this tranche – something like the collapse of The Great Housing Bubble.
Syndicators of collateralized debt obligations go to the open market to raise sufficient capital to buy the necessary securities and cover their fees. Since there is very little risk to the senior tranche holders, they require a lesser return on their investment. Although they own 76% of the CDO and receive 76% of the cashflow, they will pay more than 76% of the capital costs of the syndication (close to 85%) and still receive their required rate of return because the underlying subprime loan pool is paying in excess of the return required by senior tranche holders. The mezzanine tranche has more risk, and they will require a higher rate of return more closely approximating the interest rate on the underlying subprime mortgage. The remaining cost of the syndication is raised by the mezzanine tranche. The equity tranche raises no additional capital, and it is generally kept on the books of the syndicator as a bonus.
One can argue that structured finance creates greater efficiency in our financial system because capital is freed to pursue other objectives. Although, it can also be argued, as Warren Buffet has, that derivatives, the product of structured finance, are “financial weapons of mass destruction.” Both arguments stem from the same characteristic of these securities: excessive debt. When the loan that became part of the collateralized debt obligation was originated, this money was created out of nothing by the originating lender. This is how all money is created in a fractional reserve banking system. As long as there is sufficient cashflow, debt creation is normal; however, when excessive debt is created and available cashflow cannot service this debt, the system experiences the very serious problem of insolvency which can lead to monetary deflation – the disappearance of lender-created money into the ethers from which it was created.
If an individual investor wanted to buy a mortgage loan, it would be purchased with equity rather than lender-created money. However, once packaged into a CDO, the senior tranche is often purchased by an investment banker or another lender which also created this money from nothing. Since the equity tranche raises no capital, the mezzanine tranche may be the only money in the structure not created by a lender out of the ethers. With so little “real” money in the deal, there is very little buffer between what would be a loss of invested capital and a banking loss of created capital. There is a tipping point where the debt service exceeds the cashflow, and when this tipping point is reached, the entire debt structure may collapses in a deflationary spiral. The structured finance products such as collateralized debt obligations and their derivatives are highly leveraged instruments with a very sensitive tipping point. Monetary deflation was a major concern to the Federal Reserve as the Great Housing Bubble began to deflate.
The use of structured finance techniques in the syndication of collateral debt obligations was not by itself a problem causing The Great Real Estate Bubble. This was part of the infrastructure for delivering capital to the mortgage market which began with the creation of the secondary mortgage market. In the aftermath of the crash of house prices, collateralized debt obligations received a bad reputation as dangerous securities unworthy of the safe, “AAA” ratings they received from the companies that evaluate the creditworthiness of financial instruments. The advantages of structured finance did not disappear because of problems with the market or the ill-advised ratings these securities received. Collateralized Debt Obligations did not go away, and they have continued to be an integral part of the capital delivery system providing money for buyers to purchase residential real estate.
I have been looking more carefully at the Adjustable Rate Reset chart to determine when these resets will hit the market.
It takes at least 300 days from the time of mortgage reset to the time the REO is listed on the open market. This process can drag on much longer if the borrower attempts to make payments on the new schedule. Borrowers may drain other resources such as credit cards or retirement savings to postpone default.
Once the property becomes REO, the lender may not quickly and efficiently prepare it for sale. Most lenders do not have sufficient staff to deal with the large number of REOs they currently have, and the numbers are growing daily. Plus the loss mitigation procedures often demand higher prices for 90 days before the price cuts get more aggressive. Basically, it will take at least one year between the reset and the final sale in the open market, and 18 months is probably a more realistic timeframe. So what does this mean? It means the REOs we are currently seeing are not being caused by the resets shown in the now-infamous Credit Suisse chart. The current REO pool is composed of those who gave up even before their loans reset. The huge number of resets and ensuing foreclosures is just now starting to hit the market. Today, we are beginning month 15 on the chart, but the impact on the market is at best in month 3 and more realistically, it is just now starting.
We have all seen the ugly Notice of Default and Notice of Trustee Sale charts. It will take 6 months or more before these turn into sales on the resale market, so there is a major lag between what you are seeing in this chart and when the problems show up in the market. Just eyeballing the chart says there will be twice as many REOs on the resale market six months from now than there are today. This is not conjecture, these are foreclosures in the pipeline. Some of these people will avoid foreclosure, but the rates at which NODs and NOTs have been becoming foreclosures has been getting steadily worse as well.
There is a chance we may see a brief bear rally this spring. Interest rates are low, and sales volumes are picking up from their record low levels. Do not be fooled into thinking there is any realistic chance we are currently at the bottom. Prices are still greatly detached from fundamentals, and the tidal wave of foreclosures has not hit the market yet. Any momentum the market may build this spring will be reversed by the onslaught of REOs later this year and throughout 2009.
Right when I start to think sellers are accepting the reality of the new market, I come across a listing that makes my jaw drop at the greed and clueless irrationality of my fellow man. Today’s seller needs a new drug because they have clearly overdosed on the kool aid…
One of largest entertaining back yards in community. Low HOA fee. Highly artistic customized upgrades with oak wood cabinets and granite counter tops through out, stainless steel appliances, cove & recessed lighting in the kitchen & 1st floor BR, wine rack in kitchen. 18’X18′ travertine flooring, wood & carpet flooring, Granite shower walls, frameless glass cover enclosure of master BR shower, 3 French door openings in Living room & 1st floor Br, 2 French doors in family & living Rooms, Granite counter top with top grade grill for built in private B. B. Q. Built in out door granite bar. Professional Landscaping.
How many times does the word “granite” appear in this listing?
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It has been demonstrated on the blog over and over again with listings all across the spectrum of housing that we are in a market decline, and pricing is back at 2004 levels for those few properties that are actually selling. But no, this property is different, this property has increased in value over 60% during the last 4 years. Forget the fact prices have dropped almost 20% from the peak; it is as if that never occurred. This property has been appreciating at 15% a year just like it did during the height of the bubble when they bought it. Do these sellers have their heads in the sand, or is it somewhere else? The cognitive dissonance is truly remarkable. It takes courage to put a listing price out there like this. This price clearly insults the intelligence of every buyer in the marketplace. Aren’t they worried about insulting potential buyers? No wait, I suppose potential buyers should be worried about insulting them with a lowball offer, right? This property would be fortunate to sell for what they paid for it. Can you imagine their reaction if they got an offer for what it is worth in today’s market? What would happen if they got a real lowball offer for perhaps what this place will be worth at the bottom — I’m guessing 50% off their asking price? Anyone want to go mess with them? It is the only buyer interest they are likely to see at this listing price.
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That concludes another 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.
