Stillwater

We all came out to montreux

On the lake geneva shoreline

To make records with a mobile

We didnt have much time

Frank zappa and the mothers

Were at the best place around

But some stupid with a flare gun

Burned the place to the ground

Smoke on the water, fire in the sky

They burned down the gambling house

It died with an awful sound

Funky claude was running in and out

Pulling kids out the ground

When it all was over

We had to find another place

But swiss time was running out

It seemed that we would lose the race

Smoke on the water, fire in the sky

Smoke on the Water — Deep Purple

The smoke on the water will the smoldering ashes of the neighborhood comps when today’s property finally sells.

This is the Irvine Housing Blog, and I very rarely, if ever, profile properties outside of Irvine. However, since it is a weekend, and since this property was such a find, I thought I would make an exception today. I would like to thank Chuck for emailing me this link. BTW, the guitarist in the video is fantastic. It is worth watching.

Asking Price: $1,300,000

Income Requirement: $260,000

Downpayment Needed: $325,000

Purchase Price: $2,500,000

Purchase Date: 1/23/2007

Address: 26 Stillwater, Newport Coast, CA 92657

Beds: 4

Baths: 3.5

Sq. Ft.: 2,000

$/Sq. Ft.: $650

Lot Size: –

Type: Single Family Residence

Style: Other

Year Built: 2005

Stories: Two Levels

View(s): Valley, Has View

Area: Newport Coast

County: Orange

MLS#: M107854

Status: Active

On Redfin: 128 days

Unsold in 90+ days

From Redfin, “Beautiful Newport home. Jack & Jill bed & bath detached Casita could be office or guest quarters. Short sale subject to bank approval.”

I thought the high end was immune? This isn’t supposed to happen in Newport Coast. This is a 48% loss in less than one year! The 2007 transaction looks suspiciously like fraud, but it could just be a really stupid flipper. Based on available information, the purchase seems legitimate. In either case, this house is listed at nearly 1/2 off its sale price from just one year ago. Apparently it was listed for a time at $1.8M and wasn’t selling, so the price was dropped all the way to $1.3. Check out this listing where they were trying to get $2,112,308. If you think this is a one-off, check out this listing for 10 San Sovino with its $550,000 reduction. (Thank you, SOC.)

This will be a new record: the total loss assuming a 6% commission will be (drumroll please) $1,278,000. Some party is going to absorb a HUGE loss. Does that satisfy your schadenfreude fix for the day?

More Price to Rental Data

I was just guessin’, At numbers and figures, Pullin’ the puzzles apart

Scientist — Coldplay

Do you remember this post on the Price-to-Rental Ratio?

Well, Calculated Risk has done another post regarding this issue. If you are not a regular reader of Calculated Risk, I highly recommend the blog. Their latest post contains two great charts I want to share with all of you:

The chart above is the historic ratio of home prices to rent with projections for how we get back to the historic relationship between the two. From the numerous discussions we have had on the gross rent multiplier, you can see that I am a big believer in the price/rent ratio as a determinant of real estate value. If you look at the stability of this relationship over the last 48 years, you can see it never deviates much from the mean — at least until our most recent bubble. There has been a slight upward drift since the recession of the early 70s with much of this slight increase being explained by declining interest rates since the early 80s. You can also see why many were saying prices were too high in 2000 and 2001. By historical measures, they were.

The chart above is the inverse of the previous chart showing the relationship between rent and price. The over-valuation in the market in 2000 becomes even more apparent. The price bubbles of the late 70s and late 80s also stand out. Our most recent bubble is hard to miss and even harder to deny.

The historic relationship between prices and rents will be restored, unless of course you believe we have found a way to support permanently higher prices. I think not.

Already Gone

Well, I heard some people talkin’ just the other day

And they said you were gonna put me on a shelf

But let me tell you I got some news for you

And you’ll soon find out it’s true

And then you’ll have to eat your lunch all by yourself

’cause I’m already gone

And I’m feelin’ strong

I will sing this vict’ry song, woo, hoo,hoo,woo,hoo,hoo

The letter that you wrote me made me stop and wonder why

But I guess you felt like you had to set things right

Just remember this, my girl, when you look up in the sky

You can see the stars and still not see the light (that’s right)

And I’m already gone

And I’m feelin’ strong

I will sing this vict’ry song, woo, hoo,hoo,woo, hoo,hoo

Well I know it wasn’t you who held me down

Heaven knows it wasn’t you who set me free

So often times it happens that we live our lives in chains

And we never even know we have the key

Already Gone — The Eagles

Today’s post is another in a series of properties where the owners refinanced at the peak taking all their equity and now they are short selling and walking away. In a sense, it has already been sold to the bank. It was sold the day they refinanced, the bank just didn’t realize it at the time. I had the Eagles’s song above pop into my head when I was researching the property. It is an ode to the lenders out there from all their short-selling borrowers. They don’t care anymore. They are already gone…

Asking Price: $799,000

Income Requirement: $159,800

Downpayment Needed: $199,750

Purchase Price: $770,000

Purchase Date: 9/1/2004

Address: 9 Utah, Irvine, CA 92606

First Mortgage $651,000

Second Mortgage $279,000

Total Debt $930,000

Beds: 5

Baths: 3

Sq. Ft.: 2,240

$/Sq. Ft.: $357

Lot Size: 4,200 sq. ft.

Type: Single Family Residence

Style: Contemporary

Year Built: 1999

Stories: Two Levels

Area: Walnut

County: Orange

MLS#: P614401

Status: Active

On Redfin: 14 days

From Redfin, “Beautiful Newer Home At Cul-De-Sec Location W/ Friendly Neighbors. Tons Of Upgrades, plantation Shutters, window Frame, crown Molding, security System, Custom Painting, 2.5 Car Garagew/ Blt In Storage Rack, huge Master W/ Walk In Closet, main Fl. Bedroom Can Be Used As Office Home does need a carpet cleaning.”

Can anyone figure out what rule or rules guided the realtor’s use of capital letters? Perhaps the random cap approach?

Do you like the new short sale graphic?

I don’t know where the refinance money went, but it doesn’t appear to have been spent on the property. The white tile and cheap cabinetry might be original construction.

If the short sale goes through at the asking price, and the lender pays a 6% commission, they stand to lose $178,940.

Is this where I launch into a diatribe on why downpayments are going back to 20% because no lender will issue a second mortgage? Total losses on second mortgage loans like this one will have that effect.

Is this where I rant on the foolishness of lenders doing 100% CLTV cash-out refinancing? I must admit, after watching the S&L disaster, I never thought I would see equity requirements eliminated again. Back then it was commercial properties getting the wacky financing, but the lessons learned were universal. I guess each generation of lenders must make the same mistakes in the name of “innovation.”

(Note to self: refinance at peak of next bubble and rip off the lender…) Isn’t it just a bit too easy? Aren’t the consequences just a bit too light? (If there are any consequences at all.) It doesn’t keep the honest man honest when the lenders are just giving it away.

I would like to finish this week with a laugh (Warning four letter word ahead.) Does everyone remember David Lereah, the former economist for the National Association of Realtors? He wrote a book at the height of the bubble claiming there wasn’t one.

He came out with a new book now that the bubble has burst.

Thank you for joining us this week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

Almost 2003

She’s a brick—-house

Mighty mighty, just lettin’ it all hang out

She’s a brick—-house

The lady’s stacked and that’s a fact,

ain’t holding nothing back.

She’s a brick—-house

She’s the one, the only one,

who’s built like a amazon

We’re together everybody knows,

and here’s how the story goes.

Brick House — The Commodores

You don’t see much brick in Irvine. This property has a brick facade on part of the structure, a brick wall and a brick walkway. I think the architecture is rather attractive… She’s a brick—-house…

Asking Price: $715,000

Income Requirement: $178,750

Downpayment Needed: $143,000

Bank Purchase Price: $714,000

Bank Purchase Date: 12/14/2007

FB Purchase Price: $700,000

FB Purchase Date: 6/23/2003

Address: 2 New Meadows, Irvine, CA 92614

Beds: 3

Baths: 3.5

Sq. Ft.: 1,887

$/Sq. Ft.: $379

Lot Size: 4,848 sq. ft.

Type: Single Family Residence

Style: Contemporary

Year Built: 1983

Stories: Two Levels

Area: Woodbridge

County: Orange

MLS#: U7005149

Status: Active

On Redfin: 5 days

From Redfin, “WOW, THIS IS THE CITY OF IRVINE! ENJOY THE OUTSTANDING SCHOOLS, THE BEST PARKS AND THE BEST LOCATION IN ORANGE COUNTY. THE HOME FEATURES THREE BEDROOMS AND TWO AND ONE HALF BATHROOMS, DESIGNER TOUCHES THROUGHOUT. A PRIVATE POOL AND SPA, AND PLENTY OF ROOM FOR ENTERRTAINING. .. COME HOME TO IRVINE AND START LIVING THE ORANGE COUNTY LIFESTYLE TODAY. “

WOW, THE CAPS LOCK IS STUCK.

ENTERRTAINING?

If the bank has to cut their price $15,000 to sell this property, it will be a summer 2003 rollback. Welcome to 2008 where 5 years of appreciation has now been wiped clean…

This is a nice property. It is in Woodbridge, on a corner adjacent to a park. It is not too small, and it has a yard large enough for its own swimming pool. I don’t see many negatives here, and I certainly don’t see any reason this should be a 2003 rollback, other than the conditions of the market. I can’t help thinking the original buyer overpaid in 2003, but real estate always goes up, right? We will keep an eye on this one and see if a knife catcher gets it below its 2003 price.

Springflower

Its rainin but there aint a cloud in the sky

Must of been a tear from your eye

Everythingll be okay

Funny, thought I felt a sweet summer breeze

Must of been you sighin so deep

Dont worry were gonna find a way

Im waitin, waitin on a sunny day

Gonna chase the clouds away

Waitin on a sunny day

Waitin’ on a Sunny Day — Bruce Springsteen

Over the holidays, I had time to contemplate the content on the blog, and I realized we have not spent enough time and effort examining the rental market. Considering 40% or more of Irvine households are renters, it seems appropriate for the Irvine Housing Blog to pay more attention to what is going on in the rental market. Plus, much of our discussion on valuations and projections for the market bottom depend on rental rates, so it is important to know where rental rates are to gain a feel for where prices are in the marketplace.

Examining prices for rentals is fraught with the same problems as examining prices of for-sale properties with one exception: there are good deals in the rental market. I will generally profile those I consider good deals or those that are simultaneously offered for sale. Occasionally, I do find WTF rental asking prices from floplords trying to cover their payments. I will profile these too. I will not examine any rentals owned by the Irvine Company. If you want to see their offerings, I suggest you go to Rental-Living.com. Instead, I will focus on private rentals offered on the MLS and Craigslist. I do not know any of the landlords, and we are not going to accept money from landlords to feature their properties. My opinion of the quality of the rental and the deal it represents is based solely on the information from the internet, and it could be entirely incorrect.

With all our explanations and disclaimers in place, let’s examine a property offered for rent and for sale to see what it tells us about the market. Today’s seller can’t decide if they should rent or sell. They are waitin’ on a sunny day…

Asking Price: $568,000

Asking Rent: $2,350

Gross Rent Multiplier: 241

Rent Finance Value: $371,795

Income Requirement: $142,000

Downpayment Needed: $113,600

Purchase Price: $165,000

Purchase Date: 1988

Address: 11 Springflower, Irvine, CA 92614

Beds: 3

Baths: 2

Sq. Ft.: 1,144

$/Sq. Ft.: $497

Lot Size: –

Type: Condominium

Style: Contemporary

Year Built: 1986

Stories: One Level

Area: Woodbridge

County: Orange

MLS#: P585566

Status: Active

On Redfin: 188 days

Unsold in 90+ days

From Redfin, “single story detached condo house, 3BR, 2BA (3rd BR could be used as den or office), corner lot location, walking distance to sch, park, pool, lakes, shopping, newer carpet, baseboard, paint, scrapped ceiling, woodblind window coverings, show very clean and bright, move-in condition. No Mello-Roos, low tax rate”

Do you sense a lack of enthusiasm in the description? I don’t need three exclamation points, but that description reads like a medicine bottle.

First, I would like to introduce a new concept: the rent finance value. Since the payment is the most important determinant of value, the rent finance value looks at the maximum value that could be financed with a 30-year fixed mortgage at todays interest rates (I used 6.5% above.) In today’s example, a payment of $2,350 would finance a payment on a loan of $371,795 at 6.5%. It is not as handy as the gross rent multiplier because you need either a financial calculator or a spreadsheet, but IMO it provides a good method for estimating value because it comes closest to simulating a buyer’s mentality without crunching too many numbers. As you may have noticed, it comes out pretty close to the 160 GRM value of $376,000.

So what can we observe with this property. IMO, this asking rent is near market for this unit. Further, this unit is what I would consider a “median” house product in Irvine: small 3/2s or large 2/2s. Obviously, the asking sales price is too high or it wouldn’t be languishing on the market for over 180 days. Gross rent multipliers were near 300 at the peak, and with our 20% drop, they are under 240 now. This unit confirms that GRMs are falling below 240. A knife catcher may pick this up for $525,000 and watch it drop another $150,000 in value over the next few years. If the property data I have is correct, there is no urgency for this seller to sell, but also no need to be stubborn about the asking price. They really have two options: rent this out and be the bagholder, or lower their price and let someone else be the bagholder. What do you think they will do?