Predictions for 2008

Slow Ride, take it easy

Slow Ride, take it easy

Slow Ride, take it easy

Slow Ride — Foghat

.

.

When I started writing for this blog, I wrote a series of posts culminating in Predictions for the Irvine Housing Market published on March 11, 2007. It seems only fitting to take this opportunity to take a look ahead at 2008 and make some predictions for 2008 based on the events we have witnessed in 2007.

The first stages of a decline are are always slow to register on the median home price because the low end of the market collapses first leaving only the more desirable, high-end property transactions in the market. We have documented on this blog numerous individual properties sporting 15% to 20% declines, and housingtracker.net has documented a drop in asking prices in Orange County from $651,225 to $569,900 (12.5%). Foreclosures are up almost five-fold since April of 2007. With the ongoing tightening of credit, there are no signs that any of these trends are reversing or will reverse any time soon. In fact, foreclosures are likely to continue to pile up dramatically as adjustable rate mortgages continue to reset and more homeowners are underwater and unable to refinance.

Adjustable rate mortgage reset schedule

In short, 2008 will likely see more declines. I will make the not-very-bold prediction that 2008 will see the worst single-year decline in the median house price ever recorded, and quite possibly the largest single-year decline we will witness in our lifetimes (although 2009 could be even worse.) My original prediction was for a 12% decline in 2008, I will stand by that number, although it could be even greater. Between 2008 and 2009, I believe we will see a 28% decline in the median home price. Am I crazy to think such a thing? Not if you ask Christopher Thornberg formerly of UCLA and now with Beacon Economics.

The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.

Now I will give a caveat. The FED will likely continue to pursue its wreckless course of lowering interest rates causing rampant consumer price inflation in an attempt to provide enough liquidity to the financial markets to stop a string of catastrophic failures of several of our large financial institutions. If this liquidity somehow finds its way into residential mortgages (something I doubt,) then house prices may not drop in nominal terms as far as I have predicted. In inflation adjusted (real) terms, the drop will still be large and unprecedented. This caveat leads to another not-very-bold prediction for 2008: one or more of our major financial institutions and one or more of our major homebuilders will fail as a result of the collapse of housing prices.

BTW, if you want to see why the credit crunch is so serious, and why it is likely to push the economy into recession (and why the FED is so aggressively lowering rates,) examine the chart below I copied from Calculated Risk. Banks are not willing to loan money: period. They have lost all confidence in the ability of borrowers to repay loans. Is this throwing the baby out with the bathwater? Sure it is, but that is what happens when you have a credit crunch. The ratings agencies gave AAA ratings to a steaming pile of mortgage manure, and banks have lost all confidence in everyone's credit worthiness as a result. This is what the FED is trying to combat by providing as much credit as they possibly can. Of course, it isn't just lender psychology at work here. They are also hording cash to prepare themselves for the onslaught of bad loans and write-downs they are going to experience as house prices continue to fall. The combination of fear of the unknown and fear of the known is causing a dramatic decline in lending: a credit crunch.

Discount Rate Spread

Am I being an alarmist and a worry-wort? If so, I am not alone. Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years. If you need a refresher on what happened to Japan and what Ben Bernanke would have done about it, click on this PDF link to Bernanke's writing on the subject. You can see the current course of FED action outlined in this paper.

So what does all this add up to? My next not-so-bold prediction: a severe local recession. Huge amounts of money used to flow into our local economy through the subprime mortgage business. This business model is dead. It is not going to return. Yes, it may still survive, but it will shrink down to the 2% of the market is used to have rather than the 20% it enjoyed at the peak. This is a huge loss to our local economy. Also, the decline in house prices is going to shut off the housing ATM another huge source of unsustainable local spending. Then of course, there are the realtors who used to feast on all this borrowed money that is no longer flowing into residential housing transactions and the local homebuilders who are no longer building and selling many houses. Basically, our heavily real estated dependent economy is going to tank — badly.

.

.

For my final not-so-bold prediction for 2008, I predict we will see many more angry homedebtor's troll the blog. As denial turns to fear and acceptance, it often detours through periods of anger. It will be extremely embarrassing for the many sheeple who got caught up in the financial mania to admit they made a huge mistake, particularly the most arrogant and willful of the the bunch. Since people generally do not want to take personal responsibility for their mistakes, many will come here and blame the "negative media" for the decline. We may report on the market, but we don't influence it, and we certainly don't control it. We will be a convenient place for many to vent their frustrations.

Financial manias have a way of deluding even the most intelligent of people. Sir Issac Newton was rumored to have lost £20,000 of public funds in the market — a substantial sum of money at the time. He is quoted as saying "I can calculate the motion of heavenly bodies, but not the madness of people." This financial mania infected many intelligent and successful people, and it will be the ruin of many of them.

Remember, housing markets do not move quickly. It is going to be a slow ride, so take it easy…

.

Auld Lang Syne

Should auld acquaintance be forgot,

And never brought to mind?

Should auld acquaintance be forgot,

And auld lang syne?

CHORUS:

For auld lang syne, my dear,

For auld lang syne,

We’ll tak a cup of kindness yet,

For auld lang syne!

And surely ye’ll be your pint-stowp,

And surely I’ll be mine,

And we’ll tak a cup o kindness yet,

For auld lang syne!

We twa hae run about the braes,

And pou’d the gowans fine,

But we’ve wander’d monie a weary fit,

Sin auld lang syne.

We twa hae paidl’d in the burn

Frae morning sun till dine,

But seas between us braid hae roar’d

Sin auld lang syne.

And there’s a hand my trusty fiere,

And gie’s a hand o thine,

And we’ll tak a right guid-willie waught,

For auld lang syne

Meanings

auld lang syne – times gone by

be – pay for

braes – hills

braid – broad

burn – stream

dine – dinner time

fiere – friend

fit – foot

gowans – daisies

guid-willie waught – goodwill drink

monie – many

morning sun – noon

paidl’t – paddled

pint-stowp – pint tankard

pou’d – pulled

twa – two

Auld Lang Syne — Robert Burns (1759–1796)

.

.

2007 has come and gone. This would probably be a great time to do a post on the events and changes we have witnessed over the last year, but with family still visiting, I do not have the time.

We have seen many new visitors this year, many of which may not know where Irvine is or what it looks like. I found these images on Google to help orient everyone on Irvine’s place in the world.

Irvine Map

.

.

Irvine Skyline

I hope you all are having a great holiday weekend, and I wish you a happy new year.

.

Met my old lover in the grocery store

The snow was falling christmas eve

I stole behind her in the frozen foods

And I touched her on the sleeve

Dan FogelbergShe didnt recognize the face at first

But then her eyes flew open wide

She went to hug me and she spilled her purse

And we laughed until we cried.

We took her groceries to the checkout stand

The food was totalled up and bagged

We stood there lost in our embarrassment

As the conversation dragged.

We went to have ourselves a drink or two

But couldnt find an open bar

We bought a six-pack at the liquor store

And we drank it in her car.

We drank a toast to innocence

We drank a toast to now

And tried to reach beyond the emptiness

But neither one knew how.

She said shed married her an architect

Who kept her warm and safe and dry

She would have liked to say she loved the man

But she didnt like to lie.

I said the years had been a friend to her

And that her eyes were still as blue

But in those eyes I wasnt sure if I saw

Doubt or gratitude.

She said she saw me in the record stores

And that I must be doing well

I said the audience was heavenly

But the traveling was hell.

We drank a toast to innocence

We drank a toast to now

And tried to reach beyond the emptiness

But neither one knew how.

We drank a toast to innocence

We drank a toast to time

Reliving in our eloquence

Another auld lang syne…

The beer was empty and our tongues were tired

And running out of things to say

She gave a kiss to me as I got out

And I watched her drive away.

Just for a moment I was back at school

And felt that old familiar pain

And as I turned to make my way back home

The snow turned into rain —

Same Old Lang Syne — Dan Fogelberg

.

.

Irvine home prices and sales for November

ZIP Median Change Sales Change

92602 $662,000 -23.9% 8 -78.4%

92603 $760,000 -29.3% 22 -31.3%

92604 $630,000 5.9% 11 -31.3%

92606 $867,500 19.7% 11 -56.0%

92612 $397,500 -34.3% 18 -14.3%

92614 $650,000 8.3% 8 -63.6%

92618 $742,000 11.9% 21 23.5%

92620 $892,250 24.8% 20 -66.7%

This is the first median I have seen reported under $400K (92612). It is also the first time I have noticed any zip codes with less than 10 sales in a month (92602 & 92614).

Serissa – Why pay more here when you can get a brand new home (exact floorplan) in Woodbury for less

Originally posted January 27, 2006

Address: 52 Tea Garden, Irvine, CA 92620 (Northwood)

Plan: 1600 sq ft – 3/3.5

MLS: S442227 DOM: 246

Sale History: 11/27/2004: $754,000

Price Reduced: 06/13/06 — $899,000 to $859,000

Price Reduced: 06/24/06 — $859,000 to $848,000

Price Reduced: 07/17/06 — $848,000 to $819,000

Current Price: $819,000

First, we’ll look at the flip. Here we’ve got a Plan 1 in the Serissa tract built by Lennar in the Village of Northwood. I believe this particular area of Northwood is called Northwood II and it consists of 4 neighborhood tracts that were built around 2003-2005 or so. This home was purchased from the builder for $754,000 in November 2004 (Phase 5). The private remarks on that listing were “This is a model leaseback opportunity. Rare to buy new home on the Irvine Ranch with no owner occupancy requirement. Builder will cover monthly PITI&HOA until the end of June 2005. 2% referral fee paid for escrow that closes no later than November 30, 2004. Please call with any questions, or come and see our beautiful models. Thank you!” I find it strange that the builder was advertising this on MLS at that time.

Lennar found a buyer who came up with a 20% down payment and took out a mortgage for 80%. This buyer purchased the home as an investment property. Perhaps he leased it back to Lennar for a few months. Then he found a new tenant (MLS S397784) to rent it for $2900/month starting in May 2005. I don’t know how $2900/month would cover a $600k mortgage + taxes + HOA. But those were good times and the property probably saw some huge appreciation (on paper).

Anyways, a year later (after the 12 month lease was up), this investor placed the home for sale in May 2006 (just in time for the peak summer buying season). The initial asking price was $899,000. That would give him a nice $150k profit (excluding commissions). Unfortunately for him, the market did not like that price. After a few price reductions during the summer (the investor knew he needed to find a GF that summer), the price stabilized at $819,000. Soo.. for the last 6 months the price hasn’t changed. Why not? Maybe he doesn’t want to lose money on the sale. Perhaps he thinks he’ll wait out the downturn and in the meanwhile just bleed a little money since the unit is rented out.

The private remarks on the current listing state: “VEry VEry MOtivated SELLER!!! REduCEd THe PRICE , REduCed And REduCEd, Now offering 3.5%, yes 3.5% to the buyers’ agent. SHOWS like a model!. MOTIVATED agents.” If sold at the $819,000 asking price and assuming 7% in selling costs, this investor stands to make a whopping $7,000 profit!

Here’s the competition in the Serissa tract:

  • 48 Bamboo – Plan 1 – $798,000

  • 37 Wonderland – Plan 1 – $789,000 (Thanks EvaLSeraphim!)

  • 45 Bamboo – Plan 2 – $819,000

  • 47 Secret Garden – Plan 2 – $849,800

  • 43 Secret Garden – Plan 2 – $849,000

  • 68 Shadowplay – Plan 2 – $869,000

  • 62 Shadowplay – Plan 2 – $879,000

Unless there’s a considerable difference in upgrades or location, our seller will have to adjust the price at least once more. It gets better (or worse)… Thanks to IRVINITEEE, I learned that the Serissa tract is pretty much the same as the La Casella tract in Woodbury. La Casella has just started to sell their homes and from what has been gathered in the thread, the Plan 1’s that just sold started around $690k. That is $130,000 LESS than what our featured seller is trying to unload 52 Tea Garden for.

How will the La Casella sales affect the appraisal values for Serissa? Anyone hear the sounds of instant equity evaporation?! Lennar has priced Phase 1 of La Casella in Woodbury (a full Village with a ton of amenities) in January 2007 to be lower than Phase 5 of Serissa in Northwood II which was sold in November 2004! (I am comparing $690k to $754k) As has been stated before, the builders are going to do whatever it takes to move their product.

UPDATE #1 – February 2, 2007

Thanks to a tip from EvaLSeraphim in the comments, I’ve learned that this property has been relisted.

MLS #: S473840

The asking price is now $799,000. With 6% in selling costs, the seller will be about $3,000 in the hole. Will a $20k reduction in price help sell this place? I doubt it. But only time will tell.

UPDATE #2 – December 28, 2007

52 Tea Garden is still on the market (it’s been on the market under various MLS listings since May 2006). Here’s the latest listing: S494270

The new asking price is $759,000 which is about the same as what the investor purchased it from the builder for in November 2004. It’s yet another example of a seller chasing the market down. Had this property been priced at $759k in May 2006 it probably would have been sold.

Here’s what happened to the other properties in the original post:

  • 48 Bamboo – Plan 1 – Sold for $746,500 on 4/24/2007

  • 37 Wonderland – Plan 1 – Reduced to $749,000 and then the listing expired

  • 45 Bamboo – Plan 2 – Sold for $800,000 on 4/3/2007

  • 47 Secret Garden – Plan 2 – Sold for $792,000 on 8/7/2007

  • 43 Secret Garden – Plan 2 – Sold for $800,000 on 7/20/2007

  • 68 Shadowplay – Plan 2 – Asking price is now $800,000

  • 62 Shadowplay – Plan 2 – Reduced to $814,900 and then off the market

    • And here are a few other properties that are on the market in the Serissa tract:

  • 20 Shadowplay – Plan 2 – $838,880

  • 60 Shadowplay – Plan 3 – $875,000

  • 35 Secret Garden – Plan 2 – $849,000

  • 27 Wonderland – Plan 2 – $675,000

  • 61 Wonderland – Plan 1 – $699,900

    • 27 Wonderland (short sale) and 61 Wonderland are definitely going to make it harder for the rest of the sellers in the tract.

    REO in San Juan Bautista (Irvine)

    S516101c

    Address: 28 Bolinas, Irvine, CA 92602

    Plan: 3 – 1622 sq ft – 3bd/2ba

    MLS: S516101 DOM: 4

    Sale History: 12/4/2007: $638,586 (back to the bank)

    9/9/2005: $680,000

    6/11/2004: $675,000

    Current Price: $529,900

    This Plan 3 in the San Juan Bautista tract in Northpark went back to the bank earlier this month. At the current asking price, the bank is willing to accept a $100k+ loss on this property.

    Here are the private remarks:

    Combo R-E-0. Buyer must submit a prequal w/Wells Fargo along with the offer. (Bank rules)Call xxxxxxxxxxxx Property sold AS-IS. $1,000 bonus to selling agent if closes by 2/28/2008.

    There is actually another Plan 3 REO townhome in this tract (15 Bolinas) which is pending sale at $532,900. These 2 REO’s will definitely have an impact on the comps.