Patron Saint of Flippers?

Asking Price: $637,900

Purchase Price: $610,000

Purchase Date: 1/24/2005

Purchase Price: $566,200

Purchase Date: 3/21/2006

Address: 96 Saint James #80, Irvine, CA 92606

Beds: 3

Baths: 2.5

Sq. Ft.: 1,660

Year Built: 2001

Stories: 2

Type: Condominium

County: Orange

Neighborhood: Walnut

$/Sq. Ft.: $384

MLS#: U6602629

Status: Active on market

On Redfin: 258 days

MLS#: U6603874

From Redfin, “Just Reduced!!! Don’t Wait!!! Sellers Says Bring All Offers! Vacant Go Direct! Best Value in Park Lane – Walnut area of Irvine. Gated. Beautiful. Community Pool/Spa Area – Pristine. End Unit, Like New, 3 Bdrm 2.5 Ba, Single Family Detached Condo, MUST SEE!!! 2 Stry, 2 Car Dtched Garage, w/ great private rear and side yard. This is a Winner and will not last. This home sold As-Is w/ NO Warranties of Anykind.”

This appears to be listed twice, and it has been on the market for a very long time. It is difficult to tell from the property records what is going on with this property. The records show the last sale on 1/24/2005, but Redfin shows the last one on 3/21/2006. Perhaps the last one was the bank taking back the property as the current owners is listed as GMAC Mortgage Corporation. They have a $488,000 first and a $122,000 second on the property for a combined loan balance of $610,000. Another 100% financing deal gone bad. What a surprise. Has the bank had this on the market as an REO for over a year without reducing its price?

Saint James is the patron saint of pilgrims (trivia fact for the day). There are a great many flippers in this neighborhood who are hoping Saint James can double as their patron saint. There are 4 properties within a block purchased in the last year, and there are more than a dozen purchased in this neighborhood. I suspect these are not all long-term homeowners. These properties are newer, and although they are small, they are 3/2s, so families may find being trapped here livable. In short, the prices here may hold out a bit longer. They will collapse after the prices of transitory housing (2 bedrooms and under).

Maybe they should all pray to Saint Joseph, the patron saint of real estate.

Brookside Comp Killer

Asking Price: $699,000

Purchase Price: $830,000

Purchase Date: 11/17/2006

Address: 4342 Brookside St., Irvine, CA 92604-2237

Beds: 4

Baths: 2

Sq. Ft.: 2,200

Lot Sq. Ft.: 5,623

Year Built: 1971

Stories: 2

Type: Single Family Residence

Neighborhood: West Irvine

$/Sq. Ft.: $318

MLS#: P575245

Status: Active on market

On Redfin: 5 days

From Redfin ” THIS IS A SHORT SALE. ALL TERMS, SALE PRICE, AND COMMISSION ARE SUBJECT TO LENDERS’S APPROVAL.”

This is how prices come down.

When short sales and REO’s are more the rule than the exception, prices will fall. Zillow thinks this property is worth $853,413. A sale for less than $700,000 will certainly lower the comps in this neighborhood. How many does it take before a new, lower value is established?

This knife-catcher gave up after only 6 months. Redfin shows the purchase price as $820,000, but property records show it as $830,000. Since this is probably a first payment default, I suspect fraud. The sale prior to the 11/17/2006 was on 3/15/2005 for $735,000, so it is possible the 11/17/2006 buyer was a straw buyer saving our previous flipper. As you can see, even without any commissions, the bank is going to lose $131,000. Factor in even a 3% commission, and the bank is going to lose $151,970.

PMC Bancorp “A leader in Prime and Alt-A mortgage banking” is the bagholder on this one. They have a $622,500 first mortgage and a $200,000 second. With the second mortgage being a total loss, you can see why lenders have stopped issuing them. The days of the 80/20 loan package are numbered.

I wonder who owns the Mercedes Benz in the driveway, or is my identification in error? 1. Starving Realtor? 2. Bagholding Banker? 3. Failed Straw-man Flipper? 4. Rescued Flipper?

Your Buyer's Loan Terms

Over the last several years, buyers have not concerned themselves with the day they were going to become sellers. Why would they? There was an endless demand for properties, and buyers were going to pay whatever was asked. Those days are gone. They are not coming back any time soon.

In one of my first posts, I talked about Financially Conservative Home Financing. There has been much discussion on these boards about the high debt-to-income ratios and adjustable rate mortgage terms now required if you chose to buy in today's market. For anyone considering buying a home right now, I would like you to think about the buyer who is going to buy your home from you at some point in the future, and more specifically, what debt-to-income ratio and loan terms will this buyer utilize. This is important, because the amount of money this take-out buyer will pay you for your home is completely dependent upon these variables. Your house is only worth what your buyer can pay for it. For you to get out at breakeven or better, your take-out buyer must be leveraged more aggressively than you are, or you must wait for fundamental valuations to catch up to today's pricing. In this post, I will examine both scenarios, and I will present a range of valuations for homes based today's income and prospects for the future.

Fundamental Valuations

As a primer, please read How Inflated are House Prices? In that post I discuss a simple method to calculate a house's fundamental valuation. In short, 160 times the monthly rental rate is a useful number. The monthly rental rate can be calculated as follows: Median Income / 12 (months) x debt-to-income ratio = monthly payment = monthly rental rate. For example, in Irvine in 2006, the Median Income was $83,891 / 12 = $6,990 monthly median income. Financial planners (and your banker) will tell you not to put more than 28% of your gross income toward housing (Realtors will tell you to put 55% or more if that is what it takes.) Assuming a more rational 28% debt-to-income ratio, the median monthly payment (and thereby the median rent) is $1,957. Based in a 160 multiplier, the median house price should be $313,120 or 3.7 times earnings. Since the borrower should have a 20% downpayment, it can be argued that the median home price should be $375,744.

So how does all the above compare to reality? The median rent in Irvine is $1,660. This is going to include many 1 and 2 bedroom apartments and very little at 4 bedrooms and above. The housing stock in Irvine is generally larger and nicer than the rental units, so a median house rental of $1,957 is probably not too far off. If you go to OCRealEstateFinder or FirstTeam and search for rentals, you will find what I would consider a median type property renting between $2,250 and $2,500 a month. This means that most Irvine renters are probably spending more like 35% of their gross income on housing instead of the suggested 28%. So if you recalculate the theoretical median based on $2,500 a month, the median home price should be $400,000; add a 20% downpayment, and the median could be as high as $480,000. The last statistics I saw for the Irvine median home price was $687,000: No reasonable metric can be constructed to justify that price.

As you can see from the discussion above, there is a range of values which can be used as a "reasonable" fundamental valuation. For the sake of simplicity, I am going to use $360,000 which is the number I used in the post Predictions for the Irvine Housing Market.

Debt-to-Income Ratios

The table below shows the impact of debt-to-income ratio on house price.

As you can see, the current debt-to-income ratio in Irvine is 60.8%. Even if you assumed ever buyer is puttting 20% down (which is laughable), the DTI ratio is 50.1%. Remember this is gross income; as a percentage of take-home pay, the number is much higher. Will your buyer be willing to spend that much of their income on housing?

Amortization

The above table shows the DTI assuming a 30-year conventional mortgage. Only 20% of loan originations in Orange County were conventional mortgages in 2006. People have bid prices up using interest-only and negative amortization loans. The table below shows the impact of these loan terms.

This is where the action is. There are many factors which contributed to this bubble, but it is the combination of these loans with Southern California’s Cultural Pathology that really made this bubble happen. The biggest gamble current buyers are taking is the availability of future financing options. If defaults continue to increase at the current rate, these products will likely be eliminated: the banks are losing to much money. Will these loan terms be available for your future buyer?

Interest Rates

Mortage interest rates on 30-year fixed rate mortgages with no points are running about 6.4%. This is about 20% less than the historical average of 8% for home mortgages.

As you can see from the above table. The higher interest rates go, the less a borrower can finance utilizing the same payment. If interest rates go up from the current 6.4% to the normal 8%, buyers will be able to bid 15% less than previously; therefore, house values will decline 15% as a result. If interest rates spike to 10%, house values decline 30%. What will interest rates be when your buyer wants to buy your house?

Appreciation over Time

I will use an appreciation rate of 3% to reflect the normal growth of wages and rental rates. It can be argued that appreciation will be higher, but it can also be argued that Appreciation is Dead.

Fundamental valuations are directly tied to wage growth. How much money will the buyer of your house be making in the future?

Future Value Table

Pulling together all of the above variables is a challenge. Below is a table which attempts to do so. Please click on the table to enlarge.

To make it easier to read and follow, I have broken down the above table into three sections based on the DTI ratio of your future buyer.

The most likely scenario is that your future buyer will pay from the second column in the above table. A 28% DTI is not just advisable, it may become a limit imposed by lenders — liar loans and high DTI ratios cause defaults and may be eliminated. Interest rates will likely climb back to their 50-year historical average of 8%. Notice that today's median home price is not reached in the 29 years shown on this chart if interest rates rise.

If you believe the "sun tax" is alive and well in Southern California, and you believe lenders will allow DTI's in excess of 28% in the future, future values may be found in the above chart. This DTI is what house renters are currently paying in Irvine.

Of course, there are those who believe we have reached a permanently high plateau, and buyers will continue to either utilize exotic financing or put 60% or more of their income toward housing (You have to believe those things to think prices can appreciate from current levels.) If you believe these conditions will persist, or occur again in a future bubble, then the above chart is for you. Who knows, maybe those of us who buy at the bottom can sell at these prices at the top of the next bubble…

Don't get greedy.

Think about what terms and conditions your buyer will face, and you may save yourself a lot of problems today. Right now the market has been pushed up to unsustainable heights, and it will fall. Don't buy when the conditions are not favorable. If interest rates are low, debt-to-income ratios are high, and exotic financing is the norm, it is a bad time to buy. You want to purchase when credit is tight and values are depressed — this is coming soon. Be patient and wait for the conditions to be right because you want your buyer to buy from you when credit is loose and prices are inflated. Remember, your house is only worth what your buyer will pay for it.

P.S. If you want to run this spreadsheet for yourself, below is a link. You can input your own income and house price assumptions and see what happens.

Buyer’s Loan Terms

Irvine's Woodbridge

Woodbridge is a large community in the heart of Irvine. Started in 1975 and completed in the early 1990’s, the community covers approximately four square miles bounded by Culver, Irvine Center Drive, Jeffrey and the 405. It is one of Irvine’s premier neighborhoods.

Woodbridge is bisected into two residential segments, called North Lake and South Lake, by a broad stripe of retail, commercial and institutional development between Alton and Barranca. The lakes are between three and six feet deep and each is crossed by a large wooden footbridge, owing the village its name. A four-lane circular loop road, Yale Loop, runs around the interior of Woodbridge, connecting all its housing blocks and major streets. The village is walled off from the rest of Irvine by a row of pine trees and a continuous, 20-foot-high Privet hedge.

In Great Streets by Allan B. Jacobs (MIT Press), Pinewood (street name) on the Northern edge of the village off of the Yale Loop, is cited as one of the great “new urban” streets. The houses of Yale Loop and the wall and hedge which surround the development act as a shield to disguise the high-density residential products which are situated between them.

The design concept works very well. A casual observer seeing Woodbridge comes to believe the entire community is composed of large single family residential homes giving Woodbridge a high-end veneer.

Woodbridge, for the most part, is uniformly designed in a New England Cape Cod style, creating a classical seaside village feel. Shed style houses are also abundant in Woodbridge.

Even the more modest homes are very well maintained and show real pride of ownership.

Residents who really “know” Woodbridge will tell you there is a hierarchy of desirability radiating outward from the center. Neighborhoods closer to the lakes have larger homes and are more desirable. People in this area are the creme de la creme, and they defecate without odor.

Those who live outside the loop are the “wannabes” who really aren’t worthy of Woodbridge’s aura of greatness. You must pardon my facetious banter, but I was given a very similar description by a long-time resident. Interesting that even within one of Irvine’s best neighborhoods, the competition to put oneself above others is notable.

A Lexus and a BMW. A HELOC perhaps? No, everyone in Irvine makes enough money to afford a big house and two luxury cars…

There are other attractive streets in Woodbridge…

Each one of Woodbridge’s lakes has a “beach club” next to it, where there is a “lagoon” (a sand-surrounded fresh-water swimming pool that empties into the lake), a dock facility to rent pedal boats, kayaks, canoes, sailboats, and hydro-bikes.

Swimming is prohibited in the lakes, but many people swim or fall off of their boats into the water. The beach clubs also have two volleyball courts each. South lake has a recreation room and a snack shop in it also, which is only open at certain times throughout the year.

There are also two “swim clubs,” Stonecreek and Bluelake, on each side of Woodbridge. These have lifeguards all day 10-10 during summer, and weekends 10-5 during the winter. Stonecreek has a two-meter diving board, and Bluelake has a one meter and a three meter diving board. The Woodbridge swim teams are based out of Stonecreek. Woodbridge is home to Woodbridge High School.

Twenty-four tennis courts, twenty of which are lit for night play, pathways, bikeways, and a plethora of recreational parks within the four square miles make Woodbridge a community of interest to young families as well as retirees who enjoy outdoor activities. Its community tennis club regularly trains young players who are ranked in the first hundred in their USTA age group.

There are four elementary schools (there used to be a fifth, an alternative school, Alderwood, which got moved to Quail Hill), two middle schools, and Woodbridge High School.

One of the weaknesses of Woodbridge is the lack of a strong commercial gathering place. There isn’t a suburban plaza in Woodbridge that is very successful. The Woodbridge Community Center has been recently renovated because many of the retail businesses left and have been replaced by high end office tenants.

There are other successful retail centers in Woodbridge, but none with a good suburban plaza. The center on Jeffrey and Alton has a suburban plaza which is designed correctly to be successful, but it is across from the successful Oak Creek suburban plaza and for whatever reason, it has not done as well.

In my opinion, the best public space in Woodbridge is the southern half of North Lake. This section of north lake is adjacent to the semi-successful community center, and it is connected with a walkway over Barranca Parkway.

There is a unique children’s tot lot which juts out into the lake on the north side of the bridge. This play area is a bit unnerving when your children are very young because it is so close to the water, but when your children are a bit more self-sufficient, it is a great place to sit and enjoy the lake while they play nearby. (Notice the little girl chasing the ducks.)

North lake is beautiful.

Toy sailboating, anyone?

The gazebo is the lakes focal point.

Fine dining at the Waters.

Canadian Geese…

Children feeding the ducks…

A framed view of the distant mountains.

Woodbridge is a community of all ages.

The Senior’s Center is first rate.

Don’t forget South Lake. It is nice too.

South lake looking north from Yale Loop.

A community garden plot place in a retention basin.

There is a wide variety of activities.

There are a great many parks and pools…

This one is heated year round.

Anyone play horseshoes?

My “Irvine” day was full of playing with the family between taking pictures. This style and quality of life is what makes Irvine such a unique place. I thoroughly enjoyed creating this community profile.

Irvine’s Woodbridge: a great place to live.