It’s the edge of the world
And all of western civilization
The sun may rise in the East
At least it settles in the final location
It’s understood that Hollywood
sells Californication
Destruction leads to a very rough road
But it also breeds creation
And earthquakes are to a girl’s guitar
They’re just another good vibration
And tidal waves couldn’t save the world
From Californication
California is one of America’s cultural centers — for better or worse. Now that we have had our first nationwide housing bubble, it will be interesting to see if California exports one of its most pernicious beliefs: perpetual house price appreciation.
In the 1970s California experienced extreme price appreciation coinciding with the rampant inflation of the times. Like any financial bubble, many people made large fortunes, and many bagholders got burned. Once Californians realized they could drive up house prices and make large fortunes, the stage was set for repetition of the cycle.
This may be the most important point I have made on this blog:
House prices in California go up because Californians believe house prices go up.
Think about that for a moment. This simple fact eludes most people, and if there is anything I would like the readers of this blog to really understand it is how this works.
When people believe house prices will rise, it makes them want to buy. When they buy, they drive up house prices. Rising house prices convinces others that house prices will rise further. This causes even more buying. The cycle of rising and falling house prices in California is a completely psychological phenomenon.
It started in the 1970s, it was repeated again in the late 1980s, and it has been repeated again in the early 2000s. There is nothing magical about California real estate that makes it a better investment than real estate in other places. All California has is a pathological belief in appreciation that creates a high degree of volatility in the housing market. In my opinion, Houses Should Not Be a Commodity.
This uniquely Californian cultural pathology has been unleashed on the rest of the country. It will be interesting to see where else it takes hold.
Asking Price: $695,000
Income Requirement: $173,750
Downpayment Needed: $139,000
Purchase Price: $738,500
Purchase Date: 12/5/2005
Address: 42 Great Lawn, Irvine, CA 92620
Beds: 2
Baths: 2.5
Sq. Ft.: 1,824
$/Sq. Ft.: $381
Lot Size: –
Type: Condominium
Style: Other
Year Built: 2005
Stories: Two Levels
View(s): Mountain, Park or Green Belt
Area: Woodbury
County: Orange
MLS#: S512634
Status: Active
On Redfin: 4 days
From Redfin, “This home has it all; GREAT PRICE! BEST LOCATION! HIGHLY UPGRADED! OPEN FLOORPLAN! This home features gorgeous custom ‘old board’ wood flooring & berber carpeting. Gourmet kitchen w/ beautiful walnut cabinetry, ceasar stone counters & stainless steel appliances. Master suite offers walk-in closet, dual vanities w/ marble & Juliet’s balcony. Private courtyard entry opens to a separate den/office (which can be converted to a 3rd bedrm). Uppper level private deck w/ ‘picture perfect’ views & MORE. ..”
This home has all the UPPERCASE LETTERS AND EXCLAMATION POINTS YOU COULD EVER WANT!!!!!!!!!!
What is a ‘picture perfect’ view in Woodbury? Let me guess, your balcony looks directly into your neighbors bedroom, but at least the neighbor is hot.
Uppper?
And, of course, another gourmet kitchen…
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Ordinarily I would tell you about how much this seller would lose if they get their asking price ($85,200), but this seller is not going to get their asking price because of the REO in the neighborhood…
Asking Price: $639,900
Income Requirement: $147,475
Downpayment Needed: $117,980
Bank Purchase Price: $491,396
Bank Purchase Date: 9/20/2007
Address: 79 Winding Way, Irvine, CA 92620
Beds: 2
Baths: 2.5
Sq. Ft.: 1,850
$/Sq. Ft.: $346
Lot Size: –
Type: Condominium
Style: Other
Year Built: 2006
Stories: Two Levels
Area: Woodbury
County: Orange
MLS#: S513083
Status: Active
On Redfin: 1 day
New Listing (24 hours)
From Redfin, “Location, Location, Location! Fabulous Woodbury condo! Spacious kitchen with breakfast bar that opens to living room. Perfect for entertaining!!Gourgous tiled floors throughout. Master bedroom has it’s own bath with dual sinks. Nice patio in front. Close to everything and resort style amenities that include pool, spa, and more! “
Gourgous? Is that like couscous?
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I think the kool aid man must have visited JP Morgan’s REO department if they think they can sell this place for 25% more than they paid at auction.
It appears to me that our featured property seller is screwed. They are being undercut by this REO by $60,000, and based on the auction price of the REO, there doesn’t appear to be any market for these units at all. JP Morgan went to the auction and bought this unit for $491,396. There were no professional flippers out there who would even bid $500,000 and try to flip it for $575,000? If the pros don’t think this could sell for over $600,000, how is our featured seller going to get $695,000? No, I am afraid our featured seller is going to lose more than $85,000… a lot more…
IR,
Far be it from me to be a grammar Nazi, but there is a typo in the bolded “most important point you have made in this blog”. The word “Californians” should be a simple plural, not a possesive, (i.e. change Californian’s to Californians).
I agree with you that California real estate shouldn’t be a better investment than elsewhere. True, the prices are higher because there is more money here, but I don’t think that, overall, the amount of affluence here is increasing relative to the rest of the country.
Carl
—–
You are correct. I have fixed the error.
Excellent post IR. However (;-)…
Could be rest of the world. Certainly the United Kingdom and, to a slightly lesser extend, The Republic Of Ireland.
“Gourgous? Is that like couscous?”
HA!
As for exports, no, we’ve created this microcosm of insanity and will continue to baffle the rest of the world with our irrational views. =(
I sense another ROLLBACK on the bank property!
I must be drinking the kool-aid; this is the first red wall I’ve ever liked in any on-line real estate photo!
My guess is that there are a lot of mid level managers in banks thinking they are going to “beat the system” by buying back homes for the value of the first and then reselling them at a profit…..like the situation with the REO here. After this group of mid-level managers sits on the property for too long…. they will get fired. Then the next group of mid-level managers will be hired to clear inventory……about a year away.
These units…….$370,000 max.
Emotional pandering on an issue they obviously do not understand…
http://www.nytimes.com/2007/11/19/opinion/19mon1.html?_r=1&ex=1353214800&en=ed65a5977c208196&ei=5088&partner=rssnyt&emc=rss&oref=slogin
New York Times Editorial
Editorial
Keeping Americans in Their Homes
Published: November 19, 2007
The nation’s housing market is in a deep recession, and further declines in new construction, sales and prices are imminent. By the end of next year, falling home values, combined with rising payments on adjustable mortgages, tighter lending conditions and, in all probability, a faltering job market, will have unleashed mass foreclosures — estimated at several hundred thousand to two million — unless something is done to help keep Americans in their homes.
In a speech last week extolling the economy’s strength, President Bush made just one reference to the battered housing market, calling it “challenged,” and asserted that we can “deal with it” and other economic uncertainties, “particularly if we keep the taxes low.”
Fortunately, some members of Congress do have a plan to help.
Senator Richard Durbin, Democrat of Illinois, recently introduced a bill that would allow bankruptcy courts to modify repayment terms on mortgages for primary homes. That could keep an estimated 600,000 troubled borrowers in their homes, paying off their mortgages, albeit over longer terms, at lower interest rates or on lower principal balances.
The bill also undoes a longstanding injustice. Under current law, mortgages on primary homes are the only type of secured debt that is ineligible for bankruptcy protection. Owners of vacation homes, farms and commercial property can modify those debts in bankruptcy court. But not your everyday homeowner. Under any circumstances, that double standard should not be allowed. With a foreclosure debacle unfolding, it must be rectified.
There are worrying signs that the White House will oppose the reform. Opponents will likely argue that modifying troubled mortgages in bankruptcy may pose a threat to the legal sanctity of other contracts. That makes no sense. Contracts are modified every day in bankruptcy court. A mortgage on a primary home is not significantly different from other secured debt.
The mortgage industry is already warning that granting bankruptcy protection to most mortgages would raise borrowers’ costs. That doesn’t make much sense either. The total economic costs of foreclosure are much greater than bankruptcy-associated costs. The cost of making sound loans could drop if the Durbin bill became law.
Senator Durbin’s reform bill must move through the Judiciary Committee, which has jurisdiction over bankruptcy issues. The committee’s chairman, Senator Patrick Leahy of Vermont, should schedule a full committee hearing as soon as Congress returns from the Thanksgiving break. There is no time to lose.
The insanity continues……
Thanks for another great example of how crazy this market is, IR.
OT- but I saw the following new listings yesterday. 2 houses in TR listed on the same day, same street (1 house apart), same lot size, same “comprised location” (both back to Turtle Rock Drive)
for $1,000,000 DIFFERENCE
Best part- both have the same screwy realtor agency!
Check them out:
http://www.redfin.com/stingray/do/printable-listing?listing-id=1300652
http://www.redfin.com/stingray/do/printable-listing?listing-id=1300651
WTF!
Maybe not IR. Can you imagine a home debt “relief”in bankruptcy on par with the Credit Card debt relief rework they did a couple years ago?
The courtyard entry on Great Lawn is nice. Although it looks a little busy for such a small space. A little overboard on the red walls, particularly in the bedroom, unless the guy is a bull, then I can see it working.
“There is no time to lose.”
If “they” don’t act soon people who weren’t qualified to purchase homes in the first place will need to become renters again and average families might actually be able to afford starter homes again…
Typical of our current representation. They don’t even bother trying to understand an issue. All they see is a potential sound bite.
Well, Bank bought this at $265/SF and is trying to sell at 346/SF, are banks on koolaid as well?
Question:
“are banks on koolaid as well?”
Answer:
Without question, yes. You don’t think mindless greed is a habit so easily changed, do you?
I didn’t think so.
A lot of people think there is some secret silver lining here just waiting to develop or be legislated into existence. What they either aren’t bright enough to understand or choose to ignore (for a number of reasons) is that the downturn is a cure for itself and it’s a necessary one. “Saving” anyone only screws up the system, prolongs and deepens the pain along with proving, once again, that fiscal irresponsibility is ok.
The one lesson we learn from history is that we never learn from history, especially when the lesson is one that is painful to us.
I remember the 70’s quite well. That was a time when families made the transition from a single wage earner to two wage earners. This was done to faciltate the buying of already expensive housing here in California. Incomes did not double but they did typically go up 40 to 60 percent. This had a dramatic effect on home pricing and added much fuel to the rapid appreciation of the 70’s in California. I don’t think we have this fundamental change happening this time around; and I think most people forget this fact.
Completely anecdotal, but Irvine does seem to have a healthy number of homes in which multiple generations live together. This may be more popular in recent immigrant families. Also, I seem to know a lot of people who are renting rooms in their homes in order to pay the mortgage. Is this another possible cultural shift that inflates home prices? Maybe, but it probably has a minimal effect.
Hmm, I actually liked this place. I’ll have to keep it in mind when it’s available for under #150 per foot.
No problem! We’ll just need to create the three income family so the insanity can continue unabated…
We used to have that: man, woman, and house. All three were earning money spent by the family each year.
Ironically, just having this bill could actually reward the banks more/screw the homeowners longer. If it turns out to be a red herring that keeps deperate people working 2 or 3 jobs to trying and stay current on payments a little longer, hoping for the bill to pass before throwing in the towel … that’s more payments in the banks pockets before the bill is defeated and people give up and mail in the keys.
Is it just me, or do the “new reduced” prices STILL seem crazy, even the REO ones? If you mark down a two-bedroom house from $730,000 to $675,000 it is STILL outrageously priced, in my humble opinion.
What if you take 7.5% off of the price of a Ferrari or a Rolls Royce? Does that make it a bargain?
I think the market has a lot more to fall before prices get even half-way sane.
The more expensive one is quite a bit larger than the less expensive one, but the bigger house actually wants more on a per SF basis. When they get some pictures up, these two properties will make a good post.
Thank you.
It is typical for communities near an unversity to have boarders due to the demand for housing. UCI had has a shortage of housing, but it is much better nowadays, I heard.
Furthermore, with the various Asian groups in Irvine, it is common for them to have several generations in the same house due to culture reasons.
I think it is interesting that the bank repurchased the home back at $491k why didn’t the borrower try to sell the property for $500k before they let it foreclose? I wonder if $491k was only the full amount on the first deed and they just give up on the second? Hmmmm…
That could be possible when Romney gets elected, if you catch my drift…
Can you have an REO on a bank REO?
Would this be an “REOREO”… or just a plain OREO?
Come on down to our OREO. Free Oreos for the first 30 visitors.
Actually the prices make sense. The larger house has been rebuilt and you could expect it to be in much better shape all together with up to date design.
The cheaper house is a 40 year old house that -IMHO- soon will become a tear down.
No. These particular prices are not crazy per se. What’s the crazy is that the small house wants so much money per square foot.
I would think that at the bottom of the market the larger house will eventually from for 350 or 400 per square foot. The smaller house will go for 300. Less if it still has the popcorn, original formica, lynoleum floors and those cheese square ceiling lights. Watch out to see if it has those “hanging globe” lights in the kitchen. If they do, then cut the price down to 275 per square foot because that’s an indication they’ve done nothing to the house.
And, I think I know about the new house. I think it’s the one with the porch. It just got built two or three years ago. I wonder if they are sitting on a time bomb loan that they used to fund their construction.
I hold the line at renting when it comes to gypsies.
I only allow gypsies in the garage
Catholics, Jews, Chinese, Persians, Orthodox Zoroastrians, Cholos, Batos Locos, Eastern Zambiwans, Merovingians, whatever are no problemo. I give them the run of the ground floor. They’re all welcome in my gourmet kitchen so long as they remember that the fire ring belongs in the atrium, not on the wood kitchen floors.
But gypsies in my kitchen? No way man, no way!
Those are the kind of things pictures would reveal. Although, I still have to imagine the larger, updated home is still a bit overpriced.
Perhaps there is less here than meets the eye.
I think the bigger home is overpriced because is on the Broadmoor, on the outside of the TR Drive loop and has no view.
There are homes on The Terrace that have views to kill for that run for the same figure. Sure, they are smaller (2800 sq-ft) but have 3 car garages and a primo location.
Besides, for this kind of price, they should have gone to FIVE bedrooms. To put only four bedrooms on this size kills them.
That plus the fact that -if this is the home I’m thinking of- they have maximized their lot and lost their atrium.
So I went to a couple of open houses this weekend and my annoyance with realtors only increased. One house had a slickly produced brochure on the table, titled “The Real State of Real Estate” by … guess who? … Gary Watts. C’mon. Does anything embarrass these people?
As I wandered around another house, the realtor asked me what “price range” I was looking in. I told her (only because one glimpse of the house revealed that it wasn’t a good fit, so there was no harm in talking to her). The top end of my price range was about 20% less than the asking price of the house. Her response? “Well, if you’d like to see houses in your price range, let me know.”
I’ve heard that so many times before and I’ve always just bit my lip. This time I responded. “No, thanks,” I said, “I’m not interested in looking at houses that are listed in price range, I’m looking at houses that are going to sell in my price range.” She didn’t talk to me after that. Her house has been on the market for 150 days with no major price reductions. Who do you think understands the real state of real estate?
“I’m not interested in looking at houses that are listed in price range, I’m looking at houses that are going to sell in my price range.”
That is great! I’ll have to remember that one.
I wonder somtimes what is really going on. There can’t be THAT many stupid people in the world. So, Mr. Bank, if nobody wanted your REO at $491,000, then the fair market price must be less than $491,000. Why are they listing it for $640,000? They can’t really believe it appreciated $150,000 since they took it back on the courthouse steps.
Is it possible that the bank knows it’s worth less than $491,000, but by having some appraiser say it’s worth $640,000 and they list it at $640,000, they can keep the “asset” listed on their books at $491,000? I mean, if they listed it at $380,000 to move the inventory, then I guess they’d have to write it down to “lower of cost or market,” which would be $380,000. So is this all a big accounting fraud by the banks? They know it’s worth less than $491,000, but to keep the books looking tight, they list it at a way overpriced value and let the losses keep mounting as the market continues to fall. If I were the CPAs, I’d look long and hard at their asset valuations for REO lest I end up like Arthur Anderson.
Let’s consider child’ labor …
I can’t help but wonder if maybe the bank manager’s in charge of approving the initial and subsequent asking prices for REO are limited by some bureaucratic formula for determining an acceptable asking price? They may not be able to offer REO properties for what they think are market prices. Anyways, just a guess.
I appreciate your input tonye. You have a great grasp on the market.
I imagine they have some kind of formula for beginning asking price and subsequent reductions. However, I have never seen one priced so far above their purchase price.
I don’t work in the REO dept, but banks have the utmost interest in keeping prices high. If they started lowering values, they instantly screw over existing borrowers. They will also be lowering the value of the very same asset that secures the investment vehicles sold on Wall-Street.
Banks are owned. There is no long-term solution other than marking-down the values of assets. There is no way to “spin” this in a positive light. This is unavoidable.
This multi-trillion dollar ponzi scheme was based on price appreciation. Regardless of rates, guidelines, or credit–if values are falling, the game is over. Do not pass go, do not collect $200.
…or Australia, or Spain…
many of the comments (esp. the later ones) the NYT posted on this article were also critical, emphasizing that prices inflation itself is as big a problem.
Good for you. I always feel like squeezing their eyes out when they try to insult me by insinuating that I can’t afford what I’m looking at.
I too suspect this.
This editoral made me laugh. Keep Americans in “their” homes. “Their”? When you buy with zero down, how in the world can you think you own it?
Ant, I don’t think Prop 13 is a scam, I think it keeps older people and retirees in the house they’ve bought. Instead of property tax increases that would exhaust some retirees pensions and eventually (possibly) force them to sell, the tax bill remains steady and the people who worked hard all their lives can stay put without being “priced out” by prop tax.
There are enough new buyers paying prop taxes to cover the older folks. I personally like the idea.
Now I want to know where all the “new’ property tax money has gone….shouldn’t we be rolling in it ?
Quick example. Where I’m from in CT a Connecticut River front property sold for…say 100K 20 years ago. Prop tax bill then was probably pretty cheap and affordable. Now Joe Retiree is still in the same house but has seen his taxes grow to $30,000….because he has a “view” lot. Yes, we pay more taxes for the view in CT. Isn’t that ridiculous ? So, poor 75 yr old Joe’s COLA (if he even has one) hasn’t kept up with the times and he is forced to sell his beloved home. I think it’s a crock. (I only state this example because it happened to my friend’s grandfather).
“…buying at a top can incinerate a lifetime’s worth of savings.”
Regardless of where fundamental real estate values are, you shouldn’t purchase a home > 2.5 times your household income and your total housing cost shouldn’t exceed 28% of your gross. Your home can lose 50% of its value, but you’ll still be able to invest in your family’s future. It’s certainly an opportunity to spend much less on housing lost, but you won’t “incinerate a lifetime’s worth of savings.”
It’s not hard to have a grasp on the market when you’re sitting on a ton of equity and even at the trough I will still be fine with a nice 30 year fixed.
It’s a matter of being realistic about your home. We look at it as our home, nor an investment account.
And I have lived in the TR ghetto (!!!) since ’87.
Now, my concern is my 401K. Yikes….
Actually not all RE agents are so clueless. I have met a very few that are very realistic about the market.
One is making his living off managing leases.
Another has made and saved a lot of money. He’s got a few houses being shown but he told me that he didn’t think they’d sell unless the homeowners dropped their price. Mostly he figured that he had to do something with his time and keep a profile in the neighborhood.
Of course, both of them are very long term agents/brokers. Not fly by night and not emotional at all.
The problem is that almost nobody purchased a home under those parameters during the bubble. If they would have, we would not have had a bubble.
People were borrowing 7-10 times personal income using liar loans with 50% DTIs. Even now there are lenders out there willing to loan 5.5 times income.
Please, Trooper of course Prop. 13 is a scam. How is it fair that some longtime property owner next door pays significantly less in property taxes simply because they locked into a low tax basis years ago. Both use the same services but the new comers subsidize Joe Retiree. Prop. 13 also lowers the turnover of the housing stock because people don’t want to move to lose their artificially low tax basis.
Prop 13 encourages people NOT to speculate on their homes. It’s what encourage people to treat their houses as homes not assets that are flipped every two years.
It’s no a sham but a good law that protects those who do no wish to speculate and encourages stable neighborhoods.
We’ve been in the same house for over 20 years. We liked the area so we rebuilt in the same spot. And, even after the county raised my appraised value ( the county appraiser was very mellow and nice because I opened my construction cost books to him ) our yearly taxes are under $3800 per year.
Yep! That’s not a typo. 5b/3ba rebuilt home with Caesarstone.
All Hail Caesar in his castle…. err… home. ;-D
it gets better….the community is called……Treo.
Prop 13, that’s the real scam.
Scam. Elsewhere, I have seen this problem solved by the older homeowner pay a lesser amount of property tax with the remainder deferred until sale of the property, at which point the city collects the tax due from the sale. That seems a lot more fair to everyone involved.
I’ts a double stuffed OREO 🙂
I remember the 70’s quite well too. It was the time when I was given a subscription to Ranger Rick!
Great pictures in the magazine…
This uniquely Californian cultural pathology has been unleashed on the rest of the country. It will be interesting to see where else it takes hold.
I agree with this.
No. Prop 13 punishes those who are habitual resellers.
When you first buy your house you do pay market rates but the longer you stay in place the more advantage you get.
The fundamental reason for prop 13 is that people that see their houses as HOMES and not an as investment vehicle should not be forced to pay for paper gains.
Could you imagine the hassle and logistical nightmare if those of us who did not participate in the bubble ( the vast majority ) now had to go back to the OC Assessor and request lower assessed values?
As the Chairman of Arizona Tax Revolt and both an expert in matters of property taxation and a refugee from Irvine, let me say that Prop 13 has been a very good thing for California property taxpayers. Remember that it is 29 years old, older than many buying their first home today. Prop 13 isn’t the enemy, inflation and excessive government spending are!
In other states and in California prior to 1978 when Prop 13 passed all property owners would see dramatic tax increases that they had no way of budgeting for. Property tax increases often tracked the housing market which had double digit in ceases year after year. Government expenses on the other hand tracked the cost of goods and services at 3 to 5%. After a few years this disparity threatened the ability to keep your home.
Prop 13 put a stop to people losing their homes to the tax man. It chose to put a larger burden onto the new buyers but at least they understood this before purchasing their homes. They had the ability to pay.
If you are tired of the traffic and crowds in Southern California, Arizona may be a better choice. Though today we do not have the protections of Prop 13. Arizona Tax Revolt http://www.ArizonaTaxRevolt.ORG has improved on Prop 13 by limiting government revenue with levy limits. This freed us to establish a baseline valuation system where the new buyers would pay the same tax a s the previous owner. Those buying new homes would pay the same LOW tax as those with a similar home in the community.
If you choose to stay in California and are not sure whether to support Prop 13 just ask yourself if you are on the side of the over-taxers or the overtaxed. If you can not afford a home in California consider Arizona and when you cross the Colorado River please volunteer to qualify the two Arizona Tax Revolt – Property Tax Rollback measures for the November 2008 ballot.
Marc Goldstone, Chair.
Arizona Tax Revolt