The damage is done
You’ve had all your fun
The party’s begun
The enemy has won
Walking off a cliff again
You’ve used all your tricks
Your lies don’t stick
You don’t want to admit
You’re done
Walking off a cliff again
Walking Off a Cliff Again — The Mint Chicks
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Isn’t this what the market is doing: Walking off a cliff again? The realtors have used all their tricks, and their lies don’t stick, and the sellers don’t want to admit, the market is walking off a cliff again.
Today, I am introducing a new line in the property data: Monthly Equity Burn. Since prices have dropped more than 10% in the last year, and since this trend will likely continue for the next 2 years, anyone who buys now will see a 10% per year decline in the value of their property. If you divide this 10% by 12, you arrive at the monthly loss of equity any buyer will endure for the next 2 years. Look at it as part of the cost of ownership, or call it “equity evaporation,” but it is the reality of our market, and buyers should be educated to its presence and its effect.
Asking Price: $449,900
Income Requirement: $112,475
Downpayment Needed: $89,900
Monthly Equity Burn: $3,749
Purchase Price: $638,000
Purchase Date: 10/31/2005
Address: 20 Edgestone #17, Irvine, CA 92606
1st Loan $504,000
2nd Mtg. $126,000
Downpayment $8,000
| Beds: | 3 |
| Baths: | 2.5 |
| Sq. Ft.: | 1,652 |
| $/Sq. Ft.: | $272 |
| Lot Size: | – |
| Type: | Condominium |
| Style: | Contemporary |
| Year Built: | 1984 |
| Stories: | Two Levels |
| Area: | Walnut |
| County: | Orange |
| MLS#: | S520322 |
| Status: | Active |
| On Redfin: | 1 day |
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New Listing (24 hours)
Light and bright unit, this one is clean and ready to live in. Bring the bank an offer today.
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The lender is really getting killed on this one. The owner (bank renter) lost their $8,000 downpayment, and assuming the bank gets their asking price and pays a 6% commission, the total loss on the property will be $215,094 of which the lender will lose $217,094. Look at the size of this rollback: the asking price is 29.5% off the 2005 purchase price.
Here is a 3/2 in Irvine with an attached, 2-car garage going for $272/SF. Does $200/SF seem so far away?
Yep, the lender is getting the short end of the stick here but here’s an idea: MAYBE the lender could have used better underwriting.
If they lend 500k to someone that has no skin in the game (8k is only1.6% of the value at purchase) what makes them think they are going to make mega bucks out of this?
Or maybe they didn’t care since brokers, realtors, and lenders where all getting paid fees for generating loans without bothering whether the borrower could or couldn’t pay.
In any case, looks like loan orginators may be in for loads more of equity evaporation in the near future
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Is $2200 the fair rent for this aged 3/2.5? If so, then $2200xGRM @160=$352,000, which is at 78% of asking price of $449.9k.
This is $213/sf vs. $272/sf asking.
8,000$ down on a 600K apartment – THAT IS RICH.
I love it!
Assuming the inside is in good shape, I think it will sell pretty quickly. Keep in mind this is a townhome with attached walls – at first I thought it was a SFR.
I think low interest rates will start to put a floor on prices in the more desirable areas. The floor I am talking about is 30 to 50% off peak prices.
I would offer 380k to the bank and see if they blink.
My question is –
The MLS listing says “Total Assessed Value: 650,000$”
Isn’t this sort of drawing attention to the big elephant sitting on the living room couch?
Isn’t it time that all of the “appraisal” hustlers be thrown out with the bath water and we replace them with an actually neutral organization rather than one that acts like a puppy dog waiting for their master to throw them some scraps? Whenever you hear the word “appraisal” – think “PFFF!”.
These people ask “What does the bank/realtor think this place is worth” rather than “What is this place really worth if the banks are not handing out free money to anyone with a pulse and people are not engaged in a Tulip-mania frenzy.” All these idiots appear to do is look at what a couple houses in the neighborhood sold for and then pull a random number out of their ass. I could DO THAT.
Worthless. I say “Gone with em!”
Hmm, let’s say the average bubble buyer has been in for about 5 years. That’s 5x12xabout $1500 a month=about $100,000. Some places, the runup has been going for 10 years. So the bank gets $100,000 to $200,000, then they get a house-almost break even.
Also, giving people money with next to no money down during a historic runup-they deserve some pain for ignoring history.
You’re forgetting that CA assessed values are based on purchase prices + Prop 13 limited annual increases, not on any “appraised” value. Other than as it relates to how much a lender will loan, in almost all cases appraisals have nothing to do with assessments in California.
Vincent…
Projections on a floor are based on some idea you have that there is an equilibirum that will be reached between the numbers of available buyers and sellars.
In reality, the sellar pool is expanding to unheard of levels while the potential buyer pool keeps contracting.
Therefore, no equilbirium can be reached no matter what the interest rates and prices will continue to fall for the next several years.
More importantly, they fail recognize what the market is starting to recognize. That it is a down market.
How expensive does your rent need and how long does your timeline need to be such that you would this place?
Are you going to live in it the next ten years? Five years and then turn it into a rental?
Think it through, the buyers starting to. That is the point behind IrvineRenter’s equity burn. If you can rent this place fo $2200. Why buy when you need $45,000 to put down, another $5000 for closing costs, $15,000 for reserves to get a payment of $2200 plus $400 for taxes, plus $200 for HOA plus $3700 of lost equity?
At first blush, you think it’s at breakeven rent, today with 10% down. But by next year, that 10% down will be vaporized.
I read that there are an extra million homes nationwide that are currently “unoccupied” compared to a year ago.
How much lower can we go? A long way it seems.
IR wrote, ” Does $200/SF seem so far away?”
No.
Is there a way to speed up the decline to $200/sq ft. The wait is dragging out too long!
LOWER THE PRICES, PEOPLE!
With only *TWO* pictures of the outside, it doesn’t seem they’ve put that much effort into selling the place.
I think that as more bank-owned places hit the MLS, this will become the norm. Do the banks have the time / expertise / will to “sell” a place with good photos, good descriptions, etc. online?
I finally found a home that sold in the zip code I am watching closely. It has been over three months since anything has sold. The home that sold was of course bank owned. The bank had the home priced for nearly 100,000 less than anything else in the neighborhood and accepted an offer for 50,000 less than the asking price.
One or two more comps like this and the whole zip code should fall fairly quickly.
From following this blog, it seems that banks never accept short sales, so then they have to foreclose and wait a year trying to recoup their loan before their risk mitigation process steps in and starts lowering the price.
So, to speed up the process, if banks were forced to accept short sales, then everyone could move on. It’s like ripping the bandage off; get it over with.
Of course, there will be some fraud. Perhaps if the bank doesn’t like the short sale, they could match the price.
The potential for fraud is exactly why the bank procedures are what they are. You could just see friends short selling their houses to each other to reduce their mortgages, or husbands selling to wives, etc.
Dear IrvineRenter,
I like the new “equity burn” stat, but it can be misleading if you don’t think about leverage. If you put 20% down and finance 80% with fixed rate debt, then your 10% annualized equity burn is really 50% equity destruction. After two years, your entire equity is GONE. If you only put down 10%, then it is all gone in one year. Still a losing bet to buy anything. Knife catchers beware!
Hmmm talking about fraud… some banks really can’t complain too much about their customers committing fraud when they do this:
http://www.nytimes.com/2008/02/06/business/06wachovia.html?_r=1&ref=business&oref=slogin
from today’s NYT
“Last spring, Wachovia bank was accused in a lawsuit of allowing fraudulent telemarketers to use the bank’s accounts to steal millions of dollars from unsuspecting victims.
… newly released documents from that lawsuit now show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes.
… Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators. ”
Yuck!
“One company alone paid Wachovia about $1.5 million over 11 months, according to investigators.”
But the Wachovia shareholders were well-served.
Is it just me or is redfin not showing past sales prices anymore? I always enjoyed looking at the ’95-’01 sales prices and dreaming…
It is still there. You need to scroll down to the bottom, they have moved it from the sidebar on the right.
I suspect it’s bureaucratic inertia, too. No manager wants to be the one to sign off on a loss.
Media:
Home builders offering “price protection”: If the cost of comparable homes drops before closing, you get the lower price.
http://online.wsj.com/article/SB120225142659345415.html
More details, what zip code…what was the bank asking ?
I believe they will loosen up as soon as the bank sees that they will continue to lose money for the next few years. Right now they are holding onto the property and carying it for “investment” on their books, not wanting to take the loss and hoping the market will turn around.
It’s kind of like being the “house” in Vegas, they are trying to wait out the actual buyers. At some point they will give in and take whatever they can get, but it is too early for that.
Didn’t Best Buy refund you 110% of the difference if you found an item cheaper elsewhere?
If the price of comps drops any significant amount before closing, and you don’t walk away, they may as well charge extra; they’re dealing with a fool at that point.
As far as I’m concerned, anything over $100k/sqft is a rip-off for this place, although I’m sure a buyer would step in well before it got below the $200/sqft level, depending on when the bank drops the price. Sooner or later we’re gonna see fire sales, the question is when.
How selfish of the bank to demand a down payment of $8,000.00! Or perhaps these people had bad credit and the bank just wanted to “reduce” their exposure?
I can think of one way. Change the bankruptcy laws so that mortgages can be modified.
With other types of undersecured loans (like your car) the bankruptcy court can determine the amount of the loan which is secured (the value of the item securing the loan — e.g. what you could sell your car for). The remainder of what you owe becomes unsecured debt.
So, for example, if you bought a car and still owe $25,000, but the car is only worth $15,000, then $15,000 of what you owe is secured by the car and the remaining $10,000 becomes unsecured debt which you can discharge.
Right now, mortgages are exempt from this rule. If Congress were to change the law and allow mortgages to be modified you would see prices drop much faster. Bankruptcy would become a viable alternative to foreclosure, walking away, treading water and hoping for the best, etc.
Yes, the banks would wind up holding the bag and passing the costs along to their responsible customers, but that will happen anyway. And the sooner prices correct the sooner the market will recover.
I would suspect a good amount of the inertia is due to the paucity of comps. Since it is so early in the downturn, no one wants to be the first to sign off on a short sale when that sale sets a new low and all the sales prices 6 months ago were so much higher but when your short sale price matches 10 other recent sales in price and an independent appraiser agrees with that price then the bank will have no choice but to sign off it.
This would have been a good deal several months ago when you were buying something that wasn’t completed, but I don’t think that’s the issue anymore, so at most they are at risk for 1% drop for a 30 day escrow.
http://www.redfin.com/stingray/do/printable-listing?listing-id=1362725
>> IR wrote, ” Does $200/SF seem so far away?”
>> ice weasel wrote “No. ”
In fact, I’m not sure. 200/SF may be not too close.
This one house is an exception, and not all house for sale in Irvine are foreclosure.
Most of the houses (not condo) which are sold right now are more in the 300-340$ /sf.
It is 15% lower than a year ago, so 200 is at least 3years ahead, unfortunatly.
Prop 13 doesn’t prohibit assessed values from being lowered. In my experience, the county assessor has never taken the lead here and I had pay my bill then an file appeal during the last downturn to get my assessment lowered. Property values for assessment purposes are fixed by date (which was last summer for the 07 roll) so it is unlikely property values for 07 will go down much because there aren’t enough comps yet; however, 08 looks like a good year to get your assessed value lowered because there will be a lot of lower comps by this summer!
How much do you love Redfin’s new format? Price history, neighborhood comps, dates of listing updates, overhead maps…pretty impressive.
Because change in asset value over time is always linear. As a matter of fact, curves and polynomials and asymptotes and integration are all lies perpetuated by perverse mathematicians.
200 sf HERE WE COME, like I said many months ago and got laughed at by some. Now dare I say a place like this will go for 175 sf at the very end
But if it continues to decline, not linearly but exponentially at 15% per year, going from 320 to 200 takes 2.9 years.
log(200/320) / log(1-0.15) = 2.89
Of course the APR of decline may increase. But if the current value is correct and the decline rate doesn’t change, the apx. 3 years time follows.
Note: I used 320 in my calculation as it’s the midpoint of the given range for current pricing. 300 would give 2.5 years.
The key point I should make is that exponential decay is slower than linear. Consider the rate of 50% per year: after two years, the exponential decline is down 75% from initial amount, but the linear decline is down 100%.
What do you want to bet that whoever approved this was being bribed by the scammers. If this was official policy of the bank, I rather think we should all start stuffing money in the mattresses.
…and what has happen in the past will continue to happen in the future 😉
Banks will not reduce prices, except sporadically, until forced to. That probably means that they need money desperately, or that the bank examiners force them to.
No bank officer likes losing money for the bank; he/she would fear being fired for doing so, even if it clearly meant losing less money in the long run.
On the other hand, perhaps the bank regulators will be soft on them fearing that “cascading cross defaults” of Nouriel R will be triggered by a vicious declining cycle.
“The future ain’t what it used to be.” Yogi Berra, via The Black Swan.
The problem is that, unlike cars, the resale price–in nominal dollars–of the house is likely to go up if held for the full term of the loan. Why should a borrower who files bankruptcy get a (potential, nominal) windfall when selling the collateral?
So, if the law were changed, it would be reasonable for the cramdown to be accompanied by a due-on-sale note in an amount capped at the lesser of the after closing costs gain or the amount of the reduction in the mortgage plus interest.
The upshot would be further stretching out the negative effects of the bubble, but would (1) allow many people to stay in their homes b/c of much lower payments, (2) prevent speculators from gaming the system by elimnating their upside from holding on to the houses, (3) give the lenders something of at least dubious value for their cooperation.
Ooooo, genius dripping sarcasm! Awesome
$100/sf is here today in the OC/SD commuter communities in the IE.
Let’s repeat. $100/sf has landed. That sucking sound you hear is the financial blackhole eating equity. That home in NW Pointe that some are hoping to fall from $1.3M or more is $300K today in the IE.
Sure, it’s the IE. But more and more employers are going virtual and a million dollar price tag difference creates a giant incentive to change.
Pretty sparse description too. “Clean”? How enticing.
Thought and question on inventory.
In reviewing the handy Ziprealty graph (thanks again Zovall), I’m thinking that Irvine’s real inventory right now might actually be close to equivalent to last year’s number at this time… New homes, which usually do not appear on MLS, would have contributed much more significantly to the real inventory figure in February 2007. With many of the builders stopping construction or slowing it down considerably, there is less of an effect of this stealth inventory on the real Irvine inventory number.
How can it be that inventory, which is only 10-12% higher in terms of MLS listings year-over-year and probably only 5-10% higher if you consider less new homes are available today vs. one year ago, is not significantly greater? Between then and now we had a credit crunch, massive spiking in jumbo rates, changes to lending standards, etc. Shouldn’t all of this have served to significant increase our inventories year-over-year?
And as a follow-up to my own question, if the past year’s events haven’t resulted in a big spike in inventories, what will be the catalyst to increase them signficantly in 2008? We all talk of big price declines this year, much greater than last year, but how can those be achieved if inventories are very comparable and mortgage rates are actually lower?
Despite the slowdown in new construction, I don’t think their inventories have declined. I wish we had good information on the number of expired listings that went unsold last year. During the rally, no listing went unsold. I know from the large number of properties I profiled last year, that a great many went unsold. The real stealth inventory is the group of sellers who have given up. It is like unemployment numbers: they don’t count the ones who give up. And even if the inventory numbers are not much higher, the sales rate is 30%-50% lower making the time on the market much higher.
A big spike in inventory will come when the banks list all of their REOs and people begin to panic.
So what do you think will be the catalyst to bring the give up sellers back on to the market? Can these people wait it out? I know if I tried to sell last year, didn’t, and saw a realized 15-20% decline in my home’s value, I probably wouldn’t come back this year just to get even less. I’d probably have a bit of “well, I missed out on selling before the worst of it” syndrome.
The significantly slower sales rates in 2007 seems to have resulted in only 10-12% more places on the market today, and that with a big increase in REO activity during 2007. Do you think sales need to slow even further to create a significant enough inventory overhang to crush prices?
I guess it seems that without a much greater # of months inventory on the market, and pretty darn low mortgage rates, that the pace of price declines in the near term may slow down… I was hoping for acceleration of declines, not the other way around. True recession with rising unemployment would obviously change that as there would be people that absolutely had to sell.
Just for fun I was checking home prices in Corona and neighboring cities, even though I doubt I will ever live there. I saw a 6000sqft house for $500k and about fell out of my chair. That’s one of the places I don’t think will depreciate much further… if it does I’ll buy some houses, scrap them, and sell off the building materials for more than I paid for the house.
The conditions you are describing is what the market experienced at the beginning of the prior downturn. The big difference this time is going to the be exotic financing that forces many people into foreclosure. These foreclosures have not hit the market in full force. The initial round of resets is just now occurring, and then there is the delay between reset and foreclosure and listing. When these really start to hit the market, inventories may not rise much, but aggressive price cuts will increase volume to get rid of the foreclosure inventory. I think when people see this begin to happen, if they have any financial distress, they will panic and try to sell before it gets worse.
” “I stopped paying my mortgage in October, after shelling out about $70,000 in interest [over 15 months],” said one borrower, David, who doesn’t want his last name used. “Now, I’m just waiting for the default notice.”
The Los Angeles-based writer bought two properties in Hancock Park, west of downtown, using no-down, interest-only mortgages in 2006. He paid just over $1 million for both.
David had planned to sell them quickly but got caught in the slump. Soon his interest rate will jump by a few points, and his payments will go up by several hundred dollars a month for each place. He figures his properties have fallen in value by at least $60,000 each. ”
quoted from: http://money.cnn.com/2008/02/06/real_estate/walking_away/index.htm?postversion=2008020610
Ok, so this was probably more appropriate for yesterday’s post…oh but the stupidity!
I think your question is really “what will cause liquidity?”
REOs, job losses, relocation, death… Someone probably addressed this here at some point in time. Or is that not what you were getting at?
In Hancock Park of all places; what a shithole. I can’t wait for all of the turmoil to hit LA in force. I really do think we’ll see a lot of stuff in the bad areas up here go for 80% off of peak. You can only charge $1mil for a 2/1 in Culver City for so long. Irvine is cheap… 😉
And don’t forget the pent-up demand from sellers.
Sellers are going of market not because of sales, but becuase of failure to sell. They’re giving up. At the same time, with the high inventory, potential sellers aren’t even listing.
As soon as inventory drops, the inventory will be replaced.
Offering “price protection” can cause developers more trouble. Some state Insurance Commissioners claim that these “protections” are insurance policies that must be written in full underwriting compliance with state law and that those offering them be licensed as insurance brokers.
Relocation, divorce, and death happen every year. There was plenty of that, along with lots of subprime REOs to push inventories last year. Job losses too, although not at a very large scale.
What I am getting at is given where we are today, will inventories go up enough only to drive a slow, orderly decline in prices or will there be a more explosive and capitualitve nature to inventories and housing price in 2008?
I’m beginning to think the former is the case, unless there are gobs of REOs with the lenders that aren’t listed yet. The REO wave from option ARM resets probably won’t hit the market hard until 2009…
I heard somewhere that it takes an average of 9 months for an REO to hit the market from the point of NOD. I heard 6-18 months from another source. Not sure which one is correct, but I’m willing to bet the longer of the two given that the banks are very hesitant to take losses.
zaleriana – so, you are arguing that it wouldn’t be fair, because real estate always goes up. I disagree.
Further, this isn’t about fair. Try to make everything in life fair and all you’ll do is muck everything up worse than it already is. This is about making a problem go away, and allowing mortgage cramdowns is the fastest way to do it.
Less buyers
For non-estate homes only: Inventory in Coto went down by six properties in Dec. The number of sales was less than half that of November, from 12 to 5. Price per sq. ft. decreased. So even as sales decreased dramatically, prices decreased, as did inventory. It does not follow that inventory increases are necessary for price or sales decreases.
Yeah, this whole apparatus is going to fall off of a cliff pretty soon. Call it a “cliff house.”
You can many tanks of gas with a million dollars.
all i know is that i spoke to the agent and this one has accepted an offer at full price. but they are accepting back up offer. agent said they have 12 offer in back up. what the heck? is this really that good of a deal for a bunch of people to flock to it?
Redfin shows 18 other properties with 3 bedrooms and 2+ baths in Irvine for under $450K.
Three of them are over 1600 sf, six are over 1400 sf.
Wow. If this is true, Wachovia is going the way of Arthur Anderson.
I have to admit, I really love these punishing price declines. I love it when the banks get pounded, when those who own the mortgage notes get screwed, when the speculators get burned.
Watching these prices fall is so attractive to me it’s embarrassing. It’s almost like I’m cheating. All the crap I went through people telling me I was an idiot because I wasn’t buying a home for my burgeoning family.
My wife and I dodged the housing Ponzi scheme because we saw it for what it was. What was once inevitable is now happening – the overheated train is coming off the rails. Good riddance to the housing bubble!
Hancock Park is not shithole. Surrounding areas maybe, but Hancock Park has got some beautiful old character homes on large lots all in a family friendly neighborhood that you won’t find in OC.
But you need to get the lenders to buy into any resolution, too, or it won’t work. And I’m not suggesting this happen in BFP short sale transactions, but where someone wants to keep the home, but not pay a mortgage that’s 150% of the “value” of the house.
And I am most definitely NOT “arguing that it wouldn’t be fair, because real estate always goes up”. I am arguing that (1) the dollar (basically) always goes down and (2) that it is unreasonable to expect lenders to give away those (inflation-created) dollars to people who are not selling their houses for 20 years. Why is the following situation reasonable: Bought house with 100% financing for $750k, house now worth $500k, bank agrees to reduce the the note to $500k. In 15 years, borrower sells for $775k (=3% annual appreciation on $500k for 15 years). Why should the borrower get to capture that gain (phantom tho it is)?
This one got pulled from Redfin. Anyone know why?
“Why should the borrower get to capture that gain (phantom tho it is)?”
Why shouldn’t he? Seriously.
You’ve lost me completely on the part about lenders giving away inflation created dollars. How is it possible that the sale price in 20 years has anything to do with the lender?
Anyway, you won’t get the lenders’ buy-in on anything except a bail out. In many cases they no longer own the loans anyway. And the investors who bought the tranches won’t help with any bail out because the A tranches benefit when the lower tranches get burned.
How is it possible that the sale price in 20 years has anything to do with the lender?
The original loan was $750k. The crammed loan is $500k. The sale price is $775k. The borrower gets $250k (nominal dollars) for free. Why? We’re all paying for that directly or indirectly. Why shouldn’t there be a springing lien on that? It’s the equivalent of trading debt for equity in a corporate bankruptcy–makes perfect sense, even tho it won’t happen.
the A tranches benefit when the lower tranches get burned
No, they don’t, except in a relative sense. As in the A tranche can sell for 80 cents while the D tranche can sell for a penny or two. I guess that’s a benefit, if you’re playing a zero-sum game (which they aren’t)–then the A holders “win”.
The A tranche does not gain anything (structurally) from lower tranches going unpaid . . . altho I guess that the potential that a lower tranche will cure a default to the A (hahahahahaha) is a benefit–not that it will happen in residential mortgage bonds anytime soon.