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We have reached a new milestone in our documentation of the price decline in the Great Housing Bubble: we have our first property closing at 40% below its previous sale price. That’s right, 40% off in Irvine. The median has not declined 40% yet, but individual properties have. Will the median be far behind?
We have been watching this property for some time. It was the source for a post that first appeared on March 17, 2007, and was updated on Sep 15th, 2007. We followed up again with the post, Show Me, on January 15, 2008. It was purchased on May 26, 2005 for $565,000 with 100% financing. There was a first
mortgage from New Century for $452,000 and a second from New Century
for $113,000. Ordinarily, when a property goes up for auction, the lender will bid the property up to the value of the first mortgage, in this case $452,000. This property was purchased at auction by the trustee for a CDO (U S BANK NA, ; STRUCTURED ASSET INVESTMENT LOAN TRUST 2,) for $337,500. Think about what that means: 1. Lenders and CDO trustees are now letting properties go at auction for less than the value of the first mortgage. 2. At open auction, the highest bidder was 40% under the purchase price of this property. The flippers wouldn’t even touch it. 3. If investors are losing 40% on Irvine properties now, how bad will it be for them in 2 or 3 years? 4. The neighborhood comps just got obliterated.
This last point warrants further examination. Let’s say you are a homeowner who purchased at the peak, and you are still in denial about the market. In the minds of such individuals, the market is down artificially, and values will rebound soon. The reality is, the market for this property is 40% off the peak (Maybe a bit less if they can resell it for more than $337,500. They are trying.) Percentages can be a bit misleading when it comes to price declines. A 40% decline requires a 67% increase to get back to the peak. Assume for a minute we are at the bottom (which we are not,) how long will it take for this property to appreciate 67% in value?
| 2008 | $ 337,500 | 100% |
| 2009 | $ 352,688 | 105% |
| 2010 | $ 368,558 | 109% |
| 2011 | $ 385,144 | 114% |
| 2012 | $ 402,475 | 119% |
| 2013 | $ 420,586 | 125% |
| 2014 | $ 439,513 | 130% |
| 2015 | $ 459,291 | 136% |
| 2016 | $ 479,959 | 142% |
| 2017 | $ 501,557 | 149% |
| 2018 | $ 524,127 | 155% |
| 2019 | $ 547,713 | 162% |
| 2020 | $ 572,360 | 170% |
At a 5% rate of appreciation, it will take 12 years for this property to get back to the peak. Of course, if you believe 15% yearly appreciation will be returning soon, it will get their quicker, but that takes a degree of denial that will be hard to sustain in the long term. It isn’t going to happen. In reality, this property will probably decline further in value because less desirable condos always do fall further, so the appreciation does not start in 2008. It probably starts in 2013 from a lower base number. How long are people going to be willing to wait for values to return? Will people be trapped in their homes for another 20 years. I hope they like them.
Asking Price: $399,000
Income Requirement: $99,750
Downpayment Needed: $79,800
Monthly Equity Burn: $3,325
Purchase Price: $564,678
Purchase Date: 1/25/2008
Address: 1 Montgomery #46 Irvine, CA 92604
Sales History
| Date | Price | Appreciation |
| May 26, 2005 | $565,000 |
|
| Feb 22, 2008 | $337,500 |
|
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,639 |
| $/Sq. Ft.: | $244 |
| Lot Size: | – |
| Type: | Condominium |
| Style: | Contemporary |
| Year Built: | 1977 |
| Stories: | Two Levels |
| View(s): | Has View |
| Area: | El Camino Real |
| County: | Orange |
| MLS#: | P627777 |
| Status: | Active |
| On Redfin: | 20 days |
shopping and schools. You must definitely see this one to appriciate
it. living room has 20ft. high ceiling, and upstairs has open balcony
with view of downstairs. all three bedrooms are upstairs, there is a
half bath downstairs for guests. Nice size patio between home and
garage.
This property is very close to the freeway. It is practically on it.
BTW, the original asking price on this property was $610,000. LOL!
.
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It is hard to say who is losing money on this one. New Century is already bankrupt, so either some CDO is losing or the various creditors of New Century are losing. In either case, if we assume this one is on their books at $565,000 (it is probably higher with all the fees and lost interest), and if we assume they get their $399,000 asking price and pay a 6% commission, the total loss will be $189,940. That loss is on one small condo in Irvine. Does anyone really believe the lenders are finished writing down their losses?
So how far will prices drop? Will we see 1999 prices? The aggregate of the market will not, but we may see some of the undesirable condos go for very low prices. I have a sneaking suspicion we may see a 1990 rollback before this is done. I know, that sounds crazy, but 1990 was the peak of the last bubble, and that puts it on par with 1998 or 1999 prices. A small condo bought in 1990 that wasn’t particularly well cared for might be a 20-year rollback. It could happen, and we will be watching for it.
.
I was dreamin’ when I wrote this
Forgive me if it goes astray
But when I woke up this mornin’
Coulda sworn it was judgment day
The sky was all purple
There were people runnin’ everywhere
Tryin’ 2 run from the destruction
U know I didn’t even care
‘Cuz they say two thousand zero zero party over
Oops out of time
So tonight I’m gonna party like it’s 1999
1999 — Prince
IR,
I think that your down payment and monthly income requirements may be off here…….
Is it really accurate to say it closed for 40% off when the sale is at a foreclosure auction? Nobody’s bidding at FC sales these days so it’s just the funny money number the effective mortgage holder wanted on the books. The investment company obviously thinks it’s worth more and it’s already on backup offers at the asking price. Admittedly the asking price is 30% off a fairly standard or even somewhat low bubble price (344/sq. ft.) so it’s still quite a drop.
“I think that your down payment and monthly income requirements may be off here…….”
Yes, they were.
“Is it really accurate to say it closed for 40% off when the sale is at a foreclosure auction? Nobody’s bidding at FC sales these days”
The reason nobody is bidding is because prices are dropping and values are not there. The sales price is the sales price. The CDO trustee is hoping they can find someone to pay more who will use conventional financing, but ordinarily, every flipper in the area would be making the same bet.
1999 rollbacks would not surprise me at all.
Can this one on the I5 get $2500 monthly rent? GRM of 160 will work out to be $400k.
George:
I think the answer is ‘no’. I gotta think the top of the rental market for this sort of housing is 2000-2200 a month. Somebody might pay it, but I’m not sure why.
I rent a 3br SFR with large yard for $1950 in El Camino, my house is on the east side of walnut, better location than this condo. So I guess, the fair rent for this condo is around $1800.
Thank you for a little dose of Prince this morning – such a great song!
IR,
Where are we now with the median price in Irvine compared to your graph?
Nice post. If it’s any indication of where things could be headed in Irvine, most of the props coming on to the market in South County right now are either a) owners who have held for 8+ years; b) REOs; c) prices 20-30% off peak pricing, 30%+ for less desirable small condos. I don’t see it being as severe in Irvine, but it’s like a train wreck you can’t keep your eyes off down in South OC.
Any chance of doing your median graph with 3 lines: your earliest prediction, the prediction last month and the current prediction. I find it helpful to look at how predictions are changing overtime.
IR,
I don’t like having to croll back to the top of the “home” page in order to click on the link to read the comments.
caliguy,
I’m surprised you think South County is doing better than Irvine. My understanding was the opposite — that South County is getting hit harder. What makes you say that?
irvinerenter
To show that rougue lending practice still exist I would like to send you a pdf attachement of an offer I received yesterday. How do I send that attachment to you?
This place is an absolute hell-hole of a dump.
David,
You can email me at irvinerenter@irvinehousingblog.com
I understand that”clear thinking” was not the norm during the bubble but I still have a hard time understanding why anyone would purchase a property like this to live in at any price.
Classic substandard 70’s contruction. This place screams crappy apt. Yet it seems the market was teaming with properties just like this that people willingly agreed to purchase and live in. I didn’t understand it then and I certainly don’t understand it now. Owning a home is a huge responsibility\obligation with some sigificant potential downsides. Did they all think they only had to live in a rat hole like this for a short time and then they could ride the bubble up to something nicer?
This property looks depressing…I don’t care what price they’re asking for it. I would need an extra strength dose of Prozac to live here.
Just a side note:
Be careful when putting up ANY Prince music, he has a tendency to go after ANYBODY for displaying his copywrited stuff. Its stupid and very annoying. In fact he’s hurting his own fan base… but …
good luck
-bix
$400,000 is a lot of money for this place, really think about it $400,000….for that?
I think that IrvineCommuter is correct. A 30 year old condo less than 1 block from the constant noise of the 5 fwy would have a hard time renting for more than $1800, and I would guess closer to $1600. In addition, not many parents would want their kids living right next to all the noise and pollution, if they have a choice, so you are most likely to attract an investor/landlord as a purchaser.
That suggests a FMV is $1700 x 120 = $200k.
of course, figure in $200/month HOA and the age of the place might require assessments on top of that for repairs, and you could argue that it is
$1500 x 100 = $150k.
I guess we’ll see if this offer holds, or if it falls out…
thats actually an MBS trustee, not a CDO Trustee.
Irvinerenter,
I am sure we will see average 50% declines. Bleak job market and future of businesses look pretty bad right now. No doubt there will be lots of more foreclosures from people who will lose jobs and then their homes and this would be sad for all, even those who are on the sidelines waiting to buy as when the time comes sideliners may not have a job. Looking at the prediction from US Economic Bureu on Recession, this one would be worse than two previous ones, 1987 included.
My question to you is, will there be a dead cat bounce? If yes, when and how long will that last?
IR:
It may be somewhat of a reach to argue that banks will continue to write off huge losses based on observations in Irvine. I remember you stating yourself that RE markets are segmented. While Irvine will see huge losses (maybe up to 50%), other market segments may not experience such huge declines.
“will there be a dead cat bounce? If yes, when and how long will that last?”
Short-term fluctuations are hard to predict. If we see any bounce, it will likely end by early fall.
“It may be somewhat of a reach to argue that banks will continue to write off huge losses based on observations in Irvine.”
Given that we have only seen the tip of the iceberg, and given that most REOs in Irvine aren’t even on the market, I would say there are still significant bank write-downs yet to occur.
Just really wondering how some people price these homes in Irvine – it’s just all over the place. Like this one:
176 GROVELAND Irvine, 92620 $699,000
That’s F@#*-in 1400 sq ft.
I know that even in lower priced markets there is more than 40 percent drop. I know of a case where they bought a house in Queen Creek, Arizona where the prices are a lot cheaper than Irvine. The house was bought in 2005 and similar models went for $275 K at that time. Now it has dropped close to 50 percent (last sale of the same model was $143K) in value.
Skek – I think I was being unclear. I was trying to say that I don’t see Irvine being as bad as South County.
Yes…South OC is not so good these days..about 50% less sales than at the same time last year.
Thanks, caliguy. I think I misunderstood you.
I’m afraid that we may see a 50% drop soon since banks are not willing to lend money to people buying a, gasp!, *depreciating* property.
That’s right folks. Real estate is no longer considered an appreciating but rather a depreciating asset. However, unlike a vehicle, a house will have its intrinsic value which will never be taken away even at its lowest point. We all have to live in an abode right? We can’t all be renting now, can we 🙂
At what price is that lowest point and when will we hit it (if ever)? Well, if I can answer that question, I wouldn’t be working for a paycheck in Silly-con Valley, would I 🙂
BTW, IR, from Redfin, this property is now in Backup Offer Accepted status.
Perhaps you can help us by keeping track of the sales price on this puppy if it goes through.
Thanks IR.
Beds: 3
Baths: 3
Sq. Ft.: 1,639
$/Sq. Ft.: $244
Lot Size: –
Type: Condominium
Style: Contemporary
Year Built: 1977
Stories: Two Levels
View(s): Has View
Area: El Camino Real
County: Orange
MLS#: P627777
Status: Backup Offers Accepted
On Redfin: 21 days
ochomehunter’s comment reminded me of something:
Not sure if anyone brought this up yet, but the Fed is shooting all of their bullets trying to bail out the financials; the people who f-ed up in the first place. When the job losses come and businesses close; some of them as an indirect result of bad decisions by the banks and investment groups (and the government) who will keep them propped up and how? When the banks get bailed out but the rest of the economy dies what will happen? Will people finally be outraged? These are the things I’m curious about.
I’m not curious where home prices will be anymore; that’s obvious. Not that I had much doubt since about 2003.
freedomCM-
You…are clueless. When and if this condo sells for 150-200k, the global banking system would probably collapse and your hoarded dollars would become worthless.
May I suggest you start reading the financial blogs for a better grasp of the current situation instead of babbling on about things that cannot be allowed to happen.
Some of you guys on these housing blogs are absolutely clueless on what is going on right now. The Fed, along with all the other FCB’s, are trying to save the System. 120 GRM’s or double digit treasury yields will not be allowed to happen again for these exact reasons.
And no, I am not a bitter homeowner. I cashed out in 04 and 05.
Per the Feds, Orange County now leads the nation in job losses.
From the Register:
Job stats from federal employment counters show that Orange County lost 19,100 jobs in the year ended in the third quarter, the worst rate of job loss among the nation’s 328 largest counties.
http://ocbiz.freedomblogging.com/
Is it just me or is there only 1 comment showing up for this entry from Jim Jones?
wierd – i had to post a comment to read all the other comments.
What will this blog be about when this is over?