Mysterious Ways – U2
The movements of financial markets are very mysterious and notoriously difficult to predict. Where will the stock market be today? Up or down? Your guess is as good as mine. Of the various types of financial markets, residential real estate markets are probably the easiest to predict because they trend for long periods of time. Of course, the difficult part is predicting when they will reverse. I thought our local real estate market would reverse in 2004, but the widespread sale of the Option ARM delayed the crash for two full years.
The top of the market is relatively easy to identify after the fact. When sales fall off a cliff, prices will soon follow. The bottom is a bit trickier. Sales volumes will pick up at the bottom, but it will also pick up in the false rallies leading to the bottom. Upticks in prices are not telling either because bear rallies have that feature as well. The relationship between price and rent is a good indicator. It predicted the last two bottoms, but if the price-to-rent (GRM) is at historic lows, we may not necessarily be at the bottom because inventories and foreclosures may be very high. In fact, I am of the opinion (and I am not alone) that we will have an overshoot of fundamentals based purely on supply and demand problems due to the REO inventory. Too many people borrowed too much money, and these owners will need to be flushed from the system before it is over.
Personally, I will not try to time the bottom tick of the market. I will buy when I can save money versus renting. In fact, I would prefer to buy before the bottom when inventories are high because I will have the widest selection of properties to chose from. If you wait until the bottom is clearly in the rear view mirror, inventories will be low, and you may not find the property you want (don’t worry, you will not be priced out forever.) The previous bottoms gave about a 3-5 year window of opportunity before prices rose to valuations that were too high relative to rents. This time, the window of opportunity may be longer. The ARM reset problem will persist into 2012, and it will take another 2 or 3 years for all the foreclosures to work their way through the system. I may buy in 2010, but I will not expect to see any appreciation before 2015. That will not matter to me because I will be saving money each month versus renting, and I don’t plan to sell any time soon.
Today’s featured property is as mysterious as the markets. It was only listed yesterday, and there are no pictures. Perhaps they will be up by the time this post airs.
Asking Price: $400,000
Income Requirement: $100,000
Downpayment Needed: $80,000
Monthly Equity Burn: $3,333
Purchase Price: $562,500
Purchase Date: 1/31/2006
Address: 52 Vintage #106, Irvine, CA 92620
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,550 |
| $/Sq. Ft.: | $258 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Mediterranean |
| Year Built: | 2006 |
| Stories: | 3+ Levels |
| Floor: | 1 |
| View: | Has View |
| Area: | Woodbury |
| County: | Orange |
| MLS#: | S544575 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
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Descriptions don’t get much shorter than that.
This guy will not accomplish much listing this property as a short sale. It is very unlikely that it will get approved. However, he does destroy the neighborhood comps for everyone in Woodbury. Remember the post Financing in a Declining Market? Lenders are now looking at the lowest sale or offered for sale comparable home in a 1 mile radius. In short, everyone with a similar property just got hosed.
This guy bought at the peak paying $562,500. He used a $449,800 first mortgage, an $84,300 second mortgage and a $28,400 downpayment. Not to worry though, he refinanced through Countrywide with a $544,000 first mortgage in April 2007, and he opened a $68,000 HELOC which one would assume he maxed out (I don’t know for sure.) If he did, the total debt on the property is $612,000, and his total mortgage equity withdrawal was $77,900 including his downpayment. If this property sells for its asking price, and if a 6% commission is paid, Countrywide stands to lose $236,000.
This borrowing behavior makes me wonder about another class of distressed homeowners we have not talked much about. How many people out there banked some of their ill-gotten gains and are making payments with borrowed money? If this guy had put $80,000 in the bank, he could have made payments for quite some time. People who have pulled out hundreds of thousands of dollars can do the same. How many Ponzi-Scheme financiers are out there? How long can they hold out? One thing I am nearly certain of is that they cannot hold out longer than the bear market lasts. Each homeowner in this circumstance has a different holding period, and as the weak hands implode, they knock prices down for the remaining holdouts. Some will survive, but the majority will not. This phenomenon is also one of the reasons banks everywhere were freezing HELOCs, even for borrowers with equity. They might have improved their short-term cashflow to keep allowing Ponzi Scheme financing, but ultimately it hurts their bottom lines when these loans get wiped out in a foreclosure.
.
Johnny take a walk
With your sister the moon
Let her pale light in
To fill up your room
You’ve been living underground
Eating from a can
You’ve been running away
From what you don’t understand…
Look
She’s slipping
You’re sliding down
She’ll be there
When you
hit the ground
It’s all right, it’s all right, all right
She moves in mysterious ways
It’s all right, it’s all right, all right
She moves in mysterious ways
O-o-oh
Johnny take a dive
With your sister in the rain
Let her talk about the things
You can’t explain
To touch is to heal
To hurt is to steal
If you want to kiss the sky
Better learn how to kneel
On your knees boy
Mysterious Ways – U2
No Description, No Pictures…they really want to sell this place, don’t they?
Give MLS time. It takes more than a few days for all the pics to go up.
You should know…you’re an *agent*.
Reminds me of the “agents” from the movie The Matrix.
I was when I took the online moniker, but I am no longer. 🙂
In Florida an office could enter it’s own listings right into the system, so should not be a delay.
Actually, judging by the google street view, this is a pretty nice area. Is 400k kinda low for this 2 year old, 1550 SF unit?
Relative to today’s pricing, $400K is very low. If this property could rent for $2,500 a month, which it probably can, it would be at or near rental parity for an owner-occupant (it might still be a bit high given the high HOA fees and Mello Roos.)
Many short sales are purposely listed on the very low to attract interests. Then it just drags its fees in the approval.
Often it is just wasting every one’s time.
There’s a $499k 3/3 just down the street with pictures, if you want to assume it’s comparable.
http://www.redfin.com/CA/Irvine/142-Vintage-92620/home/7216817
That’s also a short (or looks like it).
I’ve been renting in Huntington Beach for this past year as my employer is trying to get me to relocate here (So Cal) so I’ve been tracking prices in various areas over this past year and it’s amazing to see how home prices have tanked. I’ve seen pretty nice homes located in Coto De Caza going for in the $600’s. Many of these were sold in the bubble times for between $800K and up. I just wonder how far down prices will go. Even at $650K you still need a pretty substantial down payment and and pretty good salary to make the grade on the financing. This next year should be even more interesting.
In Great Depression, the discount was 80%. This one is even worse than the Great Depression. Try to get a house at 160K USD if it was sold at 800K at peak.
This looks worse on paper but the outcome will be very different. I expect a 60% discount (from peak, so maybe a real 5% discount) and I’m about as bearish as they come. Then again, over $100 sqft isn’t that unbelievable I suppose… if this were a city to the north east.
I’m beginning to see rent-saver prices on some places here in Chicago. The places dropping to reasonable prices first, of course, are places that need substantial work, which is fine with me if they discount the work needed from the price.
I think the sellers will be doing that soon.
Trouble is, we have 7.1% unemployment here, jobs are shaky, and credit has never been tighter.
If you have a decent downpayment and your income is secure, you ght just want to buy IF and only if you find a place you really like for a rent-saver price, and have a reasonable downpayment plus a cash reserve.
But you don’t have to be eager or desperate to buy. It’s easy to be tempted by new, low prices and settle for something that is less than what you want because you’ve waited through the runup and are seeing the first decent prices since 2002. Don’t be so fast- make sure you’re getting the deal you want and that makes sense.
Sorry- I meant to say “you might just want to buy”- was going too fast on this old keyboard.
The lack of borrowing power can have a greater impact on the future than fundamental support levels.
Freddie & Fannie, as well as all the mortgage co’s, and all the securitzation of lending, has been deeply damaged. So much, that we shouldn’t expect lending to recover to even pre-bubble levels anytime in near future. We don’t even know how bad this thing is going to become.
I am of the belief that the stock market has NOT priced in further turmoil with the banks.
One more point.
The entire state is under surge by what’s going on up in Sacramento. The asshats that run this state need MORE REVENUE. They are looking at productive communities like Orange County to pony up more coin. What does this mean? More outflow migration of producers.
I think the top end of the rental market has pricing power problems. JMHO: Rents for homes like this one are going down.
You know what I keep waiting for? New entrants into mortgage lending. Especially a stable company or bank which avoided mortgages for a long time. They wouldn’t be burdened by the ongoing writedowns. They would still have the ability to borrow relatively cheaply. If they had capacity to write a lot of loans, they could do so at a pretty good margin if they stayed out of the bubble regions where prices still have a long way to fall.
Such a lender would be a good stock investment as well. The entire financial sector is getting clobbered, but some of the lenders caught in the downdraft are likely financially stable.
Your point makes sense.
However:
Prudent lenders aren’t in the business of loaning people money to buy rapidly depreciating assets, without significant collateral.
As Barry Ritholtz says, banks need to go back to the 3-6-3 rule.
a) Pay 3% interest on deposits
b) Loan money at 6% to borrowers
c) Hit the golf course by 3pm
If the new lender(s) decided to write responsible conforming loans in areas where home prices are currently affordable and payments are not far from rents, they wouldn’t see rapidly depreciating assets. With 20% down, they also wouldn’t have that much at risk.
While we are near ground zero for depreciation in LA/OC, there are other places like Atlanta, Charlotte, Dallas, and Louisville where prices never were crazy, and are currently stable.
I think in about 2 years you are going to see a bunch of new banks start displacing the current market leaders. The only loans for banks like Citi and BofA that are performing are the fixed rate loans and they were issued at historically low rates. Rates are going to climb and the new guys will be able to raise capital because investors know that:
1) New loans will perform.
2) The new guys don’t have the baggage of low interest loans.
And if inflation does keep climbing (not my belief) then those low rate loans will be spectacularly bad to the point of being negative returns in real dollars.
Agree and I would put my money on Warren Buffet. His slogan is to buy when others are fearful and sell when others are gleeful. He jumped into municipal bond finance earlier this year after the problems of the monoline insurers. He would be able to provide alot of capital to the mortgage sector and his track record is as a very disciplined underwriter. I think he has as good a track record of picking bottoms as anyone so if you see him jump in you will know we are nearer to a bottom. That he hasn’t yet indicates he doesnt think we are near bottom.
1550 sq ft – 3 bdrm. Leaves very small rooms.
1550 should only be big enough for 2 bdrms.
These places still have a ways to fall.
Frugality is the way of the future. 1550 sq ft is ample unless the entire family needs to visit Jenny Craig.
Alan my house is under 1400 sf and we have 4 br. Very small br’s but this tract sells well because it’s 4 br not 3.
Northern California, not Southern. My 2/1 condo was 990 sf (we’re talking years ago but that building is still there and condos still changing hands).
Calculated Risk’s post on downward pressure on rents is very apropos.
CR
Not that I’ve seen any signs of such a price easing in D.C. yet, but there is hope that rents will come down out of the sky in places like Irvine, D.C., and San Francisco, where they have long been unaffordable and driven much of the buy now or be priced out forever fear mongering.
I have a big problem with the theory of tying home prices to rents in this bubble. While I realize historically home prices and rents had a strong relationship, the problem this time around is that rents got jacked up in the bubble along with house prices. Sure they didn’t go as high, but to say that today’s rents are here to stay is IMO incorrect. Ultimately rents, much like house prices, have to be anchored to what people can afford.
What I haven’t figured out yet is the dynamic for rents to go down in a place like Irvine. Perhaps it doesn’t happen quickly as long as people are employed, but occurs as distressed properties in neighboring cities go for less in rent. This would create a rental price imbalance causing downward pressure on Irvine rentals. There are many other scenarios I’m sure.
Therefore, I believe prices must ultimately settle near to what people can afford to purchase as opposed to what today’s rents dictate.
phil
Your words are the simplest, and soundest opinion I’ve read in some time.
IMO: Soon to follow housings downward rental trend, commercial real estate must always follow best price principle, because emotion is not part of the equation, just the bottome line matters.
A personal anecdote which relates to your theory.
My girlfriend (ex) and I were renting a place in westwood in 1999 for $750 a month. It was a small 1/1, but a really nice location. We left and rented a much larger place in westwood: 1+loft/2, top floor, 20 foot ceilings, 3 stories, etc. for $1700. They upped the rent on our former place to $1300. Yes, rents went up faster than home prices in many areas. I didn’t see any houses go up 100% in a year.
“Therefore, I believe prices must ultimately settle near to what people can afford to purchase as opposed to what today’s rents dictate. ”
You are probably right. I have been hesitant to forecast a drop in rents. So far, there has been some pressure on rents, but this has mostly resulted in less of an increase and not an actual decline. Unemployment is what would be required to see a decline in rents, and although the REIC has been devastated, other industries have not been hit too bad — yet.
The relationship between rents and house prices will be restored, the variable being at what rent levels this will occur.
I’m sure you saw the piece in the OCR.
Orange County’s unemployment rate jumped to 5.7 percent in July from a revised 5.3 percent in June, as local employers shed 10,100 jobs in July, the state’s Employment Development Department said today. It’s the highest unemployment rate for Orange County since July 1995.
On a year-over-year basis, the total number of jobs in Orange County declined by 29,900, or 2 percent, between July 2007 and July 2008. Financial services, construction and government reported the biggest job losses.
Pardon my ignorance, but I thought you could not pay your mortgage payment with a HELOC.
By doing so, you are telling the bank that you do not currently have the cash flow to pay your mortgage, and that you will likely default in the future once your HELOC is tapped out.
Am I missing something?
You ask a very good question, but yes, you missed something. The idea here is that these buyers, instead of tapping out their HELOC money for vacations and plasma screen televisions, took the HELOC money and socked it away, figuring that they’d be able to sell the house right away for a tidy profit and keep the loan money. Well, when the market tanked, they were screwed on making a sale for the total amount, but they have a stockpile that can be used to wait out the crash. What IrvineRenter’s noting is that unless a buyer got $100,000 on a $50k house, there’s simply no way that a buyer can keep up using that stockpiled money to pay off the mortgage until things get better. Sooner or later, the money evaporates, the buyer has to make some hard decisions, and you get a turd in the punch bowl like the house listed today.
Simply amazing. And to think I was stupid enough to pay rent all this time, hoping for prices to come down. I could have been living in a McManson for free! 0% down, unlimited HELOCs, why even work???
Your eyes are now fully opened. You see the complete insanity that was the Great Housing Bubble.
You work because you are better than people who commit fraud.
I just had a client in who was paying for his first and the heloc payments out of his heloc, until it was all used up, over 100,000 grand.
He’s a landscaper, doing very well, until he wasn’t doing well any more.
I would not be quick to think that unemployment would have to tick up before rents could decrease. It is possible that as incomes do not increase, and price inflation rises, and consumer credit runs out, folks will have less to spend on rent and mortgages.
For the most part, you’re right, but renting is a completely different animal. You know how a lot of sellers are still delusionally holding out for what they believe their properties are worth, as opposed to what anyone’s willing to pay?
It’s even more true with renting. I’m seeing a lot of houses with big fat “FOR RENT” signs out in front, where the house has essentially been left abandoned for the last six to eight months. The owners (or, in two cases where the owners are deceased and the house was on the market for a year, the heirs) heard from “Some Guy” that the house was worth much more than what the market will actually bear, and they’ll stick with that price until the cost of maintenance and tax becomes too onerous, and then they’ll still drop the price a tiny fraction. After all, “Some Guy” told them that it’s worth this much, and anybody who tells them otherwise is just wanting to screw them out of a deal.
I have met several landlords who believed that slightly underpricing the market led to three positive effects: 1. Short vacancies. 2. More potential renters to choose from, and good responsible renters would typically be in there somewhere. 3. Less turnover of renters. It doesn’t take a very large % of time vacant to nullify the extra 15-20% some other landlords are trying to get.
My parents always underpriced the rental market, and their units had essentially no vacancies and a waiting list of potential renters. In 20+ years they lost perhaps a weeks worth of rent. Over the long haul they made out better than they would have with higher rents.
Rents are determined by BOTH what a tenant can pay and what a landlord will accept. There is, right now, a wide range for similar properties if you are willing to look outside of IAC.
We rent out a 2/2 condo in Irvine. Our objective was to (1) rent quickly (2)to a well-qualified tenant. So we priced it at $1,675 and it was gone in a day. Our neighbor was furious because he needs $2,250 to break even.
Bottom line – rents for the exact same property vary widely with the most qualified tenants getting the best deals. That said, our impression when we did the comparable rent survey is that rents seem to be edging down as a whole.
The greed and the good times rolled for a solid seven years in this bull housing cycle. People still have that “feel good” feeling that everything will be OK as long as you dont sell and the bottom is in view the “next quarter”.
I dont expect people to take the view that the recovery isnt just around the corner until the grim reaper is kicking in the door.
A very good freind of mine has been in title and escrow for 25 years. We have had many discussions about real estate over the last four years and even she is in denial about the prospects of people that bought homes during the bubble. She thinks that they have to do whatever they can to save the home because in ten years everything will be fine again.
She still doesnt grasp the magnitude of the shame and she is very smart. I believe it has something to do with making all that money during those years and not believing that its never coming back.
Self denial only lasts so long. Eventually those fond memories of easy cash will be replaced by the reality of having to earn hard cash in today’s marketplace.
Easy money and perks people have been receiving during the bubble–high sales commissions on everything from mortgage loans to computer equipment, corporate-sponsored parties and retreats, high sales volume on exuberantly marked-up retail items, and fat bi-annual bonuses–has vanished.
SoCal has been one giant party during the bubble. But now its 3AM and its time to go home. Lots of people are still high, wound up and in denial, but after they wake up the hang over will be long and painful. Tylenol isn’t going to help much either.
Woodbury, keep coming down. I am waiting for rental parity, even with the double HOA and the Mello Roos.
Rents obviously did not inflate at the same rate as home prices since you cannot really finance more rent than you can afford over a long period of time. The segment of the rent segment that I follow (3 BR 2000 sq ft good neighborhood, walk to good school) is still holding up between 2800 and 3500.
Again people I strongly feel that to use “comparables” or “rents” to determine a home value in this market is, like the past recent real estate bubble, CRAZY! How can you compare craziness to nuts? Supply and demand will seize the day. People cannot afford these prices, especially now that the banks are back in line with the tried and true lending practices. Once the banks come clean with their TRUE writedowns and it hits wallstreet, which is starting to happen now, you will see a large drop in even today’s prices. FYI the list for the 90 banks that are on the Fed’s watch list has just increased to 126. Also do not believe the stat’s that the gov’t puts out, they are wrong! Inflation and unemployment, are much higher. The M3 stats are no longer provided by the gov’t. But anaylst are showing a huge increase in the money supply, thanks to Bernake, the printing press King!
any1 dare to catch it?
Price to rent ratio might not be the best indicator right now. Rents have been going up, due to the increased demand for speculator purchase properties, here in DC.
I missed the price boom and by the time I was ready to buy here, I couldn’t afford to, so I’ve been renting. No worries, though, because I’ve been getting some awesome deals. I decided to move in February, and I have to say I was pleasantly surprised.
Everyone was desperate. I had a line of women offering sweet condos they could no longer afford, willing to make a deal. I had actually looked at a place in February 2007, and the woman had blown me off when I offered $1800 a month for a 3 BR/2BA condo in a great neighborhood. I didn’t blame her, she paid $600,000 for it in 2006. That same woman called me out of the blue this year, begging me to take it at $1800 a month. She obviously just wanted cash flow to try to hold on a little longer. I was actually scared to rent most of the places I looked at, because they were so anxious to deal, I wasn’t sure they would apply my rent money to the mortgage, rather than pocket it and get me evicted from their foreclosure.
A lot of folks fell for the line, and they stretched as far as they could out on a limb to buy overpriced apartments. They’re now going bankrupt in droves.
DC Guy, out of curiosity, how many landlords who were anxious to deal were women and how many men?
Seemed like 2 to 1 women to men. I don’t think it’s a function of women being more desperate, I think everyone is desperate. Just more women seemd to have stretched to buy condos in the “hip” urban areas where I was looking.
Actually, funny fact, one of those ladies tried to get me to take her out. She was attractive, but it was clear she was more interested in me after she found out what I did for a living and how much I could help with her dire financial straights.
I don’t know if this is the agent for the $400k 3/2, but she’s one of the agents focused on Woodbury.
http://blueoceaninfo.com/About.htm
I noticed her when I was looking for Woodbury floor plans, because I went on her website by mistake thinking it was the Woodbury website. She’s ripped off all the pictures (floorplans, logos, etc.) from the Woodbury website and made her own identical website (plus some misspellings). LOL! See:
http://blueoceaninfo.com/W_Stonetree.htm
“I thought our local real estate market would reverse in 2004.”
Actually, I thought it would reverse in 2002 or so. Remember the tech bust? I thought maybe this would impact house prices.
How foolish I was!
Well here is another reason that I believe the future foreclosure numbers discussed on this blog are blown way out of proportion.
IndyMac just announced that they are offering, over 29,000 distressed homeowners, permanent modifications to their mortgages to reduce the DTI to 38%.
http://news.yahoo.com/s/nm/20080820/bs_nm/indymac_loans_dc_4
While I don’t want to see the huge number of foreclosures taking place, I’m really not happy that it’s becoming more and more financially sound to just stop making your payments and then wait for your lender to offer you a modification.
I think this shows just how desperate the Banks are right now — and how much power the borrower has. Anyone taking this deal is a complete fool because the bank has shown their hand, and it is indeed a weak one.
If I were an IndyMac borrower, I’d go down there and say, “Hey, this is an interesting starting point. If you can sweeten the deal by lowering the rate by another half point and shaving another 7% off the principle, I think we can make a deal here.”
The bank just lost all of their negotiating power by playing their hand too soon. Now it’s time for the borrowers to cash in!
I wonder how many borrowers will have a spouse quit work for a few months, or go in for a loan modification after a layoff. If they are willing to reduce principal to real income amounts, the incentive is to reduce your reported income as much as possible. Perhaps the “liar loan” crowd will go in and tell the truth and get 50% whacked off their principal. People who cheat on their taxes should go in with tax returns and lower their principal. Yeah, this should work out well.
“Well here is another reason that I believe the future foreclosure numbers discussed on this blog are blown way out of proportion.”
Keep in mind, the number of foreclosures will only impact the rate of the decline, not the eventual bottom figure. Affordability and availability of financing will set the bottom. High foreclosure rates will make prices drop faster, and if there are a great many of them, it may cause some overshoot on the pricing side as well, but even in a market with zero foreclosures, prices will still drop because buyers cannot raise their bids any higher than banks will allow.
As for the number of foreclosures, you should check out Bubble Markets Inventory Tracking:
http://bubbletracking.blogspot.com/
A quote from a recent post: “Foreclosures are ruling the markets these days. If you are a buyer that’s been waiting since the peak and looking to jump in, keep your focus. Are we producing enough foreclosures to keep up with REO demand? According to DQNews 43% of all resales in SoCal were REOs. With Riverside dominated by 64% and OC only with 22%. There were 3,088 resales in San Diego County, 40.8% were foreclosure sales, or 1,259 homes. Remember in July there were 2,285 Trustee’s sales and 3,206 NODs filed. You do the math, but looks like we got plenty of distress inventory to meet demand.”
Orange County is 1 year behind San Diego County. It has been that way since the bubble began. Their prices when up, peaked and declined 1 year in advance of these same movements in Orange County. It is not different here.
Hi,
Here in London UK rents have been going up, due to the increased demand for speculator purchase properties
Several people asked about whether rent increases are correlated with home price increases. There is a moderate positive correlation, and an R squared of 37%.
In the graph below, I show increases in rent on primary home for LA/OC from the BLS, and changes in the Case Shiller index. If the prior bust in the early 1990s is a guide, rental increases will be lower the next few years than 2000-2008. It certainly doesn’t look like current renters will be overwhelmed by people whose homes were foreclosed.
This property is too close to the 405 FWY. Is there high power lines running alongside the freeway there too?
ha ……………leluyah………….ha…….leluyah