Slaves to the Pavement — Belvedere
distractions from the ordinary
real life just not good enough
explanations hard to come by
Is it so bad to live an ordinary life? We have it pretty good in Southern California. The weather is great, there are lots of activities, and with the wages being higher than the national average, it is not too difficult to support a family. I guess for many, a real life, a life of living within one’s means, is just not good enough. It takes HELOC dependency to fuel a better-than-average life for ordinary citizens. Why do we all have to live that way? Explanations are hard to come by. Have we have all becomes slaves to the pavement, or perhaps, slaves to our payments.
i wish i could safely say
all the right decisions were always made
Based on the unprecedented drop in prices and the equally unprecedented debt levels many homeowners took on, it is safe to say that all the right decisions were not made. When you reflect on what happened, and think about all the debt people took on, you come to one inescapable conclusion: nobody thought they would ever have to pay it back, certainly not from their wage income. In fact, many of them are not. Some sold their properties and transferred the debt to someone else, and some simply walked away from their properties and let the bank take their debt back. There has been a lot of conjecture on the walkaway phenomenon. Is it real? Will it get worse? Judging from what we see here everyday, it is easy to believe it will get much worse. People don’t want to pay the money back. It is that simple. If they can’t pass this burden on to someone else, they will default. People don’t go from wildly irresponsible to miserly and responsible overnight, if they ever change at all. I speculate that many, many more people will walk once they accept that prices are not coming back. When denial turns to fear and acceptance, the burden of the debt will become very real, and the crushing burden will be too much to bear. Until then, most will carry on with the fleeting hope that prices will recover in a couple of years and the titanic debts on their shoulders will be transferred to a greater fool when they sell their properties. The walkaway phenomenon is already observable in markets wiped out by subprime defaults. When the Alt-A and prime ARMs reset and the Option ARMs explode, Irvine will be no different.
Today’s featured property is another HELOC abuser who refinanced himself out of his family home. Faced with the prospect of paying back a debt that had more than doubled in 6 years, he chose to walk. He will not be alone.
Asking Price: $464,900
Income Requirement: $116,225
Downpayment Needed: $92,980
Monthly Equity Burn: $3,874
Purchase Price: $279,000
Purchase Date: 5/11/2000
Address: 4052 Belvedere St, Irvine, CA 92604
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,448 |
| $/Sq. Ft.: | $321 |
| Lot Size: | 5,466
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Ranch |
| Year Built: | 1971 |
| Stories: | 1 Level |
| Area: | El Camino Real |
| County: | Orange |
| MLS#: | U8004517 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
SCHOOLS, PARKS, AND SHOPS. BACKYARD WITH BUILT IN BBQ, BEER TAP, AND
FRIDGE GREAT FOR ENTERTAINING.
This property is nearing rental parity. With a GRM of 160, the rental breakeven would be $2,900 a month. With the low association dues and lack of Mello Roos, a GRM of 180 might be more accurate. With that GRM, the rental breakeven is $2,582. I don’t think it would rent for quite that much, but it might rent for $2,400. We are making real progress. In our current market, this is a pretty good deal. I don’t believe that this property will drop to much less than $400,000 (I suppose I should update the equity burn numbers…)
The previous owner made a steady living off the property:
- The property was purchased on 5/11/2000 for $279,000. There was a $223,200 first mortgage, a $27,900 second mortgage, and a $27,900 downpayment.
- On 7/29/2002 he refinanced for $275,000.
- On 2/27/2003 he refinanced for $324,000.
- On 10/28/2003 he refinanced for $365,500.
- On 7/1/2004 he refinanced for $450,000.
- On 10/11/2005 he refinanced for $527,200.
- Total property debt is $527,200.
- Total mortgage equity withdrawal is $276,100 including his downpayment.
Is there anything in this owner’s history of managing his debt that convinces you he had any intention of paying this money back?
BTW, Calculated Risk has a great post on Research: Housing Busts and Household Mobility.
It has a link to a scholarly paper on the economic impact of having a
society of payment slaves. Both the post and the paper are great
reading for anyone who wants to further explore this issue.
{book}
distractions from the ordinary
real life just not good enough
explanations hard to come by
living outside the institutions
waking in awkward situations
i wouldn’t have it any other way
i can’t recall a better time,
each day felt like the next would never come
i realize i couldn’t get enough
alternatives all felt like death
i wish i could safely say
all the right decisions were always made
ya we were young but we’re still here
happy to starve for another year
Slaves to the Pavement — Belvedere
Based on the listed comps, this one is a steal! Or do we think that Brookside was a good sale?
http://www.redfin.com/CA/Irvine/4342-Brookside-St-92604/home/4666110
Based on the listed comps, this one is a steal! Or do we think that Brookside was a good sale?
I’m going to be incredibly crass when I say this, but I’m going to suggest that when we get through this, we all push for legislation requiring realtors to have basic communications skills before they get their licenses. After reading some of these realtor-provided descriptions, with the insane capitalization and, erm, interesting uses of English, I’m starting to wonder if our current crop of realtors are the party animals too stupid to qualify for an MBA, and that’s saying something. I mean, you need at least eight years of keggers to be able to sodomize one’s main commerce language with such proficiency, and I don’t think it’s going to get any better in the future.
IR:
I regularly meet landlords in my line of work and I hear that the credit worthiness, outside of any foreclosure, has slipped. I also hear that competition is forcing rents down. What do you think will happen with rental parity? In my neighborhood (which is in a very good part of the IE) I see evidence of families sharing housing.
I have no facts to base this opinion on, but I’ve thought for some time now that old-fashioned boarding homes might soon make a comeback. As people are forced to live within their means, they may find this option more attractive. They would get a room in a large home and share the kitchen, common area, etc. It might be an affordable way for singles, couples or seniors to live with times such as they are.
It is certainly possible we will see a decline in rents, particularly as the economy sours. We did see declining rents in the early 90s. If rents go down, so does rental parity.
Rental parity? I think rents are going to be a moving target – a downward moving target.
We’re headed into one mother of a recession perhaps morphing into a depression. More unemployment = less renters (with money). Yes, the gov. & Fed are liquefying at an astounding pace but I wonder if just offering all those billions & trillions will be enough. What if they offered a loan & nobody showed up? Try pushing on a string.
Mortgage rates, this morning, are headed up. Oh, my! This is counter-intuitive. With the economy slowing, rates ought to be headed down.
Someone’s pressed the wrong button!
mortgage rates reflect risk and anticipation of where interest rates will be 5-30 years from now, not what interest rates are today.
rates are going up because of anticipation that interest rates have to rise.
When the fed goes into the credit markets to borrow all this money they need: bailout, war, on top of the already large deficit, rates could head higher. This might be some lenders getting in front of the higher rates to come.
Rates should NORMALLY reflect risk. They didn’t for the bubble years–so a number of banks are, essentially, now pricing in the risk of the last 8 years into current loans.
Yet ANOTHER way responsible people got screwed by the whole Ponzi scheme.
“Rates should NORMALLY reflect risk. They didn’t for the bubble years–so a number of banks are, essentially, now pricing in the risk of the last 8 years into current loans.
Yet ANOTHER way responsible people got screwed by the whole Ponzi scheme. ”
What do you mean Matt? Responsible renters WANT higher interest rates because this will put even more downward pressure on house prices.
I mean that a renter will end up having to pay a higher interest rate than otherwise.
Yes, higher interest rates should keep housing prices lower. But, I’m imagining a scenario where people bought a house in the beginning of the bubble at a low fixed rate. If the bubble only ends up popping back to the level at which they bought that house, I end up buying a comparable house at a breakeven price but a higher rate. The argument might go that interest rates will push the prices below those at which houses were bought in, oh, 2002 or 2001. In that case, I might end up not being too hosed.
However, someone who bought a house in, let’s say 1998 (ie, non-bubble, normal pricing) was able to refinance to an insanely low rate. I don’t think I’ll ever get that opportunity.
I think it is so much more important to pay the lowest price and if high interest rates get us there then wish for them.
I bought my house in 1985 for 100K at 13.25%. When rate started dropping in the 90’s, I refinance a number of times. Never paying fees and never taking money out. During this time I was also prepaying on the mortgage. My original payment of 1,100 was reduced to 700, and then later to 400. I continued to prepay, but I knew in a hardship, I could always drop back to the lower required payment. In 1998, I paid off the house and quit my job and we live on just my husbands salary. I could never have expected to do that with these prices we have seen lately.
I don’t know how this recession will compare to the early 90’s, but we were plenty scared watching all the defense jobs go away and the house prices drop. I am hoping that I can get condo so cheap, in maybe 2012, that I will be able to pay it off soon after.
Why do you think it won’t drop farther than 400,000 – this is the one of least desirable neighborhoods in Irvine – and since size wise I would consider this a very average home – in a lower neighborhood – shouldn’t it go for a little under what the average income can afford???
You may be right. Based on what people are paying for rent for 3/2s, this will reach rental parity around $400,000. If rents drop, or if people consider this property so undesirable that they demand a bargain over comparable rentals, it certainly could drop below $400,000.
If this house doesn’t drop under 400K, I’ll be taking my azz out of the County of Orange. And we’re not talking within commuting distance. Have fun supporting a vibrant economy without any skilled workers OC!
A 1971 3/2 with under 1,500 sf of living space for $400,000??
Wow – I’m glad I don’t live in Irvine if that’s where things will bottom.
I think this one will blow through 400K, but stop in the low $300s, ASSuming mortgage rates stop spiking. If they get over 8%, game on.
If we see a big increase in interest rates, which seems likely, then the GRM at breakeven will be even lower. Combine that will falling rents, and this property could go that low. I think that people will be comfortable paying $400,000 for a SFD 3/2 even at the bottom.
Falling rents is key.
Even in SF rents fell after the .com implosion. It can happen, even where it “can’t” happen.
Just for my own knowledge (as I’d like to live in Irvine at some point), what makes this a least desirable neighborhood of Irvine? What would have the top-5 and bottom-5 (and why)? Thanks.
Robert,
Check out IR’s “community profiles” under categories on the sidebar.
ECR (el camino real) has declined quite a bit and is no longer on the same level of amenity as the newer communities (Northpark, Woodbury) nor in a geographically advantaged location such as Turtle Rock. Plus if you have elementary school aged children the neighborhood is no longer desirable as the community school has been closed (moved to Woodbury) so kids have to either commute there or to Deerwood.
Really not much to recommend it besides being on the leading edge of the price implosion.
On the up-side, it is in close proximity to Heritage Plaza and The Marketplace, plus it’s very convenient to the 5. And as IR noted, there’s the low association dues and no Mello-Roos.
I like the area, myself.
I *think* that this neighborhood doesn’t have as many amenities as some of the others (i.e., pools). Primarily I am just basing this on the feeling I get from talking to people – perhaps someone who lived here longer has more to add.
Oh, and since when is 1500 sq ft w 3 tiny bdrms crammed in on a small lot great of entertaining.
Entertaining who, high school kids.
This will blow below $400 k because it’s so small, less than 2000 sq ft.
I believe that your rent parity calculation is flawed……it assumes there are an endless number of renters, and an endless number of investors. Neither is true. Further, as the downturn continues, large rental companies will start to lower prices.
The value of this home will be established by the American savings rate. My guess is that we are looking at a nice 300K property here.
thank you Nano, exactly what I was thinking.
Am I wrong in assuming that a 1971 home, average looking 1400 sqft. should be a MEDIAN HOME.
Actually 300k is optimistic if you ask me in light of the carnage in the economy 😆
“I don’t believe that this property will drop to much less than $400,000”
Gosh IR, This home was purchased in 2000 for $279,000. The OC RE market is going to overshoot the fundamentals on the way down. I am confident it can drop below $400,000.
I could be wrong, but I think rents are going to drop, right next to average gross incomes.
Bought for 279k in 2000. 3% yoy this place would sell for 353k today, 4% this place would sell for 381k and at 5% it would sell for 412k.
At 3% yoy it would take until 2017 for this place to appreciate to 464K.
What is so great about this place that it should appreciate by more then the historical norm?
Rental increases have been averaging about 4.5% for since the early 1980s. This puts it in the $400,000 range. Of course, rents may not continue to increase and may actually decline.
Rents have increased at a faster pace than 4.5% since the late 90’s. Places I rented in Corona Del Mar for a song in the late 90’s are at nosebleed rates right now. It forced me right into Westpark, which is a hellacious step down from CDM, unfortunately. So my position remains that there has been a bubble in rents as well: even in likes of Westpark it is common to demand more than 3K a month. And I can tell you that writing a 3K check every month that provides no tax advantages whatsoever is a tough row to hoe despite having the good fortune to make some substantial income. But at least I get a relatively modern 4 bedroom home for the 3K: you tell me this El Camino hellhole might fetch 2.5K and I am aghast: who would be suckered like that, are these folks (I would guess newcomers to the good ol’ US of A since that is what constitutes the Irvine I am familiar with) that hoodwinked by the Irvine school mystique that they would mortgage their future like that? I don’t get it.
and by the way, “el camino” sure seems like an apt name for this neighborhood: I picture that classic trailer trash pseudo-pickup truck being parked proudly right in front of this dump. It would fit right in with the backyard keg-arator and a broken-down motorhome.
2006 saw 6.8% rent inceases
http://articles.latimes.com/2006/jul/20/business/fi-rent20
The article points to the fact low affordibility caused a higher occupancy rate causing larger rent increases yoy.
The one interesting point is the Irvine Company saying they didn’t increase their rents for the first part of 2000. They increased mine at the end of every lease.
While I agree that having a mortgage larger than the market value of the home reduces that owner’s mobility, I wonder how much mobility moves elsewhere.
For example, renters and recent graduates tend to be more mobile than homeowners in any market. There are still plenty of each. Some of the demand for movers gets diverted to them.
Some of the demand for employees is also diverted to other geographies, particularly those which did not have a bubble. With a choice between moving a top executive from Riverside or Dallas to Chicago, if both are homeowners, the one from Riverside will be in a worse position. Either the potential employer pays a $100k+ hiring bonus to cover his negative equity, or he does something else like rent out the house at a loss every month, or save up in order to be able to sell his house. Of course, he could also accept the offer and hand the keys back to the bank. Hope he isn’t looking for a new job where they care about credit history soon.
The guy from Dallas just sells his house and breaks even or makes a slight profit.
A renter says “sure, when can I start?”
The other place the mobility might get rearranged is the job location. Sometimes the job can move to the employee’s current city. Other times, an entirely new office or plant can be located nearby. Since home prices were one of the main deterrents to expansion in CA starting around 2002, dropping home prices mean more people can stay here or relocate here and be homeowners.
Effective rents in SoCal have certainly declined in the last 12 months. While not a perfect sample, my partners and I own about 5,000 units from San Diego County up to Ventura and we have seen real collections (net of concessions, delinquencies, etc) decline. People are doubling up, moving in with parents, or leaving the state due to employment issues. Not fun times.
Love the Blog IR. Good luck with the book.
Are those units apartments or SFR’s? I had heard that apartments are a tough rental because house rentals are more available and cheaper than owning, not to mention all the foreclosed upon want to be in a house. Have the effective rents decrease in coastal housing, or housing not specifically in the IE?
Robert,
The top areas to live in Irvine I would say are:
1) Shady Canyon
2) Turtle Rock
3) Woodbridge
4) Northwood
5) The Ranch
Shady Canyon and Turtle Rock are priced beyond most peoples means, Woodbridge has a nice mix of apartments, condos and single family homes with a ton of ammenities, Northwood has some really nice areas and The Ranch is kind of a throw-back neighboorhood of all single family homes where associations don’t rule the world and hoemowners have some freedom to do what they want to with their homes. This is just my own personal list – I’m sure others will have their own thoughts. If you were just going strictly by price then many of the newer neighboorhoods would be included – at least until their prices decline more.
Bad neighboorhoods? Most of the “bad” neighboorhoods make my list because they are either older or have poor locations or they just have no real sense of identity.
1) Orangetree – near Irvine Valley College
2) Culverdale – now called something like West Park South – very old area way too close to the 405 freeway
3) University Park – near Michelson and San Joaquin Middle School. Some of the last leasehold properties in Irvine – poorly planned developments
4) College Park – older properties – noise from the 5 freeway
5) Any properties that has an $800,000 mortgage that is worth less than $600,000.
Just my opinions from living here since 1987. Let’s hear some opinions…..
Dano
Hi Dano, here’s my thoughts…
Top Areas
1) Shady Canyon
2) Turtle Rock
3) Westpark
4) Woodbridge
5) Northpark
Like you, I believe SC and TR are priced beyond most people’s means but IMO have really nice homes, views, and cooler weather due to close proximity to the coast. Westpark is nice because it’s close to the IBC (Irvine Business Complex), schools are top-notch, and lots of amenities. Woodbridge is nice because of the lakes, schools, and amenities but I don’t like the home designs too much. Northpark’s pluses are its big homes but it’s too far north for me.
Bottom Areas
1) El Camino Real
2) Deerfield
3) Walnut
4) Orangetree
5) Quail Hill
Most of these areas are the city’s older designs with less amenities and weak HOA’s that cause poorly-maintained homes. Plus, most of these areas are near major transportation corridors that cause increased noise. The pluses are you can get some bigger lots at a fraction of the price compared to other areas of Irvine. Quail Hill to me is nice, but it’s far from the IBC and has more density than I like.
This is just my best guess…my thoughts are subject to change based on other’s opinions…
🙂
The other saving grace of places like Deerfield and Walnut are the proximity to lots of good shopping options. That’s one thing about Turtle Rock that I’m sure a lot of fans of old-fashioned family-style SFR suburbs actually like but which I do not — the vast swaths of housing tracts with no retail presence.
Thanks for the opinions on where to live in Irvine. I’ve saved and highlighted your comments my weekend field days checking neighborhoods. Thanks again.
Where is The Ranch? I wasn’t able to find it with Google.
I remember someone on here had a web page where they have a listing of all the Irvine neighborhoods (with abbreviations and other info), but I can’t seem to find it now.
Interesting comment thread. I seem to be the least bearish of the group 🙂
I appreciate that you haven’t lost your objectivity. 🙂
A realist seems like a Bear when everyone around him is a Bull, and seems like a Bull when everyone around him is a Bear. The realist is right far more often than the average, because he never listens to the crowds; he sticks to the numbers and builds out the arguments. The truth of the matter is that the American economy has some serious weaknesses and is still in for a lot of pain for a long time, but it has a few strengths up its sleeves, too, and you never want to count out the average U.S. citizen.
Once the Gore global conspiracy to sabotage the global stock and real estate markets to put a Democrat in the White House is over, this mad depression will go away and the RE market in Irvine will quickly climb to 800++ per square foot.
Places like El Camino Real here will go for even more as the Democratic Kontrolled Gov. will buy the whole place and contract with Gore Industries to build a State of the Art train station for Amtrak trains up and down the Coast and West to Hawaii on the Transpacific Tunnel to China (Wallmart wants to lower their costs).
At that point I think I’ll sell my Chateau at TR, move to a “delux” double wide in Virgina City and get me a restored For Ranchero.. I never cared that much for the Chevy El Camino…
I really don’t think people are walking away from their home anymore. The drop in foreclosures means that more people are becoming “caretakers” for the bank. In exchange for not paying rent, they are keeping the lawn watered, lights on, and vandals away.
This allows the banks to avoid writing down the value of the loan and holds down expenses. It’s easier to lose the interest over time than to take one big hit and show the world what your assets are really worth.
It will be interesting to see how much longer everyone can play this game.
It still comes down to what you can afford. If everyone is counting on inflation to solve the problem, ask yourself one question. When do I think my boss is going to give me a 100% raise?
Gotta admit that’s brilliant.
Sit on your overpriced McMansion, not paying the mortgage, perhaps only paying the utilities as a caretaker and wait until the Feds intervene and redo your mortgage to a third of what is was.
Dang it… where did I go wrong? Why do I have the niggling concern that if I did that they’d throw me on the street? Not to mention the actual equity that I do have in the place.
I guess being responsible in this country just gets you screwed.
Tony,
I don’t think your concern is niggling.
What I think may well happen is the scenario you mention initially, but tied to terms so onerous as to induce what can only be interpreted as debt-slavery. That is: “Sure, we’ll let you ‘buy’ this house, but if you ever move, you pony up the difference, full recourse”
Given everything that has happened in the last month, I cannot imagine the bankster taking a permanent loss. They will surely find a way to recoup at someone’s expense later. I could see them getting major tax-payer funded benefits up front, then double dipping on the back some years down the road when the owner sells.
The way the game looks now, I can’t see where doing anything other than walking away would be the best solution. It’s not like they won’t lend again to such people in the future, they love people that like to borrow money.
El Camino Real has good and bad areas. The ones near Jeffery and the rail road (by Walnut) has both rail/train and high voltage power lines. That’s a very lame area to live in, sandwiched by train noise and high voltage. The areas along Irvine Center Drive, IMO, is OK but over-priced.
Woodbridge, at least inside the Yale Loop, is a beautiful community. Its landscaping puts Oak Creek next door to shame. Actually the only landscaping in Oak Creek that could match it is along Alton, outside the walls, LoL. The landscaping and parks inside Oak Creek doesn’t com close to Woodbridge’s level — I live in Oak Creek BTW.
Parts of Quail Hill is pretty nice, but the realistically affordable units are, I suspect, crammed even closer to each other than Oak Creek homes. The nice homes on the hill are well out of reach for most.
Is anyone familiar with Rancho San Joaquin? Seems like an interesting area with golf course property.
Some day, when Irvine goes into decline like Mission Viejo, the older homes & areas next to the freeway will probably decline first. Just my $0.02.
Good point about the trains. The airhorns are extremely loud wherever the trains have to cross streets (as opposed to where there’s a dedicated train bridge, as at Culver and under construction at Jeffrey). I don’t understand how the people in those houses in south Tustin that abut the track along Edinger can bear it.
Yee-Gads – the market closed down 733 – will that have an effect on the housing market?
WOW. Small World.
I have personal knowledge on this one. This house used to belong to my friend Paul. Poor guy.
He tried like hell to sell this but he just followed the market down. At one point he almost had it sold for $ 600K a little over a year ago.
He used his Heloc $$$ on a small business that did
not do too well either. It does have a nice small back yard that used to have a fish pond. An ok Kitchen. But it is a small home with tiny rooms as I recall. The neighborhood is getting older.
And all that traffic around Culver/Walnut. No Thanks.
At one time this would have gone for $ 700K at the peak. That old shake roof is ready for the trash too. The poor guy did all he could to save
this from the bank as I recall. But when it went underwater he let it go. As a rental you would be hard pressed to get $ 2400.00 for this place.
As I recall the inside is rather worn too.
Thanks for the insider info. It’s good to have the occasional example of HELOC use that was used for legitimate and responsible purposes, not just to buy toys as there’s a bit too much eagerness to assume here on IHB.
Another example of that is a friend of mine who’s a teacher and uses her HELOC to tide her over during the summer months when she’s not receiving a paycheck (as well as for medical costs not paid for by insurance, which people here love to claim almost never happens).
There’s no way you’d get $2,400 for this house. Much much much nicer places around 1,700sf in Northpark rent for around that level.