Little Lies — Fleetwood Mac
Tell me lies
Tell me sweet little lies
Real estate always goes up. I will pay back this loan. Stated Income is OK. The market will recover to peak prices soon. There is a huge pent up demand. They are running out of land. Buy now or be priced out forever.
You all recognize the lies of The Great Housing Bubble. I imagine you could compile a longer list than I can. A great many people believed these lies (and many still do) because they wanted to. As long as prices were going up, any reason to buy seemed like a good one. There is one lie that everyone who buys real estate believes: prices will go up from here. Yes, there are people who claim they know prices will drop further, but nobody who buys think this will be very much or for very long.
I remember reading an article last year where a knife catcher was buying in a suburb of Los Angeles because prices had dropped about 10%. He said in the article that prices might drop 1%, 2% at most. Of course, prices have dropped 30% since then. It has been fascinating to me to watch knife catchers buy properties during this decline. I had always wondered what was going through people’s minds when they bought while prices are dropping. From what I have witnessed, they all believe they are buying the bottom.
Close my, close my, close my eyes
There will come a time when prices are still dropping that I may buy. I will do so because the purchase will save me money versus renting. At that price level, there is another valid economic reason to buy. Appreciation does not matter if a purchase has another economic benefit. Today’s knife catchers do not have that benefit. They are getting the worst of both worlds. They have equity evaporation, and they have a negative cashflow as compared to renting. It takes blind faith in the lies of the bubble and baptismal acceptance of kool aid to buy in this market.
Today’s featured property is actually one of the better deals I have seen. It is still above rental parity, but it is quickly approaching that threshold.
Asking Price: $456,000
Income Requirement: $114,000
Downpayment Needed: $91,200
Monthly Equity Burn: $3,800
Purchase Price: $645,000
Purchase Date: 6/30/2005
Address: 15 Woodland Drive, Irvine, CA 92604
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,655 |
| $/Sq. Ft.: | $276 |
| Lot Size: | 2,645
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Contemporary |
| Year Built: | 1976 |
| Stories: | 2 |
| Floor: | 1 |
| Area: | Woodbridge |
| County: | Orange |
| MLS#: | U8004956 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours) Fixer-upper
|
|
THIS IS THE CITY OF IRVINE. OUTSTANDING SCHOOLS, PARKS, RECREATION, AND
MORE. THE HOME IS A THREE BEDROOM TWO AND ONE QUARTER BATHROOM ATTACHED
SINGLE FAMILY HOME WITH CLOSE TO 1655 SQUARE FEET OF INTERIOR LIVING
SPACE. YOU WILL ENJOY THE PRIVATE PATIO AND REAR YARD THAT IS JUST THE
RIGHT SIZE FOR ENTERTAINING. THE HOME IS PART OF AN ASSOCIATION THAT
CREATES THE FEELING OF LIVING IN A RESORT, YOU HAVE AN ASSOCIATION
POOL, AND SPA, AND COMMON AREAS. THE LOCATION IS GREAT, YOU ARE CLOSE
TO ALL THE GOOD STUFF IN THE CITY; SCHOOLS, PARKS, RECREATION, SHOPPING
AND TRANSPORTATION. SO COME HOME TO IRVINE, AND START LIVING THE ORANGE
COUNTY LIFESTYLE TODAY.
ALL CAPS.
When I plug the inputs into the calculator, the cost of ownership comes to about $3,000 a month (the HOA Dues are a killer). I would estimate this would rent for about $2,400 a month, so it is only 20% overvalued. That sounds like a lot, but given that Irvine properties were 100% or more overvalued at the top, this is significant progress.
This house was purchased on 6/30/2005 for $645,000. The owner used a $516,000 first mortgage, a $129,000 second mortgage, and a $0 downpayment (big surprise). If this property sells for its asking price, and if a 6% commission is paid, the lender stands to lose $216,360.
This property is being offered for 29% off its 2005 purchase price. That is a significant discount for a single-family detached house in Irvine.
I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
{book}
If I could turn the page
In time then Id rearrange just a day or two
Close my, close my, close my eyes
But I couldnt find a way
So Ill settle for one day to believe in you
Tell me, tell me, tell me lies
Tell me lies
Tell me sweet little lies
(tell me lies, tell me, tell me lies)
Oh, no, no you cant disguise
(you cant disguise, no you cant disguise)
Tell me lies
Tell me sweet little lies
Although Im not making plans
I hope that you understand theres a reason why
Close your, close your, close your eyes
No more broken hearts
Were better off apart lets give it a try
Tell me, tell me, tell me lies
Little Lies — Fleetwood Mac
“That is a significant discount for a single-family detached house in Irvine.”
According to the description, it is an “ATTACHED SINGLE FAMILY HOME.”
You are right. I was looking at the elevation and the aerial where it looks like a SFD. It is in fact an attached product made to look like a detached one.
How can they classify it as a SFR when it’s not?
I was wondering why the lot size was so small.
LOL! This house was on the market in April when I was still with my realtard. She tried to tell us all the nice things about the house like the proximity to school and “woodbridge” etc, but somehow the hole in the carpet was a big turn off. Now it’s updated. We had a “conversation” on the staircase that the way I look at houses, there was no chance of getting anything in Irvine in my budget.
This was when the house was offered at 515k and I had told her that it won’t go above 450k by any standards:-)
CZ
The other fallacy being committed by your knife catching buffoons is that they are assuming that when prices begin to go back up, they will do so dramatically.
This mentality views the house as a commodity to be traded and flipped rather than a place to live in, pay off, and enjoy retirement in without worry of “making the payment”.
Assuming that you view your house as an investment. Let’s say you are very smart and lucky and time your purchase to buy right at the bottom of the decline.
WHAT IF the value of your home remains stagnant for 5-10 years from there on out?
This would be the same thing as investing in a CD with a 0% interest rate. What’s worse is that the house will have extra carrying costs such as taxes, maintenance, HOA, etc throughout the 10 years that you earn to return on your investment.
This sounds like an incredibly foolish investment to me.
And when the prices do begin to go back up, it will typically be in an adjustment for the cost of living (i.e inflation) which is hardly any different than investing at 0% as your investment will have the same purchasing power as when you started.
The knife catchers are betting that another bubble is around the corner and they are getting into the party while the chairs and decorations are still being put up.
These people are going to be very disappointed.
I will point out one advantage to the buying scenario you present.
Buying with a standard full am, fixed rate mortgage puts people on a forced saving plan. All the principal is in fact going to their savings. Many people will spend all they got, so this at least takes the money out of their hands before they spend it.
Yes, I agree with you – as long as house prices are stable.
That’s why I was explicitly saying that “viewed as an investment”, a house is foolish because I agree that the house is a good forced savings account as long as you see it for that reason rather than a speculative investment.
Fair enough, I missed the “viewed as an investment” part.
Something still missing from the analysis is the cap rate. If the house is bought at a price that offers an attractive cap rate, it can be a very profitable investment even if there is no appreciation.
Any discussion of investment property needs to include the cap rate and how it compares to competing investments.
Also, don’t you at least avoid 5-10 years of rent going up, whereas your monthly payment (mortgage, tax, hoa) should basically stay the same?
Rent is only going to go up with inflation. The amount of money invested in your house will not net more than inflation (in a typical stable market). It’s the same thing as investing in a CD that pays 0% interest.
The only good thing is that you are building some equity by paying down the balance.
I think what no_worries is saying is that if you have that standard fixed rate/fully am loan owning a home can be a hedge against inflation.
Your monthly housing costs will be fixed versus a rental, and you build equity by paying down the balance as you said.
No?
Yes, but if you want an investment that is going to beat inflation – a house is not the way to go.
The forced savings account argument has merit. But saving money and investing are two different animals.
“…WHAT IF the value of your home remains stagnant for 5-10 years from there on out?
This would be the same thing as investing in a CD with a 0% interest rate…”
I think you’re leaving out the fact that your home investment pays a dividend, even if its face value never increases, in the form of a place to live. The dividend is the equivalent cost of rent.
No, it is not paying you a dividend.
If I take $500.00 and put it in the bank, that 500.00 is not a payment from the bank to me. I am paying myself.
The dividend is the 3.5% ($17.50) that the bank pays me for letting my 500.00 sit in their coffers for a year.
Your house on the other hand pays you nothing after a year. All you have is the money you put into it minus all of your overhead which may or may not exceed what a renter pays in rent. You are also assuming that your “equity” is equal to what someone is willing to pay for your house.
Does your bank account need a new roof or new air conditioner from time to time?
The argument is not against houses being semi-savings accounts. The argument is the against the house as an investment.
People who invest typically have money.
Homedebtors do not have money to invest. They are paying interest to borrow money to invest in a commodity that carries a lot of overhead.
The equity effect gives an illusion of investing, but that is all that it is – an illusion.
A true real-estate investor, buys properties for cash. People who pay mortgages are not investors, they just playing a greater fool shell game.
“A true real-estate investor, buys properties for cash. People who pay mortgages are not investors, they just playing a greater fool shell game.”
That’s not entirely true. That’s like saying any major business in America is only doing things correctly if they’re using cash and not borrowing (which we all know isn’t the case). At the heart of capitalism is easy access to credit; you just have to carefully manage it.
Yeah, AZDavidPhx’s statement is rather ridiculous and insulting. Even figuring in interest, buying via a mortgage can be cheaper than (or at least on par with) renting, when timing and selection is done correctly. And most who appreciate the benefits of owning would tell you that they’d rather enjoy those benefits now, while paying off their house (at a higher total cost, due to the interest) rather than having to forgo those benefits for decades until they’re older and have saved up enough to pay with cash (at a lower total cost).
Bitter Renter, you must be responding to someone elses post. I have read your response several times and I cannot determine what you are even talking about.
It appears to me that you read something the wrong way and immediately began frothing at the mouth and went crazy.
No, not frothing, nor crazy. I’m responding to the same thing that lowrydr310 was (thus I made my response a response to theirs):
“People who pay mortgages are not investors, they just playing a greater fool shell game.”
is there perhaps any value in looking at things as 3 different options rather than two. The conventional rental we all know and love, second “ownership” as defined for those with mortgages – this is really a long term rental agreement with the bank with a fixed rental rate and some interesting options to alter the property, and some win/lose options when you choose to terminate the agreement early. Third is the “yes I really own it, I paid cash” option. [rarely seen in the real world].
“The dividend is the equivalent cost of rent.”
Not really. A dividend is supposed to be a benefit of ownership not obtained by those who do not own. Both renters and owners have the “use” benefit of a property. For a property to have true dividend value, the cost of ownership would need to be less than the cost of a rental. Then you have something of economic value that a renter does not.
Also, even if your house is fully paid off. It is not the same thing as money in the bank.
I can withdraw 500.00$ today from my bank account and blow it on a game of black jack. End of story, no big deal.
If I take out a HELOC for that 500.00 and go blow it on a game of Black Jack, some bank somewhere is eventually going to come looking for that 500.00 they gave me.
This is why I do not completely accept the “forced savings account” argument unconditionally.
Yes, you can build equity and get back some of what you put into your house.
BUT!!!
You have to SELL first! in order to realize that money.
Anything else is nothing more than a loan using your house as collateral.
I’m with you here. I don’t understand people including the equity in their home in their net worth. It’s just too fungible. Your equity can be a good financial cushion allowing access to credit otherwise unavailable; but otherwise, it only adds real value to your net worth IF something else happens (e.g. you downsize, move to a lower cost locale, etc.).
I think that prices will NEVER reach the previous highs. The demographics are not there. The boomer die-off will be starting soon. And the historic flame-out will only lead to crashing and burning. There will never be another Phoenix.
This is what i’m *hoping* for when I buy.
Assuming you can get a tax break, you’ll save money, build equity, and your ‘move-up’ house will technically be getting *cheaper* (assuming inflation and salary raises).
My dream scenario is to buy a condo, have prices stay flat while i’m in my condo building equity and saving 12k a year on taxes, and continually increase my salary.
Then I’ll be much more likely to afford a move-up house. If things appreciated, I would be less able to afford a move-up house in 5 years or so.
This is my first time writing on this blog, but read it religiously everyday. We have relocated from Santa Monica about 1 1/2 years ago and have been renting (thankfully). We rented in Northwood Pointe until the owners had to sell their home (they bought it in 06, didn’t like the backyard, then bought another in ’07.) We are now in Westpark, and love the fact that we are not losing money with purchasing a home.
In response to David AZ, we own a condo in Westwood, near UCLA and bought in ’89 for 200k. That was the height of the market. Over the years is dipped down to $140k and took over 10 years, until 2000 to be worth the the 200k we spent. 10 years!!!! We still own it and we are fine, as of course it is worth much more. I doubt most people can hang on that long.
Sounds like you made a smart decision to rent for awhile.
In regard to your condo, I’m guessing you also used more traditional financing, underwent proper income verification, and the bank probably even made sure that your down payment was actually saved up by you (as would normally be expected).
The people who bought at the top of this latest market were into financial voodoo with balooning payments on the horizon and the bank didn’t bother to do a basic pat-down on the borrowers.
These people gambled a lot more than you probably did.
It’s going to be a tough road ahead for these people and the rest of us who now share in the loss via taxes and inflation. At least the bankers will be OK though.
oc, my friends bought a condo at the same time you did and told me the same thing…it took over 10 years for them to get their purchase price back, but that doesn’t even count the carrying costs and everything. Yeah, they rented it out for a while but they were still bummed.
I agree, I think most people won’t be able to hang on that long. I think we’ll see some price stabilization in the next couple of years then a few years of flat/no growth.
“I would estimate this would rent for about $2,400 a month”
Just leased a 1540 sf detached house with 4500 sf lot for $2260 in Northwood. We found definite willingness to drop prices especially with good credit. The house was purchased in 2004 for $625K. Why buy now when leases are falling?
Rents falling? I suppose that probably means that people should not be using current market rents to derive any conclusions regarding the absolute bottom-value of a house.
Unemployment is supposedly up to 6.5% today nation-wide. I would imagine there are a significant number of unemployed real-estate agents and financial Wizards in the CA area.
Either way, that can’t be very good for those high rents!
Rents in CA are going to have to come back down to a level more consistent with the rest of the country. The weather was just as nice in 1970 as it is now and people were not spending an arm and a leg for a studio apartment.
I guess that people are moving out as soon as they lose their jobs, here in Huntington Beach. There were two moving trucks in one day a couple weeks ago. This is after the end of beach season. I suspect that many are headed out of state or to cheaper areas.
We will buy before the bottom, and we will lose some equity. My wife will not wait until the bottom, and my marriage and peace in our household is more important than some extra equity.
Just make sure that you have Suzanne research it before you buy.
LOL.
I have to agree with everyone else: true, it might rent for $2400, but why should you get stuck in a year’s lease for that price when it’ll probably be renting for $1800 or less in six months?
I’m already seeing the same situation here in Dallas: in my neighborhood, many of the older locals waited too long to put their houses up for sale when they retired, and now they’re desperately trying to get what value they can in an area already overflowing with Sixties-era ranch homes. In at least two cases on my commute to work, the owners died while waiting for someone to come along and offer them the value that Some Guy told them the house was worth, and now their heirs are trying to get out from underneath the property and inheritance taxes. At this point, especially with some of the famed Dallas McMansions, the owners aren’t even trying to get what used to be a fair market price on rent. They’re just happy to get in a regularly paying tenant with a good credit history who’ll mow the lawns, clean up the back yard, keep his frat brothers from punching holes in the walls, and prevent the place from decaying before our eyes.
It looks like the car is parked on the lawn (or where a lawn should be).
That is odd. They have a 2 car garage, and yet felt it necessary to pave their yard to have enough parking. 1 car per bedroom? As a rental? Or did they just buy too much stuff and use up all the space in the garage? Or is the 1976 garage incapable of fitting the gas-guzzlers of today? Hmmm
While pondering that I ask myself, why the interior walls are painted the same color as the exterior walls. The total mesa feel, or total lack of inspiration?
The entire development was planned like this– all the houses have a “front lawn” you can park on. There are no curbs. It’s not just this house.
I can’t remember the type of financing, but I believe we (our family) put a large sum (almost half down) and paid it off within a few years. Don’t get me wrong. We are not rich or extravagant. We had very little money growing up. But was we did was save ALOT. We didn’t go out to dinner very often, buy the latest clothes, take luxurious vacation, or get pedicures. We lived below our means. We saved enough to buy a property, which then allowed us to use the income generated from the rental and leverage it to purchase other properties. I am still new to this, as my parents were the ones who first invested, but I am learning first hand that living with very little debt and below your means is definitely the way to go. Irvine renter, we would like to buy a home(we have 3 young kids and would like to have them settled in a permanent home), do you suggest to buy in mid to late 2009 or after?
AZ’s crystal ball says:
Save your money until 2012. There is an Option-ARM tidal wave headed your way. The foreclosures are going to get worse and the knife catchers are going to start wanting out of the casino around 2011.
http://www.crackthecode.us/images/optionarmexplode.jpg
This may be a conservative estimate. Others seem to think that the process will be accelerated and the system will be flushed sooner. Depends on how optimistic you are.
I’m one to believe the issue you highlighted will flush out sooner.
Those recast dates are based on optimistic assumptions that a significant portion of the people would be paying the interest only or fully-amortizing payment of the pay option.
As has been documented, northwards of 90% are paying the minimum down, forcing may to exceed the 115% to 125% of original loan value covenants in place. Those face earlier recasts (not resets, recasts). This is what is going to force the next wave of foreclosures, as in 2005 and 2006, some 35 to 40% of ALL borrowers were using Pay-Option loans.
Some have even gone so far as to say that a significant portion of the current foreclosures are pay-option owners. I have not seen that in my analysis, but I could be wrong since I don’t track the high-end as much. I think you’ll see Pay-Option mass capitulation in Mid 2009 through Mid 2011. Prices could bottom as early as 2011. Either way, 2012 isn’t going to be far off.
Chuck Ponzi
http://www.socalbubble.com
By observation rents have not been declining in Woodbury – leasing listings have drawn strong interest. The condo next to the one I rent is 3/3 about 2,000 sq ft. When the agent put it on the market for lease at $2975 she got so many offers that the price quickly escalated to $3,000 plus. From our front porch we saw an army of interested families come by for a look. The same is true of the other 3 bedreoom listings in the community. This does not make me happy as I am planning on asking for a substantial decrease in the rent when my lease comes up again at the end of this year. I really don’t want to change rentals while I wait for home prices to come down, however we must be willing in order to negotiate effectively. (but don’t think I’m even closing to convincing my wife of that)
I did extensive research about Irvine rents before buying, and it was impossible to pinpoint a “fair rent.” Meaning, due to the unending variables, I could only conclude a wide range for a possible rent for any given home (e.g. $2,700 – 3,200).
When you’re trying to extrapolate the fair market value (FMV) from the rental cost using the wide a range, the FMV value’s range is just as wide.
That’s interesting.
I’m guessing it’s because the lack of available credit has kept people from purchasing homes so they rent.
Another scenario: My co-worker owns a rental and many of the applications were from people that got foreclosed on, so renting is their only option.
I thought the link below was the more current and accurate picture of the resets?
http://images.businessweek.com/story/08/popup/0604_arm_reset.jpg
The question then is..will the government rescue these people? Will they have to? And if they are rescued shouldn’t the re-selling of the house to the occupant count as a comp so that, in all fairness, those who wish to purchase in that same neighborhood can compete?
Either way, I am liking 2012.
If other people want to go shopping in 2010-2011 – have at it. To each his own.
Also have to pay very close attention to the interest rates in 2011. If the government goes the way of Japan with 0%, be ready to lowball the hell out of the sellers as future rate hikes will kill your equity.
If the government goes the way of Japan with 0%, be ready to lowball the hell out of the sellers as future rate hikes will kill your equity.
Can you explain this?
Check out any mortgage calculator and play with the interest. Once the interest rates go way up, the amount of house you can afford goes way down. Thus stalling out the buying process and driving down prices.
Yes. I posted a lengthy response, but it is sitting in the IHB spam queue below. I’m guessing it will be allowed in later.
The underlying logic that Tim and AZDavid note is sound, but in any individual person’s circumstance, the advice can’t be so cut-and-dry.
A $240K loan at 6.5%, 80% LTV (so no PMI), 1% tax rate is a monthly payment of 1817, and over 30 years is $654K
To get the same monthly payment at 8.55 interest (and everything else the same), you can only borrow around $213K (or, 90% as much).
However, the second person would recognize more tax savings (as they are paying more in interest), so the “break-even” is likely higher. So maybe they could afford a $220K loan.
Because the great unwashed masses are focused on the monthly payment, higher rates drive down prices. So, even if you get a place at a payment that you can afford, your neighbor will end up selling his house for less when rates go up.
Now, here’s where it gets REALLY complicated. You can refinance to get a better rate, but in MOST times, you can’t simply declare your house to be worth more. So, a number of people argue that you should focus on the purchase price more than the monthly payment, especially in times of higher rates. However, I think that the logic that Tim and AZDavid are applying ONLY works if you know which way rates are going and how that will work out by the time you are going to sell your house. Because, until you sell your house, it really is inconsequential how much it is “worth;” the only thing that will matter then is how much you are paying every month. Eventually, you may move, and then price matters to you.
The problem is that I’m not so sure that mortgage rates are that predictable, especially 2 or more years out. So, buying a house when rates are high (because the equity is low) might make sense, but if you don’t see the end of high interest rates in sight before you sell, then the purchase of X at 15% vs. 2X at 7% could be a wash. (numbers just for the sake of example; haven’t crunched those)
Right now, I’d agree with AZDavid that rates are low now, and my guess is that they’ll go up. But, with the implosion of the whole economy, the rates might stay low for a good while. Eventually, all this inflationary pressure in the debt and other places SHOULD lead to higher rates, but given the way we’ve managed to band-aid ourselves forward for the last 30 years, one starts to wonder if we can’t keep doing that for another 30.
The government is currently keeping interest rates very low because they want to keep credit flowing and they want us, their slaves, to keep borrowing and not protesting.
http://www.crackthecode.us/images/ratecharts16.jpg
If they raise interest rates too fast, they will freeze up the system completely as nobody can borrow.
This is why your grocery bill is higher today than this time 1 year ago and why the savings rate on your CD or money market acount is half of what it used to be.
Eventually they are going to have to bring the interest rates back up. When this happens, you will not be able to borrow as much money to buy that house.
As a result, since the average person cannot borrow as much money, nobody will be able to afford that house. Therefore, the value of the house will go down.
If you borrowed the maximum to buy your house when rates were low, you are going to have a hard time finding a greater fool to bail you out later on down the road when money costs a lot more to borrow.
So if you buy before interest rates go up, make sure you figure that loss into your offer because you cannt expect to re-sell it later for the amount you paid.
The Japanese government has already tried this:
http://www.nytimes.com/2005/12/25/business/yourmoney/25japan.html?ei=5090&en=32ab31a39ab94fe6&ex=1293166800&adxnnl=1&partner=rssuserland&emc=rss&adxnnlx=1135520091-wtUvV/njj/McXMan+wQK8w&pagewanted=all
We are simply repeating history, but hopefully a little wiser this time around.
“THIS IS THE CITY OF IRVINE. OUTSTANDING SCHOOLS, PARKS, RECREATION, AND MORE.”
Nothing like the polished writing skills of an RE agent to trumpet the virtues of Irvine schools.
You too, can learn the tricks of the trade.
In my new book:
http://www.crackthecode.us/images/realtorspelling.jpg
ha ha ha ha
SLOD!
I was typing the same thing, but I got the spam word wrong and you beat me to it.
Well done AZ.
SLOD!!!
IR, your “baptismal acceptance of kool aid” phrase was quite LOL-inducing. 😆
BTW, looks like this relatively good deal didn’t last long — Redfin now just has “The most recent listing for this property has gone off the market.”
Another one finds a knife!
YEOW!