Sweet Baby James — James Taylor
The low end of the market collapsed first while the mid- and high-end of the market dropped at a slower rate. There is still a great deal of denial at the high end, but now the mid range is starting to break down. I have profiled a number of properties in the $600,000 to the $1,000,000 range that are showing significant price drops from the peak. The collapse is working its way up the food chain.
The first sign of a troubled real estate market is a dramatic reduction in volume known as buyer exhaustion. There are simply not enough buyers able or willing to push prices any higher even at the lower transaction volumes. In a residential real estate market, this phenomenon is particularly pronounced at the entry level. The imbalance between supply and demand first becomes apparent at the bottom of the affordability scale with entry-level buyers because these buyers are not bringing the profits from a previous sale with them to the next property. Affordability is less of a problem for existing homeowners in the move-up market due to this equity transfer.
The real estate market can be visualized as a massive pyramid. There are very few multi-million dollar properties at the top of the pyramid, and a large number of relatively inexpensive entry-level properties forming the base. Like any structure, if the foundation is weakened, the structure may collapse. In the same way, housing markets collapse from the bottom up due to problems with affordability. The foundation of a residential real estate market is the entry-level buyer. Entry-level buyers are generally young people starting to form new households. When homeowners want to sell their house and move up to a nicer one, someone needs to buy their house. If you follow this chain of move-ups backward, eventually you come to an entry level buyer. If there are no entry level buyers pushing the sequence of move ups, the entire real estate market ceases to function.
Today’s featured property is one of the move-up type properties in one of Irvine’s most desirable neighborhoods: Turtle Ridge. We have not seen much distress in this neighborhood to date as knife catchers have been quick to gobble up any property coming on the market at a discount. The WTF prices at the high end are still living on healthy doses of kool aid. If (I should say when) more properties like today’s enter the market, the bough might break, and down will come prices, Turtle Ridge and all.
Asking Price: $849,000
Income Requirement: $212,250
Downpayment Needed: $169,800
Monthly Equity Burn: $7,075
Purchase Price: $985,000
Purchase Date: 5/24/2006
Address: 49 Bower Tree, Irvine, CA 92603
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 1,770 |
| $/Sq. Ft.: | $480 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Tuscan |
| Year Built: | 2003 |
| Stories: | 2 |
| Floor: | 1 |
| Area: | Turtle Ridge |
| County: | Orange |
| MLS#: | U8004573 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 41 days |
RARE, RARE main floor bedroom and full bathroom makes this a possible 4
bedroom, or a 3 bedroom plus an office. Highly upgraded with hardwood
floors, custom paint and crown moulding throughout. Top of the line
kitchen includes Viking appliances, luxurious kitchen island, and walk
in pantry. Backyard with gorgeous flagstone and fountain. Garage
features built in cabinetry also.
gurde? moulding?
This house was purchased on 5/24/2006 almost at the peak of the bubble for $985,000. The owners used a $738,750 first mortgage and a $246,250 downpayment. They are trying to sell while they still have some equity left. We are starting to see more properties with 10% and 20% downpayments enter the market.
If this house sells for its asking price, and if a 6% commission is paid, the owners stand to lose $186,940. Ouch!
This house is offered for 14% off its peak purchase price.
{book}
There is a young cowboy he lives on the range
His horse and his cattle are his only companions
He works in the saddle and he sleeps in the canyons
Waiting for summer, his pastures to change
And as the moon rises he sits by his fire
Thinking about women and glasses of beer
And closing his eyes as the doggies retire
He sings out a song which is soft but its clear
As if maybe someone could hear
(chorus)
Goodnight you moonlight ladies
Rockabye sweet baby james
Deep greens and blues are the colors I choose
Wont you let me go down in my dreams
And rockabye sweet baby james
Sweet Baby James — James Taylor
patrick.net is linking your book today.
Redfin has it off the market, Zillow still has some info: http://www.zillow.com/homedetails/photos/61646092_zpid
Looking at the Walmart furnishings these folks were probably over their heads from the start.
Thank you. I updated the link.
Just an aside, those “water features” usually look great for less than a year and then they need regular maintenance. We’ve never had one, but our neighbors got a great looking splashing fountain that they took out completely before 5 years were up. It just didn’t look all that great anymore and the upkeep became more frequent to keep it in working order. I think this had something to do with the hard water.
It does tend to give that faux luxury resort feel to the property, doesn’t it?
“Stay-cation all I ever wanted
Stay-cation had to get away…”
What a waste of $246,250. That much money would buy a house in full in many parts of the country.
To think it was pissed away on an overpriced apartment. Ugh.
Now they need to bring in a knife-catcher with another 246K to lose.
big deal. they probably didn’t EARN that $$$$ anyway.
that $250K probably came from another trade-in property.
hopefully they’ll have learned a good lesson.
Think about the kind of interest that their bubble money could have earned if they put it into a bank back in ’06 and rented an apartment for awhile.
They could have taken that 246K, spread it between 3 CD’s at 82K each.
At about this time now, their 3-cd ladder would be worth about 271K assuming interest rates of 2.50% (1 year), 3.00% (2 year), and 3.50% (3 year) respectively.
They would be +25K (not bad)
That alone pays for 16.6 months of rent at 1500.00 per month or 1 year of rent at 2000.00 a month.
In the meantime, they could have been saving more and more money.
That’s quite a premium they ended up paying in order to tell all of their friends and family that they live in a fancy-pants neighborhood.
LOL@fancy pants comment
and maybe bought stock in Wamu, Wachovia or Lehman, and made tons of money… what a bunch of losers… 🙂
No joke. Notice how there are multiple shots of the kitchen and dining “area,” but only one apiece of the living room and bedroom? It looks like the granite countertops are the only attractive thing inside this condo.
Some knife-catcher will run for this, I’m sure. Their eyes will glaze over from all the glitz (semi-ritzy, chain motel glamour), and they’ll take advantage of the falling mortgage rates to squeeze themselves in.
“The real estate market can be visualized as a massive pyramid.”
From 2001-mid 2007, it was also a massive pyramid scheme.
IR I am curious as to how TR has maintained these insane prices in the face of the worst market of all time. Asking prices are consistantly 10-25% more than purchase prices during the peak of 2-3 years ago.
Is this just a case of wealthier indiviauls who can afford to hold on longer? When do you think these prices will come in line with the rest of the market? I would appreciate some insight as we love the area, but cannot justify buying, even now.
TR had less speculation than some other parts of Irvine and you have less turnover with the SFR in particular. You might have a slightly higher median household income in this part of Irvine but I think most of these people hold out because they don’t really have to sell…if they don’t get their WTF price they’ll just wait till later.
From what I’ve seen the condos have been in a freefall though.
the problems there is no later, 😆
at some point enough people will have to sell, will ther be enough buyers with the required incomes? I doubt
Tomorrow I am profiling a another property in Turtle Ridge that is owned by a wealthy family. They are asking a WTF price even higher than the simply ridiculous prices in the rest of TR. I would note than none of these are selling. People can ask whatever they want (and they do,) but nobody can finance these asking prices, so they just sit there. When the loans start blowing up there, the high end will fall, probably very hard.
IR, don’t know if you profiled this TR property:
19 Southern Wood, zip 92603.
Asking $845k ($515 sq. ft.)
Paid $825K in 7/06.
Talk about a WTF price. Trying to get peak price and looks like no improvements were made to the property.
This is still not good value. There are too many rooms in too little space. And a moment for a woman’s perspective. Over 800K for a dwelling where I have to go to the garage, which probably does not have heat or AC, and which will have a fundamental and endless dirt and dust issue from vehicles coming in and out, to do the laundry!?!?! That is completely ridiculous. The fancy center island and the TR address don’t even begin to make up for that gross inconvenience. I really think that when people come to their senses about basic livability features that these nutso places will be worth very little.
I agree…paying 985K to do laundry in the garage. :gulp: Just crazy.
But wait, Turtle Rockian’s don’t do their own laundry, they have maids for those menial tasks.
Oh, you said it.
I’m still shaking my head over the placement of the dining “room” (a completely undeserved designation) by the staircase. Maybe I’m an old-fashioned Midwestern girl, but I don’t want that much indoor traffic coming through my dining room. An eat-in kitchen is one thing, but you want to keep the dining room looking nice.
What’s with all the blurry pics?
Longtime lurker and rare poster here.
I too am surprised the higher end has been more resiliant. I’m wondering how does the move-up and mcmansion market ever stabilize?
I can see the entry level market will eventually stabilize when we get prices fall to rental parity or when the average person can fund the property with a 28% DTI/80% LTV mortgage. So the entry level will probably be the first to stabilize.
But the move up market – in normal conditions – is based on the guy who bought the entry level house say 5 yrs ago moving up and rolling his equity (and releverages at a new 28% DTI level taking into account they may have had some pay raises since they bought the original house). However it would seem that almost any entry level owner today who bought with 20% (most were 100% LTV I know) and bought in say the last 4 years has lost most of their down payment. Even if we assume we are near bottom and will get CPI level appreciation from here(a generous assumption) it will still be a few years before the current entry level home owners will have a material amount of equity to rollup. Obviously if prices have further to fall and take longer to recover it will take longer for these people to be able to move on up. So it seems that the gap between move-ups and entry-level, which probably widened during the Great Bubble, will have to contract significantly in the Great Unwind.
“how does the move-up and mcmansion market ever stabilize?”
I am trying to think of a term for this type of buyer, something like a “high end rent saver”.
I am one of the people who has been renting while saving a lot of money. The kind of houses I might buy have been falling in price at a 20-25% annual rate since early 2007. When the prices finally settle, it will cost less to buy one of these homes than to rent it.
This particular house could be bought with a jumbo conforming loan and 20% down. Homes with prices well over a million have completely different problems: higher borrowing costs than conforming (the spread is much bigger than it was in 2006, about 7.3% for loans over $1 million, vs 6% for under $729k); higher downpayment requirements; home mortgage interest is not deductible on the portion of any loan over $1 million; the low end has already had more of its carnage, option ARMs are just beginning to tear apart the high end.
I inquired about the $729K loans- basically if you wanted to buy a house now, those loans are almost impossible to get. I was told these loans were being phased out essentially within days as one has to close by the end of the year to get this limit. If I wanted to look at a house with the 729K loan limit, my offer price just went down 100K. I wonder why they want to bail out everyone, but they take this financing option away?
Yes, I think the reduction to $625k next year will put even more of a freeze on the housing market (don’t know how much more frozen it could get though)
🙂
Are there enough “high end rent savers” to support the number of houses in that category?
There are only so many ways people can get into the ownership market, or into high end homes. With the recession and home prices dropping nationally, there aren’t many people moving to Irvine who can afford to buy a high end home. The people who are most likely to buy are: 1. Newly married, and thus able to afford much more than either separately. Hopefully they were both renters. 2. Renters with good incomes who sat out the housing bubble, or who sold their homes before the crash. 3. To a lesser extent, people inheriting money.
MR: do you need to add a couple of arrows in there for birth (and aging out of the teens)? Naturally, those arrows lead TO “Living with Parents”, but one comes from homeowners and one comes from renters and goes back to renters.
Or is that the “marriage” arrow for in-migration?
Good question. It was actually quite a challenge to keep the number of arrows and boxes down to a minimum. I made the simplification that regardless of whether their parents owned or rented, teenagers and people just out of college who lived with their parents were renters. Some of them are actually paying rent to their parents, others aren’t. Regardless, the children are clearly not homeowners.
The inward migration via marriage arrow is for people who move to Irvine due to marriage. One of them might already live in Irvine, but the other doesn’t.
I’ve noticed that you have listed both ‘death’ and ‘marriage’. Isn’t that redundant? You could save a line.
That is a great graphic.
For people who want a similar graphic for other blogs that does not say “Irvine” on it, here it is.
Good points MR – the bad news is I don’t think there are many MalibuRenters out there, though that of course is great news for you.
There may be a another class of high end renters, which were people who sold in other parts of the country and relocated to SoCal but had sticker shock when they arrived. I know someone who sold their place in NY and relocated to SoCal in late 2006 and has rented since he moved there. He is probably going to buy in 2009 since his kids will be starting school and wants to settle in a neighborhood for them. He also said he doesn’t want to get too greedy and wait for bottom though he will be buying only the amount of house he needs ie he will keep his DTI as low as possible. I know IR has posted previously on the Southern California Cultural Pathology, and maybe some of the migrants from elsewhere in the US were able to see through it.
I wouldn’t say we are high class renters–renting a old house with leaking pool–2k sq. feet–2 car garage for 3k a month is dealing with the sticker shock and we are from the Bay area. We moved down here in 05 and my house could not buy me another one here–especially with your high tax, mello roos and high HOA’s.
There is still a lot of costs out of control here in Irvine. If we could work in another state I would move.
Being in NY area I chuckle at Californian’s idea of “high” property tax. In my town in Northern NJ with avg home price of $600k the average tax bill is $13k. Yesterday’s house posted by IR was asking $729k with taxes close to $5k. Admittedly our sales and income tax may be a bit less than CA
that tax rate of 5k on $729k has to be the owners rate meaning the price he paid on the house when he first bought–
the rate of buying the 729k home is one percent and an additional 1% or more up to 1.6% for mello roos (depending upon the area)
then add the HOA–those can be very high here–I’ve seen $465
and then don’t forget insurance our earth quake is not cheap–
So add it all up and you are paying taxes much higher for a decent property that is newer.
Only 20 year or much older homes have no mello roos tax. HOA’s depend upon the area–
Tax Information Tax Assessment History 2005 2006 2007 2008
Total property tax paid: $4,788 $4,884 $4,884 $4,983
Assessed value bldgs: $250,163 $255,166 $260,269 $265,474
Assessed value land: + $217,822 + $222,178 + $226,621 + $231,153
Total assessed value: = $467,985 = $477,344 = $486,890 = $496,627
http://www.zillow.com/homedetails/charts/25522080_zpid,5years_chartDuration
this tax rate was based on the assessed value of 496,627 if you buy it at listed price expect it to almost double–
The homeowners tax rate has to be ammended at the government level. When your neighbor pays under 2 K a year for living here and you would pay 10k on the same house something is not right.
The tax imbalance here in CA is going to keep people out of this state especially if Arnold goes ahead and raises them more. You cannot move within the state because of the much higher tax base. You are punished if you have to move.
The worst part about this state is they do very little for the young people moving here. Many of our new hires walk away.
Instead of the GREAT Park with land that will sit empty why don’t they build homes that people can really afford? And I don’t mean the shoe boxes.
The tax rate here is not that bad compared to the other states in which I have lived. In fact, I wonder sometimes if it is the low property tax rate that allowed prices to escalate so high – in other areas you simply cannot increase prices so much because the cost of property tax is too high.
The CA property tax system does raises prices a bit, if you expect that long term appreciation is >2% per year. For people who bought at the peak, they can get their properties, reassessed. For example, a $700k purchase in 2006 might be reassessed at $400k next year. However, if prices start rising, the property taxes could then rise by an unlimited amount from one year to the next, until it hits the $700k + 2% per year maximum.
The property tax system also leads to lower mobility for people who have owned their homes a long time, and lower affordability for anyone just moving in. This is one of the reasons why in CA children are less likely to live close to their parents.
I’d agree with movingaround that higher prop taxes would act as a brake on prices i.e. in NJ you have factor in that your tax bill is going to rise by CPI+2% so that acts as a damper on what you are willing to pay, and we’ve not seen quite the bubble as SoCal.
The way MalibuRenter describes it why isn’t everyone appealling ie if your tax price is higher than your current value you seem to have little to lose and all to gain. Worse case is your house comes back up to what you paid and you are back where you started
There is a loophole in the prop 13 tax code. If you own a home in one county “X” and relocate to county “Y”, those two counties may have an agreement that you can keep your old tax base for county X while living in County Y.
My in-laws had a house in Ventura County that they bought in 1987 for $200k. They sold it in 2005 for $1.1M and bought a home in San Diego for $900k. Today their prop tax is based off of the $200k sales price from 1987. Disgusting really.
This is a one time deal and is intended to allow retirees to downsize while allowing another family to move in. Otherwise you get stagnation in the community.
Malibu has 1/3 renters, and about 10-15% of homes and apartments which are vacant. Even in normal real estate times, it has a high vacancy rate. I think that is partly because it takes a long time to sell high end real estate, and because a lot are 2nd, 3rd, or 4th homes.
A large portion of those renters are in condos and single family homes. It’s fairly common to have a big house that 3-5 people rent and split. If you all know and like each other, it’s not bad. There are also a number of places with guesthouses that are rented out.
If the renters in Malibu wanted to, my guess is about 15% of them could have purchased the house/condo they were living in at the peak. At the bottom, more than half will be able to do so. That’s because Malibu will drop below rental parity. It happened before in the 1990s. It will happen again this time. I lived in two of them. One was sold out from under us in 1996, the other was foreclosed in 1994. Both the REO and the sale prices had all in costs of ownership below our rent.
and this house is 28 years old no hoa or mello roos–expect the tax rate to be one percent of the selling price–fyi
JUST REDUCED!!! BEST 5 BEDROOM VALUE IN IRVINE!!! This beautiful remodeled pool home has an extra large lot, PLUS approx. 350 SF has been added as a new family room off the remodeled kitchen. Original family room has been converted to a 5th bedroom with free-standing mirrored closet. Kitchen is remodeled with granite counters,newer oak cabinets,and newer appliances. HUGE UPSTAIRS BONUS ROOM can be converted into another bedroom! 3 fully remodeled bathrooms, newer carpet, mirrored wardrobe doors, closet organizers in each room, and lovely french doors and windows make this a wonderful family home! Gorgeous, large brick and concrete covered patio leads to built in pool and spa. NO HOA AND NO MELLO ROOS!!! This home is a must see!
Listing Information
Property Type: Single Family
Bedrooms:5 Bathrooms:3 Full
Lot Size:6,175 Sq. Ft. Lot Size SourceAssessor Square Feet:2,950 (approx)
Sq. Ft. Source:Landlord/Tenant/Seller Price per Sq. Ft.:$254.23 Year Built:1980
Garage: Yes – 3 spaces Stories: 2
Development: Shadow Run
Property History
Date Event Price Appreciation Source
Nov 03, 2008 Listed $1,799,000 — SoCalMLS #S553055
Jul 21, 2000 Sold $749,000 — Public Records
Property Tax
Taxable Value
Land $341,784
Additions $517,456
Total $859,240
Tax (2008) $12,737
this tax is based on the price of $859,240 and now this guy wants another almost a million more for this property–8 years later
5 Atascadero
Irvine, CA 92602
My experience with high end properties has shown them to be very susceptible to stock option and common stock values. If you were in the Bay Area during the DOT.COM bubble in 1999-2001 you watched high end homes triple in value, and then crash to as low as 25% of the peak price. What happens is that people put a lot of stock money into the home, and think that they will keep getting this money to support their lifestyle. It usually turns out that they cannot maintain this level of income for more than a few years. The market giveth, the market taketh away…
“My experience with high end properties has shown them to be very susceptible to stock option and common stock value…”
I don’t know if the practice of compensating people with stock options is as prevalent now as it was then.
Here in SoCal where we don’t have as many “start-up” high tech firms, inflated high-end home prices are just due to the pyramid scheme outlined above by IR.
The impending recession/depression will act like an army of jackhammers on the pyramid’s base. Right now you can hear all the hammer sounds, but the little light at the top of the pyramid is still happily & blissfully blinking.
Watch out little light! Watch out!
But the past few weeks have seen a major reversal. As the stock market wiped out prospective down-payments, tours and offers dropped 30%. Transactions that were done came undone. October will still be pretty good, then we’re headed for a big dip.
http://blog.redfin.com/blog/2008/10/a_very_tough_day.html
November will be VERY interesting for the sales numbers (esp above the entry level), and I believe cause of the massive slide in 401ks. Then again in Jan when the conforming limit is dropped a tad.
Don’t be so sure that the conforming limit will actually drop. There is a new bailout plan at least twice a week. I expect the current limits will be extended.
LOL @ the last two paragraphs. 😆
Interesting article with some updated numbers on the grand price decline:
http://money.cnn.com/2008/11/25/real_estate/third_quarter_case_shiller/?postversion=2008112515
Housing Could Bottom Sooner Than You Think..
While many think that the housing bottom is several years away, it could come within the next two to three quarters.
http://biz.yahoo.com/ts/081125/10449955.html
Interesting reading — thanks for that. As has been stated here before, though, O.C., and especially Irvine, began bubble inflation before most of the nation, and it’s very likely to correspondingly deflate after most of the nation.
New Case-Shiller numbers came out yesterday:
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_112555.pdf
Orange County doesn’t have its own index, but Los Angeles and San Diego are certainly still among the areas with the worst continuing declines.
One of the article’s reasons for a bottom is lower inventory. Fannie and Freddie have halted ALL of their foreclosures from November – early January. So of course the MLS inventory will go down.
Those foreclosures will be relisted on the MLS just in time for Obama to step in and delay them further.
Somewhat OT, but does anybody here wonder where still all those knifecatchers come from, and where they get the money? This may be a big part of the answer:
“FHA-Backed Loans: The New Subprime
The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more”
http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm