Who’ll Stop The Rain — Creedence Clearwater Revival
Long as I remember
the rain been comin’ down.
Clouds of myst’ry pouring
confusion on the ground.
The difference in asking prices between those who must sell their properties and those who do not is pretty remarkable. When I wrote about the ARM Problem, I laid out the case for destruction of pricing at the high end. Basically, the low end has been wiped out because this is where subprime was concentrated, and the high end is in a low-volume holding pattern waiting for the Alt-A and Option ARM resets to wipe them out. There have been some feeble attempts to make light of this problem, but I have not seen any compelling reason to believe these resets will not flatten the market. In fact, the mainstream media is starting to pick up on the fact that there is a Growing Foreclosure Crisis. I wrote the post, When Not If, to more clearly illustrate the ARM problem and show how it will impact one particular property. It will be one of many.
What I want to show today is just how devastating must-sell inventory is to a housing market. We have already seen the low end get blasted, but how significant are the discounts on high end properties when they become distressed? To illustrate I have two properties to view today. One is a distressed sale asking $1,073,100 and the other is a non-distressed homeowner asking $1,599,900. I don’t see many differences between these properties, but I will let you decide if one of them deserves a 50% premium over the other.
First our non-distressed property:
Asking Price: $1,599,900
Income Requirement: $400,000
Downpayment Needed: $320,000
Monthly Equity Burn: $13,333
Purchase Price: $589,000
Purchase Date: 12/23/1997
Address: 15 Spring Grove, Irvine, CA 92620
| Beds: | 6 |
| Baths: | 5 |
| Sq. Ft.: | 3,800 |
| $/Sq. Ft.: | $421 |
| Lot Size: | 9,000
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | French Provincial |
| Year Built: | 1997 |
| Stories: | 2 |
| View: | Trees/Woods |
| Area: | Northwood |
| County: | Orange |
| MLS#: | S560295 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 2 days |
with huge lot. POTENTIAL 6 BEDROOMS, 4.5 BATHS, POOL, SPA, BBQ, COVERED
LOGGIA, OUTDOOR FIREPLACE. SOARING CATHEDRAL ceiling living room, guest
suite and office downstairs, 4 bedrooms upstairs, master with retreat –
SUPER CLEAN – planatation shuttres, granite, Hunter Douglas blinds,
ITALIAN TILE floors, almost 9,000 square feet lot – ENJOY THREE
SWIMMING POOLS – less than 200 yards to AWARD WINNING elementary and
high schools.
WOW! the CAPS LOCK goes ON AND off.
Super clean? So what?
shuttres?
One sign of the lack of distress (or perhaps greed) is the extra $900 in the price tag. This guy was only willing to leave $100 on the table when dropping the price below $1,600,000. I suppose he could have priced it like gas and asked for $999.99 and 9/10.
Eleven years of ownership, and this guy thinks his property has tripled in value, and he deserves to make $1,000,000. Why not hang on for 33 years and make $3,000,000?
And now our distressed property:
Asking Price: $1,073,100
Income Requirement: $268,275
Downpayment Needed: $214,620
Monthly Equity Burn: $8,942
Purchase Price: $1,150,000
Purchase Date: 7/15/2003
Address: 2 Clear Creek, Irvine, CA 92620
| Beds: | 5 |
| Baths: | 5 |
| Sq. Ft.: | 3,800 |
| $/Sq. Ft.: | $282 |
| Lot Size: | 6,796
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Year Built: | 1998 |
| Stories: | 2 |
| Floor: | 1 |
| Area: | Northwood |
| County: | Orange |
| MLS#: | S560186 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
Community. Great cul-de-sac location with no neighbors behind. House
includes a large family room, living room, and gourmet kitchen with
breakfast nook. Rear yard includes a built-in barbeque area; excellent
for entertaining.
BTW, this is a 2003 Rollback at the high end.
| Date | Event | Price | Appreciation | Source |
|---|---|---|---|---|
| Jan 16, 2009 | Listed | $1,073,100 | — | SoCalMLS #S560186 |
| Sep 22, 2008 | Sold | $1,118,000 | -0.5%/yr | Public Records |
| Jul 15, 2003 | Sold | $1,150,000 | 16.5%/yr | Public Records |
| Aug 05, 1998 | Sold | $541,000 | — | Public Records |
These properties are very similar. The more expensive one has a bigger yard, a pool and one additional bedroom, but it is closer to Culver. The sizes are identical. The less expensive one is on the end of a cul de sac.
Each of these properties has plusses and minuses, and people can construct rational arguments why each one commands a premium over the other. I can’t come up with a good argument why one of them is 50% more expensive than the other… except that one is a distressed sale and one is not.
These distressed sales are going to greatly reduce prices. They already are.
{book}
Who`ll Stop The Rain
Long as I remember
the rain been comin’ down.
Clouds of myst’ry pouring
confusion on the ground.
Good men through the ages,
try’n’ to find the sun,
and I wonder, still I wonder,
who’ll stop the rain.
I went down Virgina
seekin’ shelter from the storm.
Caught up in the fable,
I watched the tower grow.
Five years plans and new deals,
wrapped in golden chains,
and I wonder, still I wonder,
who’ll stop the rain.
Heard the singers playin’
how we cheered for more.
The crowd had rushed together,
trying’ to keep warm.
Still the rain kept pourin’,
fallin’ in my ears,
and I wonder, still I wonder
who’ll stop the rain.
Who’ll Stop The Rain — Creedence Clearwater Revival
It looks like WaPo is reading your blog. Even though they focused on Riverside County they acknowledge your premis that prime loans are the next problem.
“But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default…”
And these pearls.
“Real estate became what gold was to the gold mining towns…”
“For a brief time in 2005, the housing market showed signs of cooling nationwide and interest rates edged up. Lenders reacted by reaching out to even riskier borrowers with more subprime and other exotic loans to keep the home-buying frenzy going…”
To bad they did reference your blog.
>>Eleven years of ownership, and this guy thinks his property has tripled in value, and he deserves to make $1,000,000. Why not hang on for 33 years and make $3,000<< And if compounding was used, the profit after 30 years would have been $13 millions. This property owner would be asking for $13.5 million in 2029.
I’m starting to see that in Texas as well. My wife and I visited an estate sale on Sunday where the owners had finally given up on selling their house, and decided to advertise, very loudly, its availability to rent. Well, it was a 4/4, with three of the bedrooms so saturated with mold and dust that the estate sale reps had to light candles in them the whole weekend long to cut the stench. The master bathroom was completely blocked off and covered with plastic, which helped explain the swamp in the back yard right next to the bathroom window. The foundation had shifted so badly (a regular hazard in North Texas, where almost everyone is built atop 5 to 15 feet of thick clay over 50 feet of chalk) that the back porch and door to the main living room were folded up like a taco shell. Oh, and the neighbors were so notorious for tearing down the street in monster SUVs that the owners had to put boulders in the front and side yards to keep fratboys from driving their Escalades and H2s into the house.
The best part? With the significant damage, the owners still expected a minimum of $3000 per month, which by Dallas standards was possible with normal wages if at least three people pooled together their incomes as roommates. The owners had held off for too long and demanded too much when the house was for sale, and now the rental was probably going to drop prices for the rest of the neighborhood. “Why the hell should I pay your prices? I can rent a money pit just like yours right next door, and I don’t have to be responsible for the repairs.”
This will become very common. This is part of why prices can be so sticky in a premium area. Not only do potential buyers have cash, but many bag holders have cash reserves. It will be a slow and long bleed for many.
You have home debtors who can’t sell at the price many people want to pay…. and you have insolvent banks who similarly can’t sell as they will get wiped out by the market correction on the high end. The lenders who dominated subprime are gone, guess who is next? It’s a long slow bleed in a desirable area…..
“Not only do potential buyers have cash, but many bag holders have cash reserves. It will be a slow and long bleed for many.”
I feel that this is part of the deflation process. When a $1MM loan is replaced with a $600k loan and $150k saved down payment, a very significant destruction of credit and money has taken place. I know someone who is considering paying some of his savings toward his home to lower the LTV so he can refi at the lower rates. For the same reasons, that would be another credit/money destroying event.
I also think price drops bring out a certain kind of buyer, one who’s been waiting and now can’t resist the urge to buy a home. Every time the home prices drop, you rustle a bunch of these folks out of the woods. When prices finally bottom, this doesn’t work anymore, and the bottom formed is quite stable for a long time thereafter. That seems to be how it played out in the early-to-mid 90s in Southern Cal.
Zoiks, I agree with you. Knife catchers with cash are contributing to deflation. As leverage ratios change from infinity (zero down), to 4:1 or lower that is deflationary. This happening everywhere. With the banks, home purchasing, car purchasing, credit cards, etc… You can print all the money you want, if leverage ratios are decreasing it is deflationary.
Mav,
That’s only partially correct in the pre-2007/2008 world. Once the Federal Reserve or the Federal Government starts purchasing assets at par, which they have, banks can re-lever back to infinity.
Never underestimate the power of a central banker over the value of a currency. They can debauch it much more than you can imagine.
Chuck Ponzi
that shell game will always end in the same place…. insolvency, either keep at the banking level or send it to the US balance sheet.
3800 sq ft REO in Northwood Pointe for $1.073? Unfortunately, I don’t think this house will be on the market for long.
ipo, what do you think this will end up closing at?
I predict a sales price right around $1.2M for this property. I’d say the range of $1.175-1.25M…
And yes, it will get taken down quick. My guess is they had full prices offers on day 1… Probably a submit your best and final REO deal where they accumulate offers for a week or two and then take the best one.
From “Market Conditions” for Costa Mesa, Jim Dwyer:
http://tinyurl.com/9s78oc
“PRICES are still declining and will do so for the remainder of 2009.”
What candidness! LOL. Is a Realtwhore(TM) allowed to say that? But then, a few lines down:
“As people are running away from Real Estate that is the time you need to buy. WHY — Great Opportunities.”
…A bit off topic here, but has anybody been watching how close BofA is to going belly up?
I’m watching the hearing for Geithner and nobody has a clue on what to do. Lets face it, we can’t bail-out this ship fast enough.
Click on the Forums tab up at the top of this page; I think the BoA discussion is under the Economy section.
I spend a load of time in CDM and I have been noticing a large number of properties going up for sale over the last 9-12 months that did not sell and the owners are now trying to rent them.
And now they won’t rent. I have noticed For Rent signs on the some properties being up for 3,4,5 months – some longer.
Who is going to rent a 3 bdr in CDM for $4500 per month? Especially when the owner would sell it out from under you at a moments notice.
This is going to get ugly soon.
There is a belief out there that we are in a rough patch, and that if one can hold on for a period of time things will “return to normal” (normal of course being the insanity of the bubble years).
That is exactly what people perceive in the market. Denial motivates them to believe it, and they are sadly mistaken.
Some people with cash in these premium areas have the means to deny it indefinitely. I know several people like this.
Others will extinguish their cash savings in the process, and delay the inevitable for several years.
Either way, it leads to a highly inefficient market in premium areas. Wishing rents and wishing prices will likely be with us for a while. Even the banks are forced into the same denial due to the consequences of exorbitant losses. With acceptance comes job losses, rinse and repeat…
I see this as well. I’ve been watching the homes in Harbor View, the Port Streets and Irvine Terrace, and sellers in these areas still don’t seem to have accepted that their prices are too high. And they also don’t seem to be able to attract renters because, as you point out, the rents that they are asking are too high (I guess they need to be to help coverage thier mortgages)!
It will be interesting to see if this next year brings some reality to these areas or if the “Newport is immune to what is going on” state of mind continues…..
If I’m reading the sales history on house #2 correctly it looks like it was a 2003 rollback back in September 2008. I suspect the 9/08 buyer was a knife-catcher who probably bought this as a distressed sale bought this just 4 months ago and is now realizing what a mistake. Since the sale closed in 9/2008 high ltv jumbo financing was already getting scarce so I’d not be surprised if they financed it with a mid $700k FNMA limit 1st mortgage and the rest was a real cash down payment. Looks like he is now scrambling to get his downpayment back.
In addition to distressed sellers from adjustable resets, I wonder how many 2008 knife catchers will be putting their purchases back on the market. I suspect a once-burned knife catcher will be shy the 2nd time.
sept purchase was the bank taking it back. it is a REO, thus “must sell” inventory
Wow, you’re right. There’s absolutely no reason that house should be 50% more expensive than the distressed one. I would guess that it’s another case of the foreclosures pushing prices down to a more long-term sustainable level. It’ll be more interesting to see how long that property takes to sell and how far down the price will have to go to make it competitive.
So I found some fun OC Foreclosure data from Matt Padilla’s blog.
I graphed it here
Apparently the correlation is about a year: I shifted the FCs back 1yr and they match up quite well.
We had 5,845 NODs in 2006, which turned into 4,159 FCs in 2007; a 71% conversion rate.
2007 gave us 13,786 NODs, which turned into 11,560 FCs in 2008 – a 83% conversion rate.
What happens when 80% of 25k NODs turns into FCs?
Perhaps this topic has been raised before but where can I search for foreclosed homes in Irvine in particular? Redfin doesn’t seem to do the job well in this department.
http://www.foreclosureradar.com/
You need to pay for the service, but their database is up-to-date, and it has a lot of detail.
Thx IrvineRenter. I guess nothing is free anymore 🙁
From the Washington Post article:
Shane Bohnen lets his wife deal with the lender. He was reluctant to speak for this story. He figures no one will have any sympathy for a family living in a $1 million house.
“We came in with eyes wide open,” he says, standing in the kitchen. “We knew what kind of loan we had.”
“Oh, really,” Robin Bohnen says. She darts him a look from the living room couch before launching into a series of questions that gives some hint of the tension that inevitably comes with financial trouble.
“Did you know that the housing market was going to collapse?” she says to her husband. “Did you know I was going to lose my store? Did you know you were going to lose your job? Come on. There was no reason to believe any of this would happen. It’s not like we did anything impulsive. You’ve been doing this job for 10 years and making good money.”
Did she then say:
“Suzzanne reseached this”
LOL!
Then the reporter adds, “The people at the IHB knew this was coming…”
My sister is doing an accounting program currently where the housing bubble is a big topic. She told me most people think they have three safety nets when they only have one; when they buy a house they can’t quite afford, all their eggs are in one basket, but they don’t know it.
1) people think that they will continue to make good money
2) people think that if they stop making good money, then they can sell or refinance their house
3) people think that if they can’t sell or refinance and if they lose their jobs, then they can fall back on the money they have invested in the stock market.
The health of the economy is behind each of those nets — there’s only one net! If the economy tanks, then they’re screwed.
I liked that ending to the Post’s article. I think it sums up the ambivalence in the US. “It’s our own damn fault” vs “It’s not our fault!”
You’ve been doing this job for 10 years and making good money.
Probably more than enough to pay for a house, or most of it, and save money for a slow time.
I’d say they had their eyes wide shut.
so periodically checking Redfin to see if Woodbury is finally ready to get recognize reality has become a habit of mine. I am getting so sick of waiting and at the same time hearing about all of the Obama bailout ideas that promise to hand my taxes over to the irresponsible.
and then I saw this one last night:
http://www.redfin.com/CA/Irvine/179-INTRIGUE-92620/home/7210978
OMG, has someone actually priced a house in the neighborhood to sell? This price blows away the comps. Most people are still wishing for at least $750k for 2,220 sq ft here.
I know it is a non-approved short sale, but still I choose to consider it a drop of hope in a crazy world. Maybe just maybe I can see the light at the end of the tunnel of waiting.
Dream Breaking Alert to follow. Shield eyes if needed:
Why is it O.K. to pay $297/Sq. Ft. to live in a regular sized house in on a regular street?
2,286Sq. Ft. For more than 0.5 a million dollars? Is this “affordable” now?
WOW!!! Something is so wrong with this picture.
I like this part: “SHORT SALE. .. ALMOST APPROVED.” ALMOST!
this is my analogy:
The prices in Woodbury are a funnel. The stubborn overpriced listings are like lumps clinging to the sides. I see this listing as the first to pop off and spin towards the bottom, hopefully building enough momentum to start the others moving as well.
My target is 3BD, 3BA, 2,200 sq ft for $450k, so I still have some waiting. I just watching for movement since I am convinced that once things become unstuck the downward spiral will accelerate quickly.
BTW, not sure of your basis of comparison but I have been around the block several times and have never seen (not in NY, not in Charlotte, not in Miami, not in Singapore) a better community in which to raise a family than Woodbury. It is unbelievably picturesque, safe, convenient and well located (close to beaches, mountains, highways and toll-roads). It has a beautiful new elementary school campus right in the middle. It has a full service shopping area with supermarkets, specialy markets, restaurants, banks, Taekwondo, Pilates, LA Fitness etc. It is really the ulimate master planned community and after renting a house for 3 years I would love to buy here. But only if the price is right.
It’s probably fishing price renter, used to draw out a qualified offer to get a short price approved by the lender…
You won’t find Woodbury transacting at sub $300/sf on that sized price any time soon. This place would probably fetch $800K today. I can’t see any lender being dumb enough to let it go for below $700K.
Ipo, I fear that you are right, let’s watch to see what happens. Maybe I will arrange a visit with the agent to at least see the inside.
Wishful thinking. Woodbury is inland and sort of boring, it’ll go for 300 bucks a square feet in two years.
Maybe less.
Woodbury Renter, I think your target price and neighborhood, and reasons for it are fair and appropriate. If your housing costs will be less than 28% of your gross income, and your plan is to live in the home for 10 years+, you’ll be fine despite the comments of many here.
I am not saying that the price he is going after is off, just that the current price is crazy.
IPOP: I hope you are wrong.
TonyE: I agree with you: inland and therefore should not go for such a high price.
The realtor put his rose-colored glasses on the camera lens for the photos in this listing.
Woodbury Renter,
There’s a nice house (unattached) for sale in Woodbury that I have my eye on too. It’s at 59 Midnight Sky. But I’ll let you have first dibs. I’d send you the Redfin link but I never learned how to do that.
I like this one as well. It actually has a fairly decent yard for the kids, a rarity in this community.
$749 is too much, I would buy it at $450.
How long is it going to take? I dread renewing my lease for the fourth time. Looks like no choice however.
Uh, that house is in escrow… Probably will sell for $725K or so.
It won’t fall to $450K anytime in the next decade.
REALLY hope you are incorrect. How does it make sense that a normal house is going for an unreachable price for a normal person(s) for the area? (Normal person(s)= 91k/yr household income as per earlier postings. Normal house = 3 bed, about 2000sqft. Nothing way fancy, just a nice house.)
Am I correct that neither of these have pools. And the one. Spring Grove does have neighbors behind despite the Realtor description.
Been a while since I’ve seen a property where the realtor bothered to do the “wet pavement trick”. That is so idiotic — “Wow, there’s a reflection of the house on the ground in front of it — it must be the Taj Mahal!”. I guess we know “who stopped the rain” that made the ground so wet despite the blue skies, though — the water-squandering realtor.