The few discretionary sellers out there are still living in a bubble fantasy world. Short sales and REOs in their neighborhood are forcing them to face reality. I doubt they like it. HELOC abuse is everywhere, and wherever the problems of excessive debt surface, prices fall.
There are two featured properties that are side-by-side neighbors. One is distressed, and one is not. These properties are nearly identical, except for the $315,000 difference in their prices. The distressed property is also a 2003 rollback.
Asking Price: $1,160,000
Address: 31 Lynnfield, Irvine, CA 92620
{book3}
Congratulations, I Hate You — Alesana
Suffer alone in emptiness
I lust to see you swallowed by the mess that you left in your wake
Occasionally, you will see people interviewed where they hide their personal greed by claiming they were unwilling to lower the price of their home to sell it because “they didn’t want to upset the neighbors.” This is hard to believe because these people were about to sell their home. They were not going to be neighbors anymore.
The crash of the housing bubble is stripping away these pretenses. Not long ago I wrote a post on The Difference Distress Makes. In it I showed two very similar properties with a 50% price differential. The only reason for the difference is the financial distress one of the owners is in. Today, I have another example of this phenomenon. This shows the previous post is not a special case, but it is typical of the price differentials that occur when sellers become motivated.
In the early stages of a price decline, particularly in residential real estate, bids decline before asking prices do. This widens the gap between bids and asks. The result is a dramatic decline in transaction volumes. Bidders determine where the market is. If tight financing terms reduces the amount people can finance and ultimately bid for property, prices eventually must fall to reach these support levels.
In subprime areas, the large number of foreclosures due to the ARM resets has forced properties onto the market, so pricing in these areas are reflective of the new level of market bids. However, in areas like Irvine where our resets are just now happening, the influx of must-sell inventory that pushes prices down to the new support levels is somewhat delayed. This is why you see significant transaction volumes in the subprime markets and very light transaction volumes in higher priced areas. (Has anyone else noticed the uptick in inventory?)
Don’t count on lenders loosening their standards and allowing borrowers to increase their bids any time soon. They just lost a trillion dollars doing that. If it were not for the buyers with very large cash downpayments who are still active, we would have almost no transaction volume at all.
{book4}
So let’s examine these two properties. Can you spot the house worth more than $1,000,000 in this photo? Oh wait, it’s Irvine, they all are.
These two houses for sale are side-by-side neighbors. One of them is 400SF larger than the other, but the smaller house is a corner lot with an extra bedroom. Neither one has a pool. In fact, these properties are so similar that they were originally purchased from the builder on the same day, December 30, 1998. The original purchase prices were $478,000 and $468,000 respectively. Which one do you think currently warrants the $315,000 premium over the other?
Asking Price: $1,160,000
Income Requirement: $290,000
Downpayment Needed: $232,000
Monthly Equity Burn: $9,666
Purchase Price: $478,000
Purchase Date: 12/30/1998
Address: 31 Lynnfield, Irvine, CA 92620
| Beds: | 4 |
| Baths: | 4 |
| Sq. Ft.: | 3,100 |
| $/Sq. Ft.: | $374 |
| Lot Size: | 5,398
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Traditional |
| Year Built: | 1998 |
| Stories: | 2 |
| Area: | Northwood |
| County: | Orange |
| MLS#: | S561221 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 8 days |
home features 4 bedrooms, 3 3/4 bathrooms, Kitchen with cherry cabinets
and granite countertops, permitted bonus room with built-in
entertainment center, office with built-in desks, crown molding,
granite countertops, shutters & wood blinds. 3 car garage,
beautiful landscape & hardscape, built in BBQ. Walk to Canyon View
Elementry School & Northwood High School.
{book5}
Taste your vanity and it’s sweet bitterness
As you hide behind your veil of my stolen hopes and lost dreams
This owners of this property behaved as typical Irvine homeowners. They doubled their mortgage and pretended to be richer than they are, but they did not spend their entire home. If they sell now, they still have some bubble equity they can convert to cash.
- This property was purchased on 12/30/1998 for $478,000. The owners used a $382,000 first mortgage and a $96,000 downpayment.
- On 5/20/1999, they liberated some of their downpayment equity with a $45,000 second mortgage.
- On 5/23/2000 they refinanced with a $538,000 first mortgage and a $26,900 stand-alone second stripping out their entire downpayment plus $86,900.
- On 2/5/2001 they refinanced with a $496,000 first mortgage and paid back a significant amount of borrowed money. Remember, these are the conservative borrowers who are not a short sale.
- On 9/27/2002 they refinanced with a $530,000 first mortgage.
- On 8/28/2003 they refinanced with a $533,000 first mortgage.
- On 6/23/2004 they opened a HELOC for $100,000.
- On 3/2/2005 they refinanced with a $650,000 first mortgage.
- On 1/9/2006 they took out a stand-alone second for $30,000.
- On 5/31/2006 they refinanced with a $678,000 first mortgage.
- On 4/6/2007 they opened a stand-alone second for $69,171.
- On 3/31/2008 they opened a HELOC for $120,000. There is not way of knowing if they took it out and spent it.
- Total property debt is either $747,171 or $867,171 depending on the HELOC.
- Total mortgage equity withdrawal is either $365,171 or $485,171.
Remember, these are typical Irvine homeowners who bought before 2002. From what I see:
- There is the rare, very conservative borrower who has not added to his mortgage,
- then there is the conservative borrower (relatively speaking) that has added to his mortgage, but did not get carried away,
- then there is the average Irvine homeowner who doubled his mortgage, and finally
- there is the HELOC abuser who more than doubled his mortgage and is losing his home.
This is what I see every day when researching these properties.
Asking Price: $845,000
Income Requirement: $212,250
Downpayment Needed: $169,000
Monthly Equity Burn: $7,041
Purchase Price: $865,000
Purchase Date: 9/23/2003
Address: 33 Lynnfield, Irvine, CA 92620
| Beds: | 5 |
| Baths: | 4 |
| Sq. Ft.: | 2,700 |
| $/Sq. Ft.: | $313 |
| Lot Size: | – |
| Property Type: | Single Family Residence |
| Style: | Contemporary |
| Year Built: | 1997 |
| Stories: | 2 |
| Area: | Northwood |
| County: | Orange |
| MLS#: | P673012 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 8 days |
1Br& 1 office dn.stairs.formal diningroom and huge kitchen withbig
center island.hardwood floor,4’plantation shutters throughout,built in
speakers,gorgeous yard,shadow box patio cover,custom arbors.
This homeowner also behaved like a typical Irvine resident except that he bought later and borrowed more, so he is a short sale (REO in waiting).
- This house was originally purchased from the builder on 12/30/1998 for $468,000.
- The property was purchased by the short seller on 9/23/2003 for $865,000. The owner used a $650,000 first mortgage, a $85,000 second mortgage, and a $130,000 downpayment.
- On 1/25/2007 he refinanced with a $937,500 first mortgage.
- In 2/9/2007 he opened a HELOC for $187,500. Let’s assume he took it out and spent it. I don’t know for sure.
- Total property debt is $1,125,000.
- Total mortgage equity withdrawal is $390,000 including his $130,000 downpayment.
If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $330,700.
So there you have it. One semi-responsible borrower hoping to squeeze a few more bucks out of their property before they dump it, and one irresponsible borrower who got his $390,000 out of the bank so he is walking away. The one common thread they share is the huge amount of mortgage equity withdrawal. Of course, they share this with most Irvine property owners who are listed for sale today.
The discretionary seller is living in some kind of WTF fantasy world where house prices go up 120% in 10 years. The short seller has to sell, so they are getting whatever they can for the property. This is the mechanism that will cause prices to drop quickly once the high end REOs start to enter the market in larger numbers. We can track the influx of future REOs by simply scanning Redfin for short sales. We know that short sales are rarely approved, so they are really pre-foreclosure advertisements. If you see a short sale you want, just wait 6 to 9 months, and buy it as REO. They are coming.
{book6}
No one ever said that life was fair and I’m not saying that it should be
So knowing that you are what you want to be and I’m not comes as no surprise
But don’t expect me to be happy for you
And don’t smile at me and tell me things will work out for me too
I don’t want your pity… I hate your pity
Taste your vanity and it’s sweet bitterness
As you hide behind your veil of my stolen hopes and lost dreams
… You took them all…
I watched you steal my thoughts and had to see you smile
As you build your dreams on my shattered hopes
I’ll look back on a day once loved and fantasize for tragedy
Swallow your pride
Beg me to make this easier and listen to my hopeless cries
Suffer alone in emptiness
I lust to see you swallowed by the mess that you left in your wake
Disgust lies deep within your empty gaze…
Beg me to make this easier and listen as my hopeless cries
Send stares into your meaningless eyes
My envy can’t describe how I loathe you for having all the stars
Leaving my eyes to marvel the sky knowing it should be mine
Yet it’s you I see wasting the dream that only I deserve
I’ll tear off your face to see your smile.
Congratulations, I Hate You — Alesana
I talked with a friend the other day. His son was told “it’s the right thing to do” to increase his loan size upon refinancing at a lower rate in late 2006. The son wasn’t forceful enough to just say no. They took a loan for about 25% more than they had paid. The new loan was probably for a little more than fair market value at that point.
In 2007 they had a job relocation. The home wouldn’t sell for the loan value. Here is where it gets interesting. They viewed it as stupid that the lender wouldn’t return their calls asking for a short sale, that the lender’s problem would only get worse. After months of trying, and home prices continuing to drop, they got a short sale. The borrower also contributed part of the deficiency.
At no point did this borrower have financial problems. Interesting view of how everything was the fault of the lender.
“Interesting view of how everything was the fault of the lender.”
Since the alternative would be to claim personal responsibility, this attitude isn’t surprising. I wonder what about taking on massive debt loads is “right”.
Of course, lenders do bear a great deal of responsibility for this mess, but nobody put a gun to this guy’s head and forced him to take out that extra 25%. This guy could have put the money in a savings account and had it available to pay back in the event of a price decline. Oh wait, prices only go up… Plus, I don’t know too many people who would turn down six figures of free money if it is being offered.
And keep in mind that 2007 was well before the collapse of the stock market. I could maybe understand not having the money around in November 2008 if you’d have put it all in the market, but 2007 was a different story entirely.
Do any of you reflect on how much money was borrowed by so many average people? It would be scandalous if people borrowed and walked away with $40,000. When it is $400,000, it is almost too difficult to comprehend. I write these posts day after day, and I am still amazed.
I am amazed at how few people realized that refinancing made the loans recourse in CA. How many of them seek any kind of release during a short sale? Anybody in title, escrow or RE law have a comment on this? In short sales, do borrowers get a release from future recoveries?
Oh, and during a foreclosure, when the second and third mortgages are wiped out, can’t they try to collect later?
It’s complicated, but CA lenders have typically just sent the deficiency notice to the IRS/FTB. Even if the lender could obtain a deficiency judgment, the borrower’s credit is already shot, so the cost to the lender and the prospect of the judgment being discharged in bankruptcy are sufficient deterrents.
Two years ago, I would never have believed that people would borrow so much money and put their home at risk. My husband and I used to ask ourselves, how can they afford to pay ‘x’ amount for that house, have two expensive cars and send their kids to private school? They must have a huge income! I was so naive. Live and learn.
My wife and I thought the exect same thing. How can people who are so young afford such expensive houses ? Not everyone can be a doctor or executive and make so much money to afford the fancy home, landscaping and decor. We would drive through new developments and wonder if their parents were helping them out. Only the parents were actually the banks !
The only thing I’m amazed about is that I was too stupid to not buy 3-4 places in 2003 with no money down/POA’s and then milk the lenders for everything I could. Damn morals always getting in the way…
I totally feel the emotion of this all as I see it in Wallstreet the mentality of we deserve this money we earned it (our house earned it) NO it’s a loan you have to pay it back. This country has lost all it’s morals when we pay people to lose their company and take money from the government and then give themselves fat bounces. And demand future pay for what? The question is WHAT did you do to deserve this money?? Did you work your butt off? did you contribute to society? What makes you think you deserve to steal?????
Because that is what you did!!!!!!!!!! we need Jail time!
You steal $300 from 7/11 and you go to jail you take 300k out of your house and blow it and you walk away?????
I am absolutely astonished by what people did with their mortgages!
I used to think Irvine as a place where smart people lived. Now I think of it as a place where spoiled little children with college degrees play “We are all grown up and have money now!” Oh, and I know this aint just an Irvine thing.
I fume about it everyday because now I gotta pay for it. I can’t believe how upset I am at my country, Wall St., and its “leaders”.
you are just breaking though the top layer of the iceberg–as we both know it’s all over.
My age and maybe ignorance kept me out of this mess I would have never taken out a second –just old enough we were taught to pay down the mortgage and I did it 2.5 times with 15 year loans.
A second was a loan–
Both of these bloated houses are eventually going back to 1998 prices. Real Estate like this is no longer in fad, and now considered to be a huge burden on your life. Most potential buyers now understand this.
BTW, I haven’t agreed with Gary “in the bag” Watts on anything regarding this bubble, but I think he’s admitting “how and why” this Ponzi scheme happened in his recent forecast:
From 1999 to 2002, demand for houses and the ensuing price rises could be attributed to economic fundamentals such as low unemployment, expanding household incomes and population growth. With the events of 9/11 and the Fed’s later decision to lower the discount rate to 1%, future home buyers were lured (by lower interest rates) into acquiring property sooner than they had planned. At this time, the biggest players (in home mortgages) were Freddie Mac and Fannie Mae, which actively issued and purchased conventional, conforming mortgage-backed securities. Loan volume almost doubled to $5 trillion by 2002, with Pay-Option ARMs representing only 3% of loans.
Wall Street Takes-Over Lending:
In 2002, federal regulators found (in both companies) irregularities and mismanagement by senior officers, who later resigned. By 2003, regulatory and political factors forced both Freddie and Fannie to significantly lower their future lending volume. With the Gramm-Leach-Bliley Act in place and demand for housing still increasing, the “new” investment banks created private funding in the form of mortgage and asset-backed securities, which replaced the standard conventional lending with looser underwriting standards. In 2004, these investment banks were successful in changing their reserve requirements on securities, which required $1 in reserves for every $12 loaned. The new reserve ratio became $1 to $40! Now new loan programs (created by mathematicians with PhDs) could be designed to meet the needs of the investment bankers’ clients, who were demanding higher returns. By 2005, loan volume had grown to $9 trillion.
http://www.impactre.com/Forecast.html
IR,
What a great pair of listings this is to drive home your point of where market is – REOs and distressed property dominate the actual transaction.
31 Lynnfield owner must feel pretty down because the next door price (where market is) will eclipse all paper gain he still has.
The owners of 31 Lynnfield at least pumped a chunk of change into their home. That plan normally has vaulted ceilings in the living/foyer area but they got rid of those and used that space for a bonus room. I have seen this done in the same model and it’s a great choice for adding useful square footage.
They also appear to have remodeled their kitchen and put some dollars into landscaping, e.g. the built-in BBQ. I’d guess they have put at least $100K into the house since purchase, maybe more…
The lot size is decent for Irvine and NW Pointe standards. If this place was listed at $900K, I’d probably be all over it…
Ipo, assuming that you are serious I give you credit for having backbone and sticking to your guns. I’ll just leave it at that.
Most here know that I am a NW Pointe lover.
At $275 per sf, I would be on 31 Lynnfield in a heartbeat and never look back… I think the lowest it could go would be mid $700K range.
Heck, buying it at $850K, with mortgage rates as they are today, would be right around rental parity on an after-tax basis.
ipoplaya, at this point, the 0-.25% Fed rate is the only thing that’s keeping this bubble from deflating all the way down to normal price (i.e. 3 to 4x income). However, with unemployment rising (not skyrocketing…again, 0-.25% really helped), you will see all the assets continue to spiral down *slowly*.
I wouldn’t be surprised if, in 2010, this home will hit the 1/2 million range.
“I wouldn’t be surprised if, in 2010, this home will hit the 1/2 million range.”
totally agree with you!!
My thinking is that these high end tract homes while never worth the $1 mil bubble price, will end up price limited by the jumbo loan limit of $630k. Assuming 20% down and 30% dti, you would have to make $150k to qualify for the loan and have $150k for a down payment which puts a cap at $780k. Both these properties are still priced above jumbo limits so they are looking for the cash buyer. There are only limited numbers of cash buyers.
That’s starters, my understanding is that the volume of inventory of properties just like this far outweighs the buyer pool of families making $150k or more with $150k saved for the downpayment which will put further downward pressure on the price.
IMHO, these properties will bottom between $650-$700k sometime in the next 24 months.
ipop:
Well then, maybe you should buy this house today, and why don’t you? Since you think this is a great deal.
I’ve reading this blog for a while and ipop’s motive is interesting to say the least: He is trying to get people to think that Irvine’s housing market now is appropriately priced, yet he’s still on the sideline waiting… for what? Uhh… maybe for price to drop further?!!!
I see in your article above you have put the quote below. I’d like to suggest a new article based on actual statistics around this – no names, but percentages. Take a random sample of 20 places say, and put down:
Ex. Neighbourhood (Northwood or whatever) SFR:
a% no mortgage additions
b% refi, took out less than $100,000
c% refi, took out between $100,000 and $300,000
d% refi,took out between $300,000 and $500,000
or whatever
Could do for Irvine as a whole, or do one category (ex. Northwood SRF, or Turtle Rock condo or whatever) once a week to add to that weeks article.
That would be facinating.
Quote:
Remember, these are typical Irvine homeowners who bought before 2002. From what I see:
There is the rare, very conservative borrower who has not added to his mortgage,
then there is the conservative borrower (relatively speaking) that has added to his mortgage, but did not get carried away,
then there is the average Irvine homeowner who doubled his mortgage, and finally
there is the HELOC abuser who more than doubled his mortgage and is losing his home.
I may do that. I could record the results of my property searches for a while in a spreadsheet and post them. I know from what I see that the breakdown would graph like a bell curve. It should have a parabolic drop from no MEW to outrageous HELOC abuse. It won’t.
$1 mill+….wishful thinking.
At this point and probably down the line, $1 million net worth in cash is going to be **truly** rich.
Maybe one day I’ll understand all this thinking. If you have a HELOC for something like a home improvement or as an emergency for when a jet engine crashes through the roof and your insurance says it was an act of god, that’s one thing, especially if you are either improving the property or not tapping the HELOC.
Its quuite another thing to go back to the HELOC ATM 7-8 times for various purposes. I don’t get it.
I remember my first house. I paid 290K. I had a 5% downpayment. After a few years, I refied and got rid of the second and move to a 20 year loan. I even put more money in at closing. I had a HELOC for $100K, which I used 30K to pay for some renovations. I think the only checks I ever wrote were to the builder and the supply companies. I eventually sold the house after paying the HELOC down to about 10K and the mortgage down to 200 ish.
To me, that is responsible use of a HELOC. Use the equity to increase the equity further. Aparently, I should have bought a Ferrari instead…
The first thing I thought about these two properties is how in the world can one appraise so much higher than the other one. I would have thought the lesson learned from “the bankers” giving out loans that do not compare to the rest of the neighborhood as in “comps” would come back en vogue again. It appears rules are still not in effect so it does not matter what the reality is if they can get you into that over priced home with a fat mortgage they will.
NO one is looking out for you—
“how in the world can one appraise so much higher than the other one.”
It won’t. That is the main reason the higher priced one will never sell. It would take someone with $500,000 in cash to close that deal.
$478,000 here we come! I’m gonna party like it’s 1998!
Gee didn’t think IrvineRenter was a post-hardcore fan as evidenced by today’s video selection. When is your playlist going to be available on Itunes?
In the beginning before the lead singer starts screaming, he sounds just like Weird Al. 🙂
For those that cashed out for removing real money from pseudo-equity during the high and left the bank holding the loan and house during the decline, is the cash not paid back taxable? This would likely be done with a refinancing the first, or possible with a second.
The seller with brought early and refinanced with lots of cash in his pocket is in great shape. With slightly damage credit, they can rent for 10 years or do an all cash purchase of an Irvine condo or Costa Mesa house with the $400,000 “equity loan” money. Only in America.
I wonder how dependent the GRM is on the rate? Is the GRM at 160 regardless of whether the rate is 5% or 10% since the rate has a direct impact on the monthly payment. If this is true, then does that means that rent prices go down when rate drops? This would make sense since it costs less for an investor to get financing to build.
Rationalization can be very powerful.
I guarantee you noone lost a moment’s sleep unless they were foreclosed on.
That was free money.