Most buyers during the later stages of The Great Housing Bubble were buying the fantasy of ever-increasing home prices and unlimited wealth. Fancy cars, prestige, social status, and trips abroad were all part of the dream. It is not going to happen.
As a side rant, today’s post looks at the silliness of real estate pricing.
Today’s featured property is a Quail Hill short sale. Nothing special really. Just a typical example of grossly overpriced real estate that is still going to cause bank losses. Wait until prices really drop and see how much the banks are going to lose.
Asking Price: $465,425
Address: 66 Duet, Irvine, CA 92603
{book2}
Paris — Friendly Fire
One day we’re gonna live in Paris
I promise
I’m on it
When I’m bringing in the money
Oops! That isn’t going to happen, at least not through flipping real estate. We’ll always have Paris, right? Will the dreams survive? Should they? Many of those with kool-aid intoxicated fantasies of the riches they
were going to obtain from their houses are waking up to the sober
reality of the market.
When you see pictures of people in the Great Depression, you don’t see many happy faces. Perhaps some of this is selection bias of the authors and journalists of the time, but part of it is the underlying truth that depressions are depressing. The Great Depression was so difficult because it lasted so long. As one survivor put it, “The Depression wore you down. It aged you.”
“A man is not old until regrets take the place of dreams.” John Barrymore
Reality must be very unpleasant for your typical specuvestor. I am sure more prefer the comforting denial of beliefs such as: “prices will rebound when the economy picks up” or “this correction is only temporary” or “Irvine real estate has proven to be a good investment in the long term” or “we are closer to the bottom than to the top.” All of these false beliefs cause people to hold on to real estate that is draining all their cash each month and giving them nothing in return.
“I had a dream my life would be different from this hell I am living,
so different from what it seemed. Now life has killed the dream I
dreamed.” Victor Hugo
So how will we know when the housing bubble is behind us?
“An era can be said to end when its basic illusions are exhausted.” Arthur Miller
The dreams of the Great Housing Bubble will be summarily crushed when the market fully capitulates. The low end and fringe markets are capitulating now. Prices in many markets are down 50% or more. Owners there have abandoned all hope–and many have abandoned their properties. It is the high end areas where denial still abounds. It is there where the illusions are not yet exhausted.
Today’s featured property is a Quail Hill short sale. The lender is fishing for bids to get an idea what they will get for it after the foreclosure auction.
Asking Price: $465,425
Income Requirement: $116,356
Downpayment Needed: $93,085
Monthly Equity Burn: $3,878
Purchase Price: $421,000
Purchase Date: 4/30/2004
Address: 66 Duet, Irvine, CA 92603
| Beds: | 2 |
| Baths: | 3 |
| Sq. Ft.: | 1,030 |
| $/Sq. Ft.: | $452 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Spanish |
| Year Built: | 2004 |
| Stories: | 2 |
| Floor: | 1 |
| Area: | Quail Hill |
| County: | Orange |
| MLS#: | P674408 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
|
|
I can’t fault them for the brevity of their description…
{book3}
- The owners of this property paid $421,000 on 4/30/2004. They used a $399,600 first mortgage, and a $21,400 downpayment.
- On 9/21/2004, they refinanced with a $415,000 first mortgage and got most of their downpayment back.
- On 8/28/2006 they obtained a HELOC for $150,000. They must have taken out this money, or the property would not be a short sale.
- Total property debt is $565,000.
- Total mortgage equity withdrawal is $165,400 including their downpayment.
If this property sells for its asking price, and if a 6% commission is paid, the lender stands to lose $127,500. Given that most properties like this one are selling below their 2004 purchase prices, it seems very unlikely that this property will sell for anything close to this asking price. Even in today’s market, they would be lucky to get $380,000 to $400,000.
Before I close today and for the week, I want to rant about asking prices. Not about how high they are, we already know that, but I want to rant about the specific values to which they are set.
In my study of sales and pricing (something I researched when I became a self-publisher), I found that most authors and experienced marketers believe there is a strong psychological impact on potential buyers from lowering leading digits. For example, pricing something at $9.99 will sell better than if you priced it at $10.00. There is no significant financial difference between the two, but there is a significant psychological one.
All one has to do is look at gas station pricing to see this effect in action. Gas prices are very elastic: in other words, people will seek out even a penny’s difference in price. Since gas is a low-priced commodity to begin with, gas stations have used the 9/10 of a cent pricing model to gain this psychological advantage without giving up significant revenue.
In the book pricing world, almost all books are priced with $0.95 at the end. Since a book costs a bit more than a gallon of gas, there is no need to try to get that last nickel. A five-cent discount on a $20 book is only 0.25% of the final sales price. It has psychological impact without having financial impact. However, since it is still a relatively inexpensive item, pricing it a $0.45 or some other amount below a dollar does not increase the psychological impact, but it does hurt the revenue from the sale. It is also very rare to see books priced at $0.99 at the end because people recognize that the discount is so small, that they round it up in their head. This reduces the psychological impact you are trying to achieve by pricing it below a dollar.
With that background, take a look at the ending digits of real estate prices. The best way to price real estate is to round to the nearest $1,000 (at least for prices at or above $200,000). A $1,000 discount on a $400,000 property is also 0.25% of the asking price. Plus, real estate is a negotiated item, not a fixed-price tagged item like you would find in a grocery store or on Amazon.com. To discount the price more than $1,000 from a $10,000 price break is to leave money on the table. To discount less than $1,000 is to reduce the psychological impact of the price reduction.
Also, in my opinion, to discount less than $1,000 on a piece of real estate signals to potential buyers that you are a greedy seller who is not likely to negotiate or make reasonable concessions to close the deal. I doubt I would bid on a property priced with $999 at the end like yesterday’s Love Shacks.
So where does that leave properties like today’s that have a number like $425 at the end? I haven’t a clue. This asking price looks like it came out of some guy’s calculator. It might be 85% of the outstanding loan balance or something like that. I would price this at $469,000 or $464,000, but not the bizarre number they have selected.
Another ridiculous practice is value range pricing. Chuck Ponzi over at Southern California Real Estate Bubble Crash wrote a post on this in early 2007. His rant on the subject is excellent, and I will not regurgitate it here. The one thing I would add is the arrogance a range pricing conveys to potential buyers. The whole idea that sellers will “entertain offers” between such-and-such price is borderline infuriating. As I buyer, I will tell you what you will “entertain.” You will entertain a price between your lowest offer and my highest bid. If you don’t find that “entertaining”, you can go pound sand. If you find my offer insulting, then I suggest you go pound sand even harder (It may help you release your frustrations). I can assure you, I do not give a sand if you are insulted. In fact, I will find it “entertaining”. Idiots.
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.
🙂
{book6}
One day we’re gonna live in Paris
I promise
I’m on it
When I’m bringing in the money
I promise
I’m on it
I’m gonna take you out to club showcase
We’re gonna live it up
I promise
Just hold on a little more
And every night we’ll watch the stars
They’ll be out for us
They’ll be out for us
And every night, the city lights
They’ll be out for us
They’ll be out for us
One day we’re gonna live in Paris
I promise
I’m on it
I’ll find you that French boy,
You’ll find me that French girl
I promise
I’m on it
So go and pack your bags
For the long haul
We’re gonna lose ourselves
I promise
This time it’s you and me for evermore
Paris — Friendly Fire
“…summarily crushed when the market fully capitulates.”
“If you don?t find that ?entertaining?, you can go pound sand.”
There must be a law against such economic terrorism. I’m calling the Woodinville cops.
Yesterday someone called me Osama Bin Renter…
A year or two back, I was listening to a speaker at a marketing conference. He was an “expert” in negotiation, and I recall vividly one of the points he made. He was discussing all kinds of psychological tactics people can use during negotiations. One example he gave was in real estate negotiations and setting an initial sales price for a property. He claimed round number or near round number prices such as $500,000 or $499,999 were obviously not based on anything more than the sellers dream price and subtley sent the message this this number was crap and could dramatically be negotiated. He went on to say that pricing a very odd number, such as $512,472 or $493,274 would cause potential buyers to think there was much more rigid thinking behind that number and infer that further negotiations wouldn’t result in as significant of price reductions. And, he even claimed studies have been done to show sellers get far closer to their initial asking price when it’s a strange number rather than a round number.
A few quick Google searches failed to surface this research, but I did find a good handful of random blogs also discussing and supporting this notion. Perhaps this was the impetus for $465,425. Or equally possible is $465,425 is the amount to keep the seller from losing his shirt, but I at least wanted to pass along this other theory.
A couple of observations in regards to pricing –
1. The listing agent for the Duet property has been selling in the area for a long while (since South Coast Plaza was nothing but strawberry fields) and often prices listings ending in -425. That seems to be realtor-specific and I believe it to be exactly the odd number strategy that Mattman is suggesting above.
2. Another pricing nuance, that I believe has gone by the wayside, were homes that were listed with last digits -778. These were listed through some Prudential brokers and correlated to “PRU” on a phone keypad. This strategy was a quick reference so that Prudential agents could preferentially show in-house listings looking solely at pricing. This behavior was followed by predatory mimicry from other brokers in a way that would make even Dr. Seuss’ star-bellied sneetches proud. It has effectively self-extinguished, but still shows up occasionally.
3. In defense of range-pricing: the first set of limiting criteria for a potential buyer looking on the internet for a suitable home is beds, baths, sqft, and price among most any search engine. If a home could realistically be sold at $505K, and was listed at $505K, it would not be seen by anyone who had limited their search from $450-$500K, but who might be interested in that home. Likewise, if it were priced at $499,999.99 it would not show up in search range of $500-$550K. Range pricing can be used to reach both of these pools of potential buyers and increase exposure, which is the listing agent’s job. The final acceptable price remains to be agreed upon by buyer and seller.
Taken to the extreme, why not price it at $1? While it’s a straw man argument, I’m sure that you’re aware that many of the banks are doing this with their REO homes and are effectively “auctioning” them with the full expectation and result of the home selling over list price.
-IR2
When we sold our condo our realtor wanted to end the number in 7. She said it was a lucky number for her and she tends to sell the homes quicker. She sold it in 2 months but neither the sale/listing price ended in 7.
On a side note, do you know anything about 1 Silver Crescent in Turtle Rock (Highlands)? It just cropped up as an REO and it was never listed for sale. Is that typical?
Seven, really? Were you, by chance, represented by Harland “Step into my office” Williams?
🙂
(and yes, going direct to REO happens more and more these days… google “jinglemail”)
https://www.youtube.com/watch?v=hIYYZPnacWo
hotlinked :
[url=https://www.youtube.com/watch?v=h9mioHO4hoM]Something About Mary[/url]
It’s clearly brie time, baby.
I hadn’t heard the term jinglemail, but I have heard that banks were being mailed keys. I could see that people would want to save face in front of their neighbors and just decide to pick up and move away instead of publicly being associated with their short sale/foreclosure every day. Especially in Orange County.
One of the questions I’d ask the listing agent is how this specific $465,425 was derived.
Still very over priced.
George you will never get an honest answer in any case.
IR, you meant to type “gas prices are very elastic” (not inelastic). Otherwise the meanings are reversed.
You are correct. I should have taken the time to check my definitions. I am changing the post.
My recollection and your link match. Prices are never elastic. *Demand* is elastic or inelastic. (And demand for gasoline is fairly inelastic – people may search for the cheapest gas, but they aren’t going to change the amount of gas they buy without large changes in price.)
The demand for a particular station’s gas is elastic because of close competition between stations. Your demand for gas is relatively inelastic because some of your driving is unavoidable. However your demand for gas at Station B is almost perfectly ELASTIC if Station A is equally convenient to you. Thus gas stations co-locate and price down to the 10th of a penny. In other words, how much $2.50/gal gas will you purchase at a gas station selling gas next to a station selling the same gas for $1.50/gal?
that’s all well and good, unless there are a bunch of hedge funds levered up at 50 X 1 ratios, buying crude and everything you need to live like it’s going out of style
sometimes it has nothing to do with supply and demand at the ground level
There are actually 2 different demand elasticities here. The demand elasticity for the market is inelastic, as the demand will decrease less than the the price increase. The demand elasticity for an individual gas station is very elastic (small change in price, big change in demand) because you can easily substitute the gas from a cheaper station.
C- is correct that in general gas has inelastic demand, but the gas station in IR’s example has elastic demand.
Hi IrvineRenter…we’ve lived in Woodbridge a long time and never had mello roos. How much do the newer areas like Quail Hill, Woodbury, Portola have to pay for mello roos? I’m assuming it’s a percentage of the cost of the condo/house.
Mello Roos is a function of the debt service on the bonds put there by the developer. The developer tries to make this amount as high as possible because it is all cash revenue to them. The only resistance they have is from the builders who know they must discount the home to make room for the Mello Roos payments in the home financing. In Irvine, the Mello Roos in new developments is often 0.8% of the purchase price. Your property taxes are 1.0%, and with the 0.8% Mello Roos, the effective tax rate is 1.8% in new areas. This is a major drain on the amount of money left over for a payment. It is also why areas without Mello Roos should command a financial premium over those with it.
IR, thanks for explaining that.
How long till the Mello Roos bonds are paid off? Do the timeframes vary?
They are all different. The most common terms are 20, 30 and 40 years. Sometimes they are refinanced and the terms are changed. It is all up to the entity that administers the CFD.
” The Mello Roos in new developments is often 0.08% of the purchase price ………the effective tax rate is 1.8% in new areas.”
Did you just pull that number out of thin air? or did you actually do some research? It’s more like 1.3 -1.4%……
I work in this industry. I have been involved in creating community facilities districts. Some are larger and some are smaller. In Irvine, you will find very high Mello Roos because the Irvine Company knows people will pay them, and it does not impact home sales. Check out the Mello Roos in Woodbury or Portola Springs. You will find the payments are about 0.8%.
Yes, the Mello Roos in Columbus Square is also .8%.
Notice the “new areas” in IR’s comment.
Once the area is built out and prices rise or drop… since Mello Roos is a constant number, the percentage will change.
For example, a Westpark II home when bought in 1996 was about $300k, Mello Roos on that home is about $2500 per year – 0.8%. That same house now sells today for around $825k, but the Mello Roos is the same at $2500 or 0.3%.
Most new areas in Irvine today are at 0.8%… just like they were 12-15 years ago. Places like Columbus Grove charge about 0.8% and you don’t really get any infrastructure for that. Imagine paying $9k on a $1.2M house every year and they didn’t even put a school in your neighborhood.
Good point.
What a rip-off. So where do the CG kids go to school?
Woodbridge (elementary)… which is not even next to it (Westpark schools are between CG and Woodbridge).
Wait until prices in some of these new neighborhoods fall and the resale buyer is paying 1.5%!
That’s strange. Wonder why they don’t go to Plaza Vista in Westpark?
Looking at redfin…
“No similar recent sales reported”
I think that’s a first. If redfin says none of these properties are selling then you know all the prices have to be too high.
http://www.bloomberg.com/apps/news?pid=20601213&sid=a8mdg7z0u7Dw&refer=home
More good news. Housing won’t bottom for another 5 years? Really. I was hoping to buy next year. Maybe I’ll wait til 2011 or 2012.
-Jon
Go ahead and buy next year. Just price in an additiona 4 years of price declines, and there you go.
This place would actually make a nice starter home for someone but the price needs to come down a bit. IR, I think you’re close with the pricing…with rates so low, I could see this place going for low 4’s. It is detached and newer but what’s with that tandem garage?
What exactly is a starter home, and why would someone purchase a house that they don’t intend to live in except for a several year time period?
Why not rent until one can purchase a house they actually want to live in? It’s not as if equity accrual in a “starter home” will really allow for a faster time period in which one can purchase that ultimate abode.
It’s as if the “starter home” phrase allows the house to have major defects – poor design, bad location, poor lighting, etc. with no repercussions.
Can someone enlighten me?
Because you’re “throwing away money” renting!
Just kidding – had to say it. I agree, the only reason to buy a “starter home” is if you’re certain the home will appreciate greatly within a couple years.
The reason to buy a starter home (and it doesn’t have to be a dump) is that you have to start somewhere, especially in high-cost areas such as SoCal. Places like this are good for a young professional or married couple before they have kids.
Sure, I’d love to buy my dream home at the beach but that ain’t gonna happen by paying for an exorbitant rental out here…many people have a hard time saving $ with that option. Renting is a good alternative until you find a decent place at a decent price; generally, over several years you can gain equity through pay down of the loan (i.e. forced savings) and appreciation. That’s usually how regular people out here afford to trade-up properties and eventually get into that ultimate abode you mentioned.
Hope I don’t sound like a realtor…lol
Okay. So you find a decent place at a decent price. And then you sell in 5 years after the (minimal) forced savings of principal.
Unless one has no down payment and massive appreciation (i.e. the recent bubble), total costs of purchasing/selling (include maintenance, taxes, frictional costs) will outweigh equivalent rent for that time period.
So, except in a bubble environment with extremely high appreciation rates, why is there a such thing as a “starter home.”
(The phrase annoys me almost as much as hearing about “communities” in which people never escape their car/house and the phrase “you are buying a home, not a house.”)
I think the idea of a “starter home” has gotten twisted in California. There was a time when a “starter home” was the home you bought in your late 20s/early 30s when you had a stable enough income to afford a home. Later, if you advanced in your career and made more money, you could move up to a larger, more expensive home. Your “move up” had nothing to do with appreciation and everything to do with your increased income from career success.
Now, a “starter home” has become associated with 20 somethings who have their first job out of college who buy a condo with no money down. During the establishment phase of their career when they should be saving money for their first home, they are already in one. Then when they make more money, they try to flip their condo and move up.
What people seem to forget is that the “starter home” is often the only home for someone who gets a career job and only sees raises approximating inflation (think teachers, and public servants, and the like). These people don’t see 30% pay raises when they accept promotions or take jobs with other companies. Their starter home is their only home.
IR, I think the “move up” out here is associated with both appreciation and increased income from career success as you mentioned.
You need both out here to get ahead.
A starter home makes sense if you expect to have equity by the time you sell it and buy a proper house. If you buy an overpriced house on which the interest you pay during the first few years is more than the rental value of the house and on top of that you are likely to suffer from price depreciation, a starter home does not make sense. This is especially true in markets like Irvine where prices of even smaller houses are way out of wack with their rental value, the notion of starter home makes little sense. But of course, crazy “conventional wisdom” born during a bubble time is likely to linger longer than the crazy prices.
Starter home also means starter income. if you are a young person you can probably only fund so much mortgage on a 28% DTI with your income. Over time as your income rises you can trade up.
Of course this makes sense only if the buy option is equal to the rent option. It wouldn’t make sense to buy today’s property unless your cost to own is less than the cost to rent, else you’d be better off renting.
I have run the numbers on this type of thing, and buying a home that is too big for you is a pretty bad idea if you don’t expect to fill it (e.g., with more kids later). Buying a larger home than you need subjects you not only to a larger purchase price but all kinds of higher ongoing expenses, like utilities, taxes, and crap to fill the empty rooms with.
So, for someone who is having kids later a starter home can be a reasonable move if: 1. It’s not a declining real estate market. If it is, stay renters a while longer. 2. If you will stay in the starter home for long enough that the moving and transaction costs aren’t too significant. If the house you really want is 8-10% more, just buy that one. 3. The cost of owning is about the same as the cost of renting. Otherwise, stay a renter and buy your final destination home later. It will make it much easier to save.
A realtor once told me that the odd digits at the end of the price was a code used to identify the listing agent. Another lie?
I agree with you on pricing to a point. But given that a lot of home searching is by computer now, being at 599,000 or 599,999, is significant because if you say “show me house less than 600K”, you’ll not get the ones that are 600K, even though its functionally no different than a house that is 599,999.
We have a long way to go towards normal pricing–just for an example my last house in the Bay Area–10k sq.ft lot—3k sq. ft home on a canyon view lot–5 bed 4 bath, 3 car garage cost this much in 97′—in ten years this price buys you a 2 bedroom townhouse–no lot–no view–
Just for you young people who think OC is close to being affordable—LOL
More insanity in the paper today OC Business section a lady in Newport bought her house in 2000 for 1.2 million and put it up for sale in 05′ for 3.65 million—-didn’t sell now up for 3.29–What in the world is she smoking?
No pool and someone offered her 2 million and she said no way–did she redo the home? Doesn’t sound like it–so why does she think it’s worth this price? 4 bedroom—LOL
I have often wondered about the whole culture of the 1 cent or 1 dollar discounts. Of course, I know the psychological purpose, but I didn’t know why it would work. It never worked on me, as I always visually see $50 instead of $49.99 or $1300 instead of $1299.99. It’s easier to factor in the tax using nice round numbers anyway.
However, one day it dawned on me that the pricing tactic works when you are verbally telling others about the price. One would say FORty-nine-ninety-nine or TWELVE-ninety-nine-ninety-nine. The first word is the most impressionable, and the follow-up repetition is diluted. So for example, if a wife bought expensive shoes but don’t want the husband to get upset, by saying FOUR-ninety-nine-ninety-nine is a lot better than FIVE-hundred. They may even say “FOUR-something”. This allows salespeople to tell people the cost at a seemingly lower number, and helps buyers deal with the guilt (if there is any) when they tell others how much was paid for the items.
Of course, now I just round up the numbers before speaking it. 🙂
Yes, there are other reasons, as you and other commenters have mentioned, like the computer search filters. I just find that the verbalization of the prices is worth a mention, as this is certainly not a modern phenomenon (they didn’t have automated search before the 1980s).
I think the mental price break on real estate is every $5,000, not every $1,000. So I would price this tiny apartment at $464,900 if I were the seller, or $299,900 if I were being realistic.
And by the way, there’s no competitive advantage in gasoline pricing by making the price end in nine-tenths of a cent, because every other gas station in the world does it too.
“I can assure you, I do not give a sand if you are insulted.”
I can assure you that you’ll find some mouses’ rear ends in the sand 🙂
Good one IR.