The schadenfruede we feel for knife catchers is different than the feelings we have toward rally buyers. These are the people keeping prices elevated and unaffordable, so compassion for their losses is in short supply.
As you might have guessed, today’s property is a failed knife catcher. I first profiled this property in 2007.
Asking Price: $600,000
Address: 28 Meadowgrass, Irvine, CA 92604
The Great Housing Bubble was recently reviewed by Inman News, a major online real estate news outlet. The PDF is here (InmanNewsGreatHousingBubbleBookReview.pdf)
I want to thank Patrick Duffy of The Housing Chronicles Blog for the review.
Boo Hoo — KT Tunstall
If I was a second too late
Or a moment too soon
Or an hour too long
Tell me baby would you wait a bit longer?
I wonder if you would
Or would you be long gone?
That could be the knife catcher song…
Schadenfreude comes in two flavors: there are the people who bought while prices were rallying because prices were rallying, and then there are the knife catchers who bought while prices were falling because they were getting a bargain. Today’s featured property is of the latter variety.
Why is there schadenfreude in watching knife catchers? There are a number of reasons:
- Knife catchers drank the kool-aid. They bought because they worried about being priced out forever, and they believed prices will rise again after they purchased.
- There were voices telling them not to buy (like the IHB). The sages forecasting a crash were dispensing data and analysis while prophets foreseeing a rally were reading rune stones. Divination based on data is more dependable.
- Knife catchers believed they could pick a bottom, yet they know nothing about what determines real estate prices.
- Knife catchers invested their own capital in their ignorance. Lenders were not giving out 100% financing to knife catchers.
For these reasons and others you might think of, schadenfreude has a different flavor after the market peak. You can expect to get a bigger taste as prices keep falling.
{book6}
Asking Price: $600,000
Income Requirement: $150,000
Downpayment Needed: $120,000
Monthly Equity Burn: $5,000
Purchase Price: $710,000
Purchase Date: 8/17/2007
Address: 28 Meadowgrass, Irvine, CA 92604
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,545 |
| $/Sq. Ft.: | $388 |
| Lot Size: | 4,512
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Cape Cod |
| Year Built: | 1977 |
| Stories: | 1 |
| Area: | Woodbridge |
| County: | Orange |
| MLS#: | S567115 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 2 days |
Family Residence in a Nice Nighborhood in Woodbridge in Irvine.
With so few words, you would think they would all be spelled correctly. Nope… Nighborhood.
The photos in this profile are from the listing back in 2007. They are bright and lively and present the property well. Compare those to the current photographs.
Do you think this change in photography tells you something about the state-of-mind of the knife catcher or the realtor. I do.
What is particularly sad (or embarrassing depending on you
point-of-view) is how overpriced this property still is. Even with the
discount, at $388/SF, this property has a long way to fall.
Sales price history:
| Date | Event | Price |
|---|---|---|
| Mar 13, 2009 | Listed | $600,000 |
| Jul 17, 2007 | Sold | $710,000 |
| Apr 29, 2005 | Sold | $730,000 |
| Apr 25, 1991 | Sold | $269,000 |
This property was purchased from a long-term owner by our first bubble crash loser on 4/29/2005 for $730,000. The property was purchased by today’s knife catcher for $710,000 on 7/17/2007 for $710,000. What a bargain. They got 3% discount on a property that is going to fall over 40%.
The current owners used a $568,000 first mortgage, a $71,000 HELOC, and a $71,000 downpayment. Fortunately for them, they must know a friendly appraiser because a month later on 8/17/2007, they were able to obtain a HELOC for $179,000. This got back their downpayment, paid off the first HELOC, and allowed them to cash out $37,000. Does that smell fishy to you?
If this appraisal represents the peak value of $747,000, this property has declined $147,000 in value over the last 21 months. That is an monthly equity burn of $7,000. The lender is going to absorb that loss, plus they are not getting paid by the underwater borrowers, so the lender is going to lose plenty.
If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $183,000.
{book7}
If I was a second too late
Or a moment too soon
Or an hour too long
Tell me baby would you wait a bit longer?
I wonder if you would
Or would you be long gone?
Would you be alone?
Would you be alone?
Oh and in the light of day it feels right
Comfortable to the bone, from head to toe
But come the evening when the shadows fall
Well I call your name, but it’s not the same
As having you here
As having you here
As knowing you’re near
As feeling you there
As knowing you care
As whispering in your ear
As my hand through your hair
As knowing you’re there
Oh and in the light of day it feels right
Comfortable to the bone, from head to toe
But come the evening when the shadows fall
Well I call your name, but it’s not the same
As having you here
Mmm…
It’s not the same
Mmm…
Boo Hoo — KT Tunstall
This house is nearly identical to the one I am renting in Northwood for $2260. I believe the owner would try to get $600,000 if he tried to sell it. That’s why I told him “2 to 4 years” when he asked how long I expected to lease it. My expectations are for it to end up in the low to mid $400s, maybe lower if job losses go well above 10%.
More knifecatcher’s pain = the sooner I can buy. No remorse.
I have to call this one at 300K bottom. House looks to be perhaps right about median – maybe little below median due to its 70’s hangover.
When median incomes bottom around 75K, that is going to put this time capsule in 225K to 300K range. Pepper that price with a little Sacred Land Sauce and a dash of old Kool Aid and assume that a significant number of buyers calculate their affordability based on duel incomes and add another 25K to 50K. We end up around 260K-337K. Makes an average of 300K which I think sounds pretty fair for this place as it could be affordable to someone earning the median or close to median.
That means this place still has 50% more to drop. By the time the wave of Option-ARMS have exploded across this area, old houses like this are going to be competing with newer built McMansions that are going in the 400 to 500K range making these 70’s pads worthless.
The Zillow charts agree that a 300K bottom is very possible if you believe we are going to be reaching 2000 pricing levels.
http://www.crackthecode.us/images/meadowgrass28_zillow.jpg
Sounds reasonable. Late 2009 prices will equal 2002 prices. Late 2010 prices will equal 1996.
If I’m right, this house will be worth under $400k by the end of the year.
I like the sound of that, but a 200K loss in 1 year might be a little agressive and will surely elicit some horse laughter from the bulls. I’m thinking more along the lines a 100K loss per year:
March 2010: 500K
March 2011: 400K
March 2012: 300K
That would be an 8333.33 monthly burn rate over the next 3 years which is more bearish than IrvineRenter’s 5000.00.
This is a very optimistic hope on my part. Depending on government interference and market manipulation, this could bleed well past 2012 and into 2015 and beyond. Japan lost an entire decade and their bubble was smaller than ours.
David: Just curious and hope you don’t mind me asking. Are you a former OC resident and planning to move back to OC, hence your interest in this blog?
It’s not a $200k loss in one year. The property is currently overpriced. If we take zillow’s numbers, it’s current price should be about $530k. Late 2002 prices for median Irvine home was $407k.
That’s a 23% decrease by year end. Sounds about right to me.
I’m from Tucson originally and have been in Phoenix since 2005. Never lived in O.C and have no plans of doing so. I am interested in the housing bubble in a general sense – the fact that this blog has an Irvine, CA flavor to it is irrelevent to me.
That’s one thing that keeps it interesting is my complete lack of interest in Irvine which makes it easy for me to objectively call out some of the sacred land B.S that some people engage in.
I follow the California market because that is where the bubble originated. The market in AZ was also influenced during the bubble by out of state (Californian) speculators who were using their HELOCS and bubble incomes to double down on property outside of CA and spread the disease to here leading to our own little boom and bust.
I originally found this blog in ’07 by googling ‘housing bubble’ and schadenfreudely lurked for about a month before posting for the first time.
I like the format of the blog.
The visual layout is very good.
Comments are posted instantly – very minimal moderation.
I can create a stupid image here and there and link it to the blog and get a few laughs.
The daily posts by IrvineRenter are thought provoking, consistent, and educational. You can tell the author is educated and not some fly-by-night ignoramus with nothing better to do which adds credibility.
Surprisingly little trolling on here.
Most of the participants on the blog are relatively intelligent minus a handful of buttheads over on the forums who rarely crawl out.
If you go over to places like housingpanic, the comments are not posted until hours later and many of them are by tin-foil hat internet warriors calling for the hoarding of guns and ammo to prepare for armed rebellion against the government. I can only handle small doses of that at a time.
This blog promotes more discussion and is therefore more interesting to me. That’s pretty much it.
I would be all for this place being under 400K by the end of the year.
I don’t picture the seller as having the intestinal fortitude to take that much of a haircut on the asking price in 1 year.
We’ll see. Hopefully you are right. The faster they drop, the better.
Thanks. That is what’s so amazing about the Internet!
For a quick reference: I lived around the corner from this house in 2002 and had the opportunity to buy this same floor plan (Popular)in March 2002- FSBO- for $349,000.
Your assessment of housingpanic, now sootandashes, cracked me up; that is my sentiment exactly. I was planning on moving down to OC hence my initial interest in this blog, but since then my plans have changed. I still visit IHB everyday, the posts are too good to miss… and that one image you did with the ‘SLOD’ sign still kills me.
SLOD!
http://www.crackthecode.us/images/realtorspelling.jpg
“The market in AZ was also influenced during the bubble by out of state (Californian) speculators who were using their HELOCS and bubble incomes to double down on property outside of CA and spread the disease to here leading to our own little boom and bust.”
My wife’s boss sung the praises of investing (ie. speculating) in Surprise, Arizona years ago. Didn’t take the bite.
The reason you don’t see as many NAR trolls around here is because they’ve been given a WWE smackdown by the reality on the ground! :coolsmirk:
I think this is the kind of analysis some commenters want from you. I can’t argue with anything here because this is a very possible scenario knowing what we know today.
Maybe picking prices on houses is like algebra – your teacher didn’t care too much about your conclusion, but s/he really wanted you to “show your work.” Tell me how you got there.
Just read my mind, it’s easier that way. Less typing.
Frankly, there have already been some houses of similar size and age selling in the high $400K range, in El Camino/Walnut parts of Irvine. So your expectation is not far fetched at all. I noticed a house on the market in Northwood that sold 1 year ago for $510k now asking around $540K. My guess is the owners are scared and want to get out while they can too…
http://www.redfin.com/CA/Irvine/46-Appomattox-92620/home/4783409
I really don’t see how the last buyer of this home was a knife catcher. The mid 2007 purchase doesn’t reflect any difference from others who bought more than they could afford and used 100% financing… They got 100% of their DP back with the second HELOC and it was the bank who was stupid enough to do this in August of ’07.
The early refinance is one of the reasons this looks fishy to me. You have to wonder if this buyer had this arranged in advance. When this was purchased, you could not get 100% financing, but within a month they found an appraiser and a lender willing to give them a HELOC to cash out. The speed of it seems prearranged.
There is definitely something fishy about the immediate cash-out. Most lender’s had strict guidelines (one of the few things they were strict about even in the heyday) when it came to taking out a larger (cash-out) loan within a year of purchasing because it is such a red flag for fraud… they required the use of the lessor of the “purchase price” or the “value” within the first year. Think about it… if you just BOUGHT the home for $X, then it’s only worth $X – even lender’s agreed with this on homes that “might” have been bought under-market value at the time… the max value = purchase price for up to one year.
When things were really booming, some lenders allowed a new appraisal and cash-out loan after 6 months, but even then the appraiser had to justify the increase (were improvements done, etc.).
There was so much fraud perpetrated even by normal, good citizens (occupancy fibs, stated-income white lies, down payment “assistance”), but everyone justified it because everyone was doing it… you should write a book at THAT! 🙂
Lying on a loan application is not fraud unless you can prove that the false information was used to benefit illegal immigrants. I still find it shocking that IHB denegrates honest hard working Americans on a daily basis. What exactly have these people done that is so wrong? They were merely trying to make a profit. Should people not be allowed to make money? What is this country coming to when Americans are attacking Americans? Change indeed.
Welcome back, Kirk.
Liar loans are this country’s new Apple Pie.
Ah yes,… to paraphrase Al Bundy (of Married with Children) “Its not cheating [fraud] unless you get caught.”
Is this a joke?
That is what makes Kirk so special.
Ugh. You just had to jinx Kirk’s thankful absence by saying “Surprisingly little trolling on here”, didn’t you, AZDave?
Oh well, I always had a feeling his “this is my last comment here” was, like everything else coming out of his mouth, bullshit.
Hey Kirk, Oh inventor of the midnight Internet Bell… I beseech your advice.
I want to borrow two million dollars off my mansion so that I can put road blocks on the 405 to prevent illegals and South Orangutanians from coming to Irvine.
Is this OK, Kirk?
Or should I just move to my own private Idaho behind closed gates in my 40000 acre ranch in Wyoming?
I know a lot of people who have moved to Idaho and that is probably your best bet. Wyoming is reserved for American heroes and while your heart is in the right place I’m afraid that you haven’t yet shown that you are worthy. Perhaps if you put up that 405 road block and man it with cheap Mexican labor you will be welcomed through the pearly gates of America’s second greatest state.
Hate to ask, oh Oracle of TCP-IP-Ring-A-Ding…
What is the greatest state in this nation? Wake Island, Pago Pago?
Using illegals to man the fences? Do you imply that South Orangatians are more dangerous than illegals to the Irvinite lifestyle?
Come to think about it, my gardeners come from Santa Ana. Hmm..
TEXAS!
It was totally pre-arranged. These little piggy home buyers were gaming the system and most likely had a previous Kool Aid experience.
How much do you want to bet that their 70K down payment was the result of rolling the dice on some condo in ’04-’05 with a 100% finance?
Now they are sitting probably sitting on 100K and trying to move up into a McMansion somewhere. The game is over and their down payment is going to stay with the next property they buy and evaporate away.
We bought the Paso house in Nov of ’07 with 20% down. We had a real appraisal done, but ended up going with B of A, who were still using AVM’s. The real appraisal came in at $10K over our purchase price, but B of A’s came in $120K over purchase price. The banker offered us a HELOC at the same time, but we said to wait until we closed on the house. They opened the HELOC for $26K more than we had put down and that was for 80:20 LTV… for a higher rate we could have opened one for $164K more than we had put down! So, it doesn’t sound as fishy to me.
Is this good sizes HELOC going to be forgiven?
This is a great milestone that we are entering with all the upcoming profiles of ’07 knife catchers. I love how the little piggy managed to do some cash out refi voodoo in time before the music totally cut off. Talk about not wasting any time.
I was disappointed to see the buyer managed to extract his down payment and pass the loss on to the taxpayers. The gamblers running the banks didn’t really put a stop to the HELOC abuse until around ’08 so a few knife catchers are gonna slip through the cracks. I suppose one more moral hazard to throw on the pile is meaningless at this point in the overall big picture. They are probably sitting on 100K now that they are going to pump into another property.
The ’07 knife catchers are just first rung in the ladder of our downward march. I’m looking forward to some good upcoming down payment losses and purchase disasters exploding before our very eyes.
I vote this for the knife catcher song:
https://www.youtube.com/watch?v=TJN3PGqDRNg
Comparing this to Riverside, there is currently a $400K premium for the Woodbridge/Irvine experience and not having an hour commute.
That premium is well outside of historic norms on either a nominal basis or a percentage basis. That means that either Orange County prices will drop or Riverside County prices will rise. It doesn’t seem likely that Riverside County prices will rise…
Yeah, $200,000 in Riverside will get you a nice house. I’m currently looking for houses in the $100-125k range in the city of Riverside, and even these exist in mass numbers.
On Redfin, there are 492 houses for sale in Riverside under 200k. 289 of those are under 150k, and 110 of those are under 100k. (I’m filtering out short sales and under contract for all of those numbers.)
Here’s a good example of what $200k gets you in Riverside:
http://www.redfin.com/CA/Riverside/5684-Jurupa-Ave-92504/home/4900907
5684 Jurupa Ave
Riverside, CA 92504
Price: $199,900
Beds: 4
Baths: 2
Sq. Ft.: 2,181
$/Sq. Ft.: $92
Lot Size: 0.42 Acres
Property Type: Single Family Residence
Style: Ranch
Year Built: 1945
Stories: 1
Area: Riverside
County: Riverside
MLS#: S565887
Source: SoCalMLS
Status: Active
On Redfin: 13 days
Great price for this Bank Owned SFR located on a HUGE private lot. Property has french doors throughout, 2 fireplaces, garage, fenced yard, beamed ceilings and much more…..The possibilities are endless.
I have lived in Mexico and love it there. However I don’t want to raise my family there now.
you prefer Hong Kong 😆
Apparently, nice call.
The difference is that Riverside and Monterrey Mexico look so much alike. There are many Asians in Woodbury however I would never mistake it for HK, Shanghai or Seoul.
Great example of 200k for a large lot. I would not touch a house from 1945. Here is an example with about the same size and age:
http://www.redfin.com/CA/Riverside/10977-Stonehenge-Pl-92503/home/4762378
I think the best place to live in Riverside is in the greenbelt off Victoria Ave. It is like Irvine in the 70’s. There have been growth restrictions for decades, Prop R and Prop C. It cost more than lots of neighborhoods, but Victoria is a historic street and the area is now zoned for one house per five acres.
> I would not touch a house from 1945.
Why is that? Just too many maintenance concerns for something that old?
That and not energy efficient so your A/C and heating bills will be outrageous.
Plus, if it’s a historic home you have limitations on what you can upgrade/change about the house.
I don’t want an old house because I don’t want the maintenance, the lead paint, the asbestos, or the fear of the unknown. I don’t want to be a slave to the house either by time or payment.
I also don’t like HOAs, Mello Roos, or special assessments that you find in the newer homes. I don’t want to live in a house and neighborhood that I like and then have to move so I can afford to retire. I am thinking of Woodbury with its 30 and 40 year Mello Roos. Even with the house paid off, you could have a $1,000 per month housing cost.
There are a lot of large lots in Riverside, even buried deep in the city. If I really wanted to go biggest lot for least money, I would have showed you this one:
http://www.redfin.com/CA/Riverside/7473-Westwood-Dr-92504/home/4987729
7473 Westwood Dr
Riverside, CA 92504
Price: $109,900
Beds: 2
Baths: 2
Sq. Ft.: 1,128
$/Sq. Ft.: $97
Lot Size: 0.55 Acres
Property Type: Detached, Single Family Residence
Year Built: 1925
Stories: 1
Area: Riverside
County: Riverside
MLS#: I09028520
Source: MRMLS
Status: Active
On Redfin: 8 days
REO – LENDER OWNED PROPERTY. SOLD “AS IS, WHERE IS, AND WITH ALL ITS’ FAULTS. ” NO WARRANTIES EXPRESSED OR IMPLIED. NO REPAIRS ARE OR WILL BE MADE. WHAT YOU SEE IS WHAT YOU GET. REPAIRS ARE COSMETIC. OPEN FLOOR PLAN. WOOD LAMINATE FLOORING. HUGE POOL SIZE LOT (. 55 ACRES). NEAR SCHOOLS, SHOPPING, AND FREEWAYS.
This also happens to be on a great street, and this property sold for $510k in 2006. The house next door and the house across the street (both smaller lots but bigger houses) are both for sale and listed above $300k (with no takers for over 100 days in each case, of course). Of course, this price on this one is an REO mega-lowball-there are reportedly 20 offers on this one-it’ll sell for $150k minimum, maybe $180k.
“This also happens to be on a great street, and this property sold for $510k in 2006”
Remember that 2006 prices are not real. If you are planning to live here and not rent it out, you may want to look closer at the area. I stopped going to Hardman Center when I had to wait for the bums to pass before I could get out of the car. Ramona High may be worse high school in the district. Too many problems reported in the Press Enterprise (www.pe.com) happen on Madison. If I don’t buy in Irvine, I may pick up a SFR rental in Riverside, but I am going to wait a few years. The prices are still dropping. In your case, you may be able to get your large lot in a good neighborhood.
These are the prices for a 4/2 house on 1/5 of acre in my neighborhood:
1985 100K
1989 170K
1997 140K
2006 500K
Aug 08 255K
Dec 08 209K
We had a lot of REOs that were sold pretty quickly. I am wondering if we will see $140K again. If we do, it will take a while, but seems worthwhile to wait for this rapid decline to slow.
“this property sold for $510k in 2006”
Ay chingado! Now almost 70% off?? Brilliant.
In the sat. photo you can see where the 2006 owner is living now: there’s an RV parked in the back yard.
Ever been stuck in Riverside traffic?
Once upon a time it took my over an hour to crawl 15 miles to go from the 15 to the 10… It was a wednesday at 2:30PM.
According to coworkers that live there, this is normal.
Honestly, I’d rather live in an Airstream in Irvine than a McMansion in Riverside.
Of course, my Airstream will have real stone counters and one of them fancy japanese toilets with a built in water sprayer. Somethings we can do without.
A McAirstream, my Airstream. ;-D
Most days it is an hour for non-carpool and 45min. with the carpool. That is from the western edge of Riverside to just past Jamboree and the 5 Fwy.
There are those extreme traffic days that are etched in our minds. Once on the way in, there was a semi laying across all lanes in the Canyon with cars crashed in it. Another favorite was the plane crash into the side of the mountain and the fire that resulted from it. Still most days are fine.
Years ago when I worked in Huntington Beach, I had a boss that lived in Lake Forest. She spent more time on the road then I did. I would love to eliminate the commute, but I don’t want to pay more or give up space. Same decision I made in the 80s. The bright side is if my husband gets laid off, there is no commute.
The HELOC is fishy and could be grounds for disqualification from knife-catcher designation. The real knife-catchers will be the 2008 buyers, and I bet we’ll be seeing plenty of those here soon.
I think the HOA dues for this listing is incorrect. Only $69/mo? Normally Woodbridge is ~$350.
Its going to be a while until we see 40% off in Irvine. That would be $438,000 on this place–still $162,000 away.
Since we’re all suggesting housing songs, perhaps Guns ‘n Roses cover of “patience” would be a good one for us renters.
I live in Woodbridge. The WVA (Woodbridge Village Assoc) dues are $78 per month. If you live in a condo you also pay your condo maint. dues (mine are $236 per month). I think single family homes like this one only have to pay the $78 WVA dues.
Sue, you are correct. There are even a few streets in El Camino Real neighborhood that don’t have any HOA.
I see 40% off around Malibu, Calabasas, and Woodland Hills all the time. I have seen some shocking reductions, even at the high end. Here is a recent favorite:
“This is the biggest price drop I’ve seen in the Malibu Real Estate market, ever. Starting out $39,500,000, this ocean front property has been chopped to $21,500,000 in 4 short months. That’s an $18,000,000 chop in 120 days! The home is located just south of the Paradise Cove pier and was recently remodeled.
Here’s the MLS description……
ONE OF MALIBU’S SPECIAL GATED BLUFF & BEACHFRONT COMPOUNDS OVERLOOKING DESIRABLE PARADISE COVE. NEWLY COMPLETED & OFFERING A SEAMLESS TRANSITION BETWEEN INDOOR & OUTDOOR LIVING & ENTERTAINING IN A CASUAL, YET DRAMATICALLY ELEGANT SETTING. PROPERTY FEATURES: A SPECTACULAR MAIN HOME W/ OCEANFRONT INFINITY POOL & SPA, GUEST HOUSES & BEACH PAVILION ON APPROX. 81? OF SANDY BEACH FRONTAGE. APPROX. 2.4 LANDSCAPED ACRES IN TWO PARCELS, WITH LIMITLESS COASTLINE & OCEAN VISTAS. THERE IS NOTHING LIKE IT!!”
http://themaliburealestateblog.com/price-chops-for-a-malibu-beach-house18000000-price-reduction/
46% reduction in a single step.
interesting…. buttttttttttttt
as IR has already reported, $20 million dollar homes, otherwise known as castles of the super rich, don’t have a market that can be analysed and tracked. These homes are for a limited group and require all cash payments, you wouldn’t get a jumbo for $20 mil. They typically take years to sell and have to be maketed differently than your stucco box. And the rich aren’t doing very well right now, so the buyer market has really dried up. And what idiot is going to spend $20 mil for a house he can pick up in a year for $10 mil. Buyers will stay out of the market for these homes until they see we are at bottom.
IMHO: take this one off the market, if it sells it’s sheer luck.
A description with no typos!
*Must be the superior quality of the Malibu School District*
Great call, but we need a lot more than “just a little”. I am getting really sick of the stubborness – let’s get these foreclosures moving!
Yup. You have about two more years to save up. When Irvine hits bottom, it won’t hang there for long. There are too many people with alot of money just sitting on the sidelines.
There are too many people with alot of money just sitting on the sidelines.
I am not so sure that this is the case. I think we would be seeing even more knife catchers in the current market if that were the case.
There are plenty of people on the sidelines, but the majority of them will not be able to buy without financial voodoo. Many of these sideliners are waiting for easy credit to return and most of them don’t read very much or are just plain stupid. So it’s easy to overhear the moron at the pub talk about how he is going to buy this and buy that – most of these people are blowing smoke.
The savings rate in the USA is pretty pathetic. I believe it was actually negative at one point. People are saving more now, but I think it is more out of jobloss fear and not so much for a down payment on a house.
bullsh*t
I agree about people sitting on the sidelines. There are many more people sitting around who are able to buy a house, but choose not to. Currently, there are a number of people with jobs and downpayments who think it is insane to buy an asset depreciating at 10% a year if you believe optimists, and 30% a year if you believe pessimists. Using your savings for a down payment is even dumber in a bad recession.
Since prices will bottom at less than half of peak, hugely more people will be able to put up a 20% down payment in 2010 vs 2006, or even 2008.
Overall rent levels won’t go down much, so by the end of 2010 there will be many opportunities to buy homes in Irvine for less than it costs to rent something similar.
I don’t agree about the bottom being short. There will still be a big inventory of homes that people want to get out of. As soon as prices rise a little, tons of discretionary sellers will show up. Each time prices rise above some frustrated owner’s loan value, there will be someone else willing to sell.
Exactly. People smart enough to have saved their money recognize the stupidity of buying now.
I think concerns about long term job security dampen intelligent people’s desire to take on a long term financial obligation.
All very good points.
Wait, this sounds like a vicious cycle….
“There are many more people sitting around who are able to buy a house, but choose not to.”
There is also an interesting new category: people that could have purchased a few years ago at much higher prices that cannot qualify today. For much of the market, pricing is in this no-mans land. The tighter standards have made even the lower prices unaffordable. Prices need to retreat below this dead zone to reach price points where more people qualify.
I actually had someone tell me they were glad they purchased at the peak because otherwise they could not have gotten the house they have today. I didn’t know how to respond…
“glad they purchased at the peak because otherwise they could not have gotten the house they have today”
I love people’s need/ability to spin things.
“I actually had someone tell me they were glad they purchased at the peak because otherwise they could not have gotten the house they have today.”
Simple. They are a payment buyer. All they care about is whether they get the house they want and can afford the payment.
Maybe he’s got or getting a loan modification? That is the only way it makes sense;)
That’s what I think about. Who bought in the last 8-10 years has either already sold and moved up, HELOC’d there way underwater or are already underwater? The destruction of equity and the premature exhaustion of future buyers has changed the market dianamic of today. Since most sales are at the bottom, that would indicate that most buyers are first time buyers. The destruction of equity has created a vacuum that will need to be filled by time which will allow the recreation of equity for the move up buyers. That time is still years in the making.
First time buyer does not necessarily = low end.
Pick a price point, like $800,000. At the peak, that would have gotten me a house in decent condition, 3/2, 2000 sq ft, Woodland Hills, maybe a view.
Now, that gets me a larger place in Calabasas, probably with a view.
End of this year, it gets me a place with a view in Malibu, 1/4 acre or more, 3/2, 2500 sq ft. Not many people would call that low end or a starter home.
*Newsflash*
I just got word that because of recent mortgage legislation, FHA no doc loans are now available.
I guess the government has decided to just remove the middle man of banks and let taxpayers directly fund the ponzi scheme.
That’s crazy. What have we learned from this bubble and the resulting crisis? Create more bubbles?
There seems to be a prevailing myth that the closer you get to the coastline, the more exempt the neighborhood is to this correction. Certainly Irvine, Newport Beach, Pacific Palisades or Agoura Hills will not see the kind of correction Norco or Palmdale has experienced? Are they somehow precluded from fundamental valuations?
It is with great pleasure I watch the 45%-65% correction that has consumed the inland empire and the high desert move west towards the coastline cities.
It would be great to see an interactive map of Southern California that illustrates this trend. No neighborhood is exempt, even the neighborhoods whose residents are freebasing the kool-aid.
I think we will see even greater percentage drops on some of these near-coastal properties. Since buyers there believed the myth, the prices were bid up to levels beyond WTF. It will take a 66% nominal price reductions to get down to 1997 inflation-adjusted price levels. In Irvine it only takes a 50% haircut to get there.
IR, I think it’s already happening in the Coastal areas. Not that I can afford it, but Newport Coast/Ridge at about $1-million for a 2,400 sg.ft house is back to 2.1 times the bottom of 1995 (it was at more than 3 times). The price level in Newport Coast is what it was like (or even less) in Woodbury in 2006.
A coworker who bought a 2BR house in Pac Palisades two years ago for $1.6MM estimates that he could not get more than $1MM now.
Where have you seen NC SFR for a mil? Maybe condos that size but not SFR from what I’ve seen recently.
ockurt: Please see the link below. It’s an SFR with a sq-ft of about 1,920. I thought I saw 2,400 sq-ft at about 1.1 mil but I could be wrong.
http://www.redfin.com/CA/Newport-Coast/51-Clermont-92657/home/4736140
You’re right a SFR…not too many of those in this price range. Cute house. Looks like it’s off the market.
The price of this home in 1991 was 269,000. So if I assume a 4% annual rise in price, that puts the price of this home ~545,000. I have used compound interest to arrive at this figure, which is much higher than some folks are saying here.
Can someone tell me if my assumptions are correct or not?
Thanks.
Well, an assumption is an assumption. Anybody can use almost any data to support what they want to believe. For example, why take 4% appreciation instead of 3% which is more consistent with the rate of inflation and wage rises? 1991 values were still close to the previous peak. Why not use a price point from the bottom of 1995/1996 when similar houses were selling at $225k? If you use my assumptions, then at 3% compounded from 1995, would put this home’s “expected” value at about $340K today, based on MY assumptions 🙂
I used this table yesterday in the estimates I gave.
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
It’s from the Department of Labor – Consumer Price Index. Use the last column on the right which is the annualized average.
From 1991 to 2008, the CPI change was from 136.2 to 215.303 (with 1982 as the baseline of 100)
This is an increase of 79%, in which 269,000 would be equivalent to 481,510 (269,000 * 1.79) using this method.
Sorry OCRefugee but please check your math.
(215.3 – 136.2)/136.2 = 0.58 = 58%, so the multiplier becomes 1.58 (not 1.79).
Note that the 1991 prices were still very close to the previous peak.
Oops, you’re right, I didn’t divide back into the baseline. Using 58%, that gives $425,020, not 481,510.
The 4% is bull. One might also call it a Jedi Mind Trick.
An illusion and a great example of how statistics can be manipulated to spread lies that serve the purposes of those who stand to profit.
It’s just a number that someone cranked out by looking at past trend and extrapolated to manipulate others.
These magical 4% and 3% that people toss around like something handed to them from God. It smells of an inductive fallacy where the author claims that the house will appreciate by 4% next year because that is what it has done for the last X years. The problem is that the author ignores evidence that proves the appreciation over the last X years was caused by a bubble and artificial market interference, thus invalidating the conclusion if such interference is removed.
In this case, the author might say “Between year A and year B home prices appreciated by 4% each year. We can therefore conclude that home prices will appreciate by 4% each year between year B and year C.”
“Thy house shalt appreciate 3% per year for all of eternity”. It’s an attempt to extrapolate the future based on past trends which is full of potential pitfalls and can swing wildly innacurate.
Usually when I see people engaging in this 4% lemma – it strikes me as some rule that somebody conjured up using 20/20 hindsight; making the assumption that because the clock struck 12:00 at noon yesterday the clock will strike 12:00 at noon today. Works great for awhile until the clock breaks.
“…It’s an attempt to extrapolate the future based on past trends…”
D’oh! Isn’t this what IR does daily?
No, the equivalent would be “This house has declined 8% per year for the last 4 years so it will decline 8% next year”
Nobody has made that claim.
Yes and no. Past trends based on historic appreciation rates are the least reliable predictor of future pricing. It has some value to know what prices did, but it is much more valuable to know why they did it. Despite the lack of reliability in this method, it is the one most people use and rely on.
Actually, the high end is feeling the most pain at the moment. In particular, the beach areas. This is documented in the OC Resister from time to time.
This crazy house — only 1500 sq ft — is about $200,000 overpriced. $388 per sq ft is a clue. This is an entry level, older house — you see this type all day long in Huntington Beach for $400,000. I can’t imagine it being worth more in Irvine. People expect much newer over there.
Not everyone necessarily wants “newer”.
First of all, I don’t want to pay Mello-Roos tax.
Second, I don’t want to pay the price premium for the newer place when I can easily find a 30 year old home that has been properly updated.
Third, the build quality of the newer homes is a big question mark. I know some if it is terrible because I’ve seen it first hand. Builders were constructing homes at a phenomenal pace during the boom, and I’d expect many of those properties to develop serious problems in the coming years.
Fourth, the homes in the prime locations closer to the middle of town are typically older, as those areas were built first. This is important if you want to walk a lot of places or just not drive very far.
Fifth, the floor plans of the newer homes leave something to be desired. I don’t understand why anyone would want a football field-sized 20×30 master “suite” with a series of 8×8 prison-cell bedrooms.
Sixth, the lots on newer homes tend to be smaller than those on older homes. Virtually non-existent, in fact.
I could go on, but suffice it to say, old does not always equal “bad”.
Ron, I too am worried about construction quality. I pulled out of a Toll Bros. house for this reason. What about areas like Yorba Linda. A good area with schools comparable to Irvine and no mello roos? Any thoughts. I am fence sitting right now with my downpayment.
Well put Ron-
Interestingly, I believe that this home (Creekside) was built by Standard Pacific.
You may not like the new building styles however you can’t argue with the new mechanics, wiring and high speed telecom cabling built into the house. Also attached units have automated sprinkler systems.
New in Irvine also means new community design, with parks everywhere and schools/shopping within easy walk distance.
Wiring? High speed telecom cabling? Those are easy to add to an older home.
I can’t speak to the “new community design”, except to say that I live in a 30 year old community — Woodbridge — and can walk everywhere. Shopping, lakes, parks, schools, banks, restaurants, you name it. I often walk around the lake around sunset, and stop off at the bank, bookstore, or someplace else along the way.
To each his own, of course, but in my mind, the newer homes should actually be worth less because you’re getting less and paying more for it. I added recessed lighting, scraped ceilings, new solid six panel doors, hardwood floors, shutters, paint, improved appliances, and double-pane windows to my place for a fraction of the cost differential between my “old” place and a comparable new one.
The things my place doesn’t have are things I’m not as concerned about, but obviously some people feel differently, as the newer properties certainly seemed to sell.
Perhaps there’s a place for the old AND the new, eh?
Must be quite the master electrician to say rewiring a home is an easy job.
Of course to each his own, I couldn’t agree more. I grew up in a 50+ year old house and would be happy in an older home again. I work in Pasadena and admire the woodwork in the craftsman style bungalos.
I just find the ‘newer construction’ is no good mantra annoying, especially considering the improvements in building materials over the last several years.
Totally agree on that. I prefer the 1970’s homes. Bedrooms are bigger, windows are bigger, construction quality is better and, if it’s a SFR, the lot is bigger. The newer, the crappier.
It all depends on who the builder was. Some of these 70’s homes had strange layouts and trends from that time (like sunken “sitting areas” with a fireplace) that result in wasted square footage. Plus, if the home hasn’t been cared for you could end up replacing all kinds of crap like windows and roofs that can cost you fortune.
I do agree with Ron though that generally these older homes, especially in Irvine, have bigger lots which is nice. And even older areas like Woodbridge were designed so well they are still easy to get around. Very strong demand in this area…we were outbid on many WB homes that were in good shape. The crap ones just sat.
funny you should say that– today’s featured property has an “inglenook” – fireplace with built in seating surround. Most people turn it into an office or reading area nowadays 🙂
LOL!
So they called them Inglenooks? Now I know.
I could see turning it into an office but some had these built-in lame sofas. And how does everyone else enjoy the fireplace if it’s down in that “Inglenook”?
Everyone must have been on drugs in the 70’s.
Those “inglenooks” are my favorite feature of those floorplans. We looked at renting one, and my wife thought I was crazy for thinking that space was cool.
IR, glad you listened to the better half!
I just couldn’t picture myself sitting around that little couch having random conversations. Plus, I don’t have any friends so I’d have no one to talk to.
Another term for the “inglenook” is “conversation pit”, yes?
> Everyone must have been on drugs in the 70’s.
My theory as well.
I have lurked in here for over a year, but this is my first comment. We sold our home in Aug. ’08 for $1.1 after being on the market for 9 months. We came out with $500,000 (never took out a second and lived conservatively) money is currently in cds. We are renting now (not fun with 3 kids) and I see properties like this and I think they will come down further however does anyone know how inflation could affect this? My dad is telling me it’s foolish not to buy now because he thinks my money in the bank will be worth alot less in a year. How do you see inflation playing a role in pricing? Any thoughts?
Inflation will also effect interest rates which will go up and put even more downward pressure on prices. Inflation won’t be on or off switch either. Your money is probably doing the best it can right now just being cash especially in a deflationary environment. Your Dad is using the immediate past to determine what is a motivating factor in your decision to buy when the immediate future tells us that prices will continue to drop.
You can leave CA and buy a very nice house for cash elsewhere in a market that has already bottomed. CA is going to be an economically miserable place to live for awhile.
I would leave for Texas in a heartbeat but I have a custody agreement with my ex which prohibits me from leaving the state! Youngest is 10, when she hits 18, we will move out of California. She wants to go to Texas U!
Sister & Brother in law live in Austin. Great town if you can find a job.
As a Texas A&M grad, I find your daughters choice in schools dubious 😉
I would not worry much about inflation. We will not have any for quite some time. When we do, housing will not be a good inflationary hedge because interests rates will go up making housing less affordable.
The bottom line is that housing is doomed for at least a decade.
Hey IR…my sister & brother in law both graduated from TAMU…they hate all the UT folks in Austin…lol
BTW, once interest rates and inflation start going up, doesn’t that generally mean the economy is getting better?
Yes, raising interest rates is the FEDs way of slowing economic growth and preventing inflation. If we start hearing reports of inflation and the FED starts thinking about raising interest rates, this disaster will be behind us.
So, I guess my point is if interest rates are going up, people are working again, then housing becomes more affordable…with the exception of the higher interest rates on mortgages that is.
So housing would be a good inflation hedge, especially when the economy really gets going again…right?
Housing is a good inflation hedge if and only if there is wage inflation. General price inflation will not drive up home prices; wage inflation will.
Talk to your accountant, who can calculate some real numbers to make a decision on.
We’ve had dramatic inflation in this country in the late 70’s early 80s, we don’t have it now. If we have this type of inflation again (10% per year), it will drag housing up along with it on a relative basis i.e. everything goes up in price, but still won’t stimulate demand for housing which will still decline, relatively.
In short, $500,000 in cash will still be $500,000 with the purchasing power of $400,000 (for example). If you buy a $500,000 house today that without inflation would decline to $350,000, and with inflation would only decline to $450,000 (these numbers are SWAG, just for illustration), are you still ahead?
Talk to your accountant, who can lay it out for you much better.
JMHO. When it comes to real estate, a HIGH inflation is a double-edged sword. It tends to inflate prices on one hand but it also usually causes the Fed to increase interest rates (which decreases affordability and hence lower home prices) on the other hand; so the end result could be a similar monthly payment regardless. I don’t have a crystal ball but I’d rather buy the same house at a higher interest rate and less money than the other way around. This is because one can possibly try to refinance a higher rate if rates drop, but cannot re-negotiate the price of a house years after they bought! Of course this is assuming your dad is right and HIGH inflation is coming which is a possibility considering how much money has been pumped, unless the Fed drains it before it becomes an inflationary problem. There are several scenarios and I know it’s hard to make a decision because I’m in the same boat. Just my 2 cents!
nowwaat, I fully agree that a HIGH (rate) inflation is a double-edged sword. While it was painful to watch the rising prices of everything back in the 1970’s, OTOH I saw CD & T-bill rates of 15% or more. I wish I’d had the opportunity to buy a 20 or 30 year T-bill at those rates in 1979…
One of my mother’s friends opened a 10 year CD when rates were at 17% in the early 80s. After a few years when rates went back to normal, tellers would look at that rate and say there must have been a mistake.
It
was a mistake
and in her favor, too. Glad she got a good ride….
Okay, I just have to say this. I don’t remember the correct names for all of the parts of speech anymore, but the following words are used in the following manners:
“Your” is used in the possessive sense. “Your house is very overpriced.”
“You’re” is a contraction of the two words, “you are.” “You’re not really going to buy that house, are you?”
To distinguish between which of these to use, substitute into the sentence the words “you are”. If it sounds correct, use “you’re.” If not, use “your.”
Its is also used in the possessisve sense.
“The house is large, but much of its space is wasted.”
It’s is a contraction of the words “it is”.
“It’s a nice day to go the courthouse auction, don’t you think?”
As for the usage test, ditto above for your/you’re. Sustitute in “it is” and see if it makes sense.
Now, I hope that I found all of the spelling and grammatical errors in my post before I hit the submit button.
Sustitute? Just kidding.
Dave, if there were a smiley blowing raspberries I would have put it right in here at you. But you’re right, of course, I did make several spelling errors….
yup, sustitute, and possessisve. Sigh…..
It’s OK, I said “duel” (income) earlier and meant “dual” (income). I challenge you to a dual!
It happens.
So I’ve been lurking here for over two years now, and I’ve been a voice of reason for hundreds during that time, using primarily the analysis on this site as my bible.
Now I find myself looking at prices in the areas where I want to live, and even I am beginning to get anxious. There are homes in Fountain Valley that have dropped more than 30% since 2006. How much further are we likely to see them drop? What will be the approximate floor for, say, a 3000 sq ft home, 5 beds, 3 baths, in FV?
I’ve been watching fountain valley (I really like the name of the city for some reason) for a couple of years and prices there still seem way too high. I’m in the camp that when we hit ~y2k prices, it will be a sane time to buy. Looking at a few properties on Redfin, that should put prices at ~$160/sqft give or take. Look at the trend line for the area as well, it’s dropping rapidly.
For your example, I would put a floor at $450-$500k, but that’s only a somewhat-educated guess and assumes the gov’t doesn’t bring back liar loans or 0% down. If anyone is of a differing opinion I’d love to hear it.
Brock, my answer is nobody really knows since nobody has a crystal ball. It’s great to do research and analysis but if you think you’re going to time the market you probably won’t.
I do know that the OC median selling price has remained stable for the past few months…I’m not saying it can’t get worse (it could definitely) but if you think prices are going back to 1968 or whatever it ain’t happening.
If you find the house you like and you can afford it on a 30 yr fixed and you’ll be in it at least 10 yrs…go for it.
Finding tops and bottoms in the stock market is tough. It’s easy in real estate. Real estate prices move more consistently up or down for long periods of time. I challenge anyone here to find a period when home prices rose more than 10% off a bottom in less than 3 months. Rises that fast only happened in the middle of the bubble runup, in 2004 only, and only in the severe bubble cities.
Wait. You won’t look up one day and realize prices have jumped out of reach.
If r/e was that easy, we’d all be Donald Trump (sorry, couldn’t think of a better example..is he broke now?).
I agree with you, prices aren’t going to skyrocket anytime soon. But, all I’m saying is that they might remain stable, or even if they go down a bit if you plan on being there for the long-term then it’ll work out. Sometimes people can’t wait due to family reasons.
There’s good deals out there…you just have to look and be patient. If you can find something way below bubble pricing, I say buy and lock in the asset at a low interest rate for many years.
I don’t trust the percentage drops. During the correction in the 90s, prices dropped steeply from 90-94 and then continued to drop, just not as quickly. I think you will be rewarded for waiting. I have a neighbor who jumped in early (1991). He still grumbles about being underwater for years. Why be that guy?
If that was a legitimate purchase I’m Abe Lincoln. Amazing nobody ever goes to prison on those deals…
Yeah I got one of those as a prize for an essay contest in grade school, it only cost them $10 to give me $50, 10 years down the road. (bought a hammock chair with it when it came due)