Bear rally buyers are in denial. When selling their homes, they consistently price over the market and far higher than bubble era buyers who have capitulated.
Irvine Home Address … 41 SMALL Grv Irvine, CA 92618
Resale Home Price …… $1,550,000
Why bother? it's gonna hurt me
It's gonna kill when you desert me
This happened to me twice before
It won't happen to me anymore
Weezer — Why Bother
Home prices in California are notoriously volatile. Stoked by their realtor's advice and enabled by foolish lenders, buyers get motivated by greed and fear to bid prices up to the stratosphere. When the inevitable crash occurs, everyone is surprised. Many people believe trees really can grow to the sky.
The psychological stages of loss are the same for all bubble buyers. Most people buy because they believe prices are going up. This was particularly true for bubble buyers, but bear rally buyers from 2009 fell victim to the same faulty thinking.
The buyers from 2004-2006 have already gone through denial and fear, and most have capitulated and either let the property go to foreclosure or sold short. Bear rally buyers are still in the initial stages. They believe they bought at the bottom, so the are still in the denial stage we watched most bubble buyers go through in 2007. The most obvious indicator of denial is the initial asking price of a bear rally knife catcher. According to a study by Zillow, buyers from the bear rally consistently overprice their properties.
Sellers Who Bought Post-Bubble More Likely to Over-Price Home
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July 14th, 2011
Imagine two identical houses built in the same year in the same neighborhood. House A was last purchased in 2006 and House B in 2008. House A is listed at its estimated fair market value of $300,000. Although it would be logical to assume that House B would list with a similar asking price, new research shows that it would, in fact, list at $350,000 on average, a $50k premium! Why the 16 percent price difference?
Because bear rally buyers are still in denial. It's the only explanation which is consistent with what we know about human behavior.
An analysis of seller behavior reveals that homeowners who bought after the peak of the national market in June 2006 dramatically over-price their homes relative to its estimated market value. In a separate survey fielded by Zillow, 17 percent of sellers who purchased post-bubble claim that their primary factor in pricing their house is their original purchase price. This compares with 9 percent who bought during the run-up to the bubble and 4 percent who bought before that.
It's human nature to price a property at break even and see what happens. Just like winning the lottery, a wouldbe seller might get lucky and find a foolish buyer who is willing to overpay.
In the chart below, the blue line is showing the difference between the current list price and the estimated market value of the home with the year the house was last sold running along the X axis. The green line represents the difference between the current list price and the prior purchase price. Notice in the green line that current sellers that purchased their home since 2009 have been pricing their house at 10% higher than what they purchased it for just 1-2 years ago. This is in spite of the fact that over the last two years the national real estate market has depreciated by 10 percent. This difference is represented in the blue line which shows that sellers who bought during this period are pricing around 20% above market rate. Not only are these sellers ignoring the losses they have taken since purchase, but they’re trying to claw back all of their closing costs too it seems!
Obviously the idea that your largest asset has been devalued significantly is difficult to accept, however, people who bought in the run-up to the bubble are seemingly more willing to confront this reality than those who purchased after the peak.
The further along the seller is in the process of accepting their loss, the more likely they are to price their property to sell. Selling for whatever one can get is the essence of capitulation..png)
In fact, relative to sellers who purchased their home before 2002, those who bought while the bubble was expanding rapidly are comparatively underpriced. When first placed on the market, the typical house is priced at roughly 10 percent above its estimated market value, but sellers from 2006 touch as low as 6.4 percent. Looking at sellers who bought on either side of the market peak nationally reveals stark differences between these two groups. Sellers who bought in January 2006 overprice their home by only 8 percent, while those who bought in January 2009 overprice by 22 percent.
Many keystrokes have been devoted to the downward stickiness of prices. Fortunately, the bear rally buyers bought closer to the bottom than to the top, and most of them used conservative conventional financing because it was the only financing available at the time. These people will still be trapped in their homes for years, but they should be able to afford the payments.
Sellers who bought post-bubble seem to think that since their home purchase occurred after the peak of the market, and thus home values were already significantly discounted relative to the peak, the seller escaped the worst of the bubble. The problem is that “The Bubble” didn’t pop so much as steadily deflate for the better part of 5 years now, and current home values now represent what they were worth in 2003.
Said differently, assuming your market followed the national trend, unless you bought your house before 2003, you should be selling it at a loss now. The closer to 2006-2007 you bought, the bigger that loss should be.
This fact is why I felt such a sense of urgency to write for the IHB. I started in February of 2007 and tried to warn everyone that the market was on the edge of a major fall. Those who listened to me are not trapped in an underwater home right now. Those who didn't….
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We know there are a million numbers to keep in your head when looking at a potential property, and that by no means does every property purchased in 2008-2010 is dramatically overpriced. However, I humbly suggest that when looking at properties, you keep one more very important, and very simple, statistic in mind: Previous Year of Purchase.
Methodology:
Zillow’s analysis was done by taking one million currently for sale homes with prior sale data since 1999 and looking at the difference between the current list price and the previous sale price. We then compared the change in the Zillow Home Value Index of that property’s zip code from when it was previously sold to now. These data were grouped by month and the median value, as well as the median difference between the two metrics, was then calculated. The resulting graph and data as well as the survey information yielded the above conclusions
The takeaway from this article is when negotiating to buy a house as we enter this bottoming phase, be wary of bear rally sellers. They will not be as motivated, so they will be less likely to lower price to make a deal happen. It's the bubble buyers who have capitulated that you should be looking for.
An Irvine bear rally buyer-seller
Portola Springs has become the forgotten village. Built at the peak, all homeowners there have properties worth less than they paid, and the Irvine Company seems in no hurry to build this community out. The seller of today's featured property paid $1,362,500 on 11/14/2008, and now he believes the property has appreciated 15%. Since this property has actually declined in value, this asking price is consistent with the Zillow study referenced above which noted sellers who bought since 2006 tend to overprice their homes by 22%.
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This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 41 SMALL Grv Irvine, CA 92618
Resale House Price …… $1,550,000
Beds: 3
Baths: 4
Sq. Ft.: 3577
$433/SF
Property Type: Residential, Single Family
Style: Two Level, Tuscan
View: Catalina, Coastline
Year Built: 2008
Community: Portola Springs
County: Orange
MLS#: S664038
Source: SoCalMLS
On Redfin: 67 days
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Modern Luxury and Prime Location with Panoramic Views. Irvine's prestigious Portola Springs absolute best lot. Unique 180 degree views to the coast and Catalina. Set up as 3 bedroom but can easily be made 4 or 5 bedroom. 3577 sq ft of feature-laden luxury in this 3 year old extensively upgraded home. Six figures in upgrades put into the house. Knotted wood floor, downstairs resort-like master suite with room-sized closet. Laundry rooms upstairs and down. Huge kitchen/family area, relaxing atrium, security system, cat 5 wiring with 7 outlets. Teen/Bonus room upstairs with 2 bedrooms and bathrooms. Kitchen has large range, built-in fridge and a huge island for entertaining. Energy-efficient lights. Back yard has amazing panoramic views impossible to match in the area. Built in Bar-B-Q, and elec retractable awning for hot summer days. This really is luxury with prime location. Superb Irvine School District. Community Jnr Olympic pool, 18 N'hood parks, Basketball Ct, community cntr.
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Proprietary IHB commentary and analysis
Resale Home Price …… $1,550,000
House Purchase Price … $1,362,500
House Purchase Date …. 11/14/2008
Net Gain (Loss) ………. $94,500
Percent Change ………. 6.9%
Annual Appreciation … 4.6%
Cost of Home Ownership
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$1,550,000 ………. Asking Price
$310,000 ………. 20% Down Conventional
4.19% …………… Mortgage Interest Rate
$1,240,000 ………. 30-Year Mortgage
$322,135 ………. Income Requirement
$6,057 ………. Monthly Mortgage Payment
$1343 ………. Property Tax (@1.04%)
$450 ………. Special Taxes and Levies (Mello Roos)
$323 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$149 ………. Homeowners Association Fees
============================================
$8,322 ………. Monthly Cash Outlays
-$1354 ………. Tax Savings (% of Interest and Property Tax)
-$1727 ………. Equity Hidden in Payment (Amortization)
$463 ………. Lost Income to Down Payment (net of taxes)
$214 ………. Maintenance and Replacement Reserves
============================================
$5,918 ………. Monthly Cost of Ownership
Cash Acquisition Demands
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$15,500 ………. Furnishing and Move In @1%
$15,500 ………. Closing Costs @1%
$12,400 ………… Interest Points @1% of Loan
$310,000 ………. Down Payment
============================================
$353,400 ………. Total Cash Costs
$90,700 ………… Emergency Cash Reserves
============================================
$444,100 ………. Total Savings Needed
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So, when someone says that not paying their mortgage is just a business decision, they are saying that they are as untrustworthy in their business life as they are in their personal life.
Can’t disagree more. A business contract is dispassionate and free of any moral stipulation. It is enforced by our justice system. That is why provisions for default are contractually agreed upon. In my business, contracts are cancelled all the time, and the entity cancelling does so for their business benefit. My organization has very carefully constructed language and penalties to ensure we don’t lose money (and benefit in many cases). If we fail to negotiate good terms for ourself during the legal process of the deal, the other side had better representation, therefore they “win” in the transaction.
It has nothing to do with trust. Trust is what you need if you don’t have a contract. Trust is a handshake.
So you’re saying that anytime a business exercises the termination clause they entered into, they’re acting “immorally?”
Sorry, I just don’t follow that logic at all.
Even if it is in the contract, it may not be unforceable in court for legal reason and for non-legal reason (political).
Some animal are just more equal than others. One should consider the cost to enforce the contact and if it is a loss in court if one should try to make it a Pyrrhic victory for the future. An example would business contracts that were only enforceable one way, which eventually expanded into the on-going civil right movement.
Let’s see who I can steal from, as long as I can do it legally.
Neither business nor contractual matters are conducted outside of morality. Would a “business contract” to have someone killed- by a dispassionate, disinterested party- be OK simply becuase the parties deemed it part of their business life, rather than their personal or social lives?
The illegal activities are usually excluded from contract and work agreement. Sometimes employers need reminding that the agreement is for lawful actives and does not include illegal activities. When an employee needs to remind their company on these matters, it usually time to leave.
The modern business paradign is to maximize profits, which includes personal profits. This is very different from 50 years ago. The application of these changes the demise of many American business. I hear more talk about helping the communities from business, but see actually less care in the decision process from companies.
Let’s see — you’re saying that if someone is horribly underwater on their home – let’s say to the tune of 200 – 300 – 400K – or more they should tough it out? They made a mistake, they were stupid, they were taken advantage of, whatever caused it, they should walk away.
Banks do it all the time.
I think the overpricing of 09 sales has more to do with those people thinking they got a great deal then and wanting to cash in on it now. Also, those listing homes purchased closer to 2006 may have been struggling with (or not making) payments for a longer period than buyers in 2009, by virtue of their being in the home longer and having paid a higher price. There probably were some great deals then, mostly foreclosure & other distressed sales, and I’ve seen a lot of very good relocation situations where the relocation firm sold at what might be considered below market price to find a buyer quicker. I’ve also seen a few where the owners have moved, and not been distressed, but lowered the price quickly to finally move the property.
One thing that will give people pause when buying today, as opposed to the 5-15-25% per-year appreciation days is the >6% transaction costs buying & selling property. If it takes you 3 years to save the 20% down payment, and then you have to turn right around and sell, losing 6% of the sales price, that is a full year of savings lost. To many, that is a significant downer.
I know of a family who aren’t even bubble rally buyers listing their 2003-purchased Irvine condo at what appears to be about 25-35% higher than the current comparable market in hopes of simply covering the outstanding mortgage, let alone the closing costs for resale. They’ve actually paid down the original mortgage a good $10K on top of a higher than 20% down payment and they don’t have a second or even a HELOC. I think we could consider them responsible borrowers, other than being caught like everyone else 7-10 years ago in buying overvalued property and getting very little for what was paid for. Even for them, pre-bubble, it’s simply a matter of time before capitulation sets in if they want to sell. Or else stay put and continue to pay the overpriced mortgage on a tiny home.
Ugh, I would hate to be paying the summer AC bill for a 3600 SF home in Portola Springs…
Don’t you all think this will be the case for the foreseeable future? IMO, the move away from foreclosures and toward short sales was designed exactly to deflate the bubble over a longer period of time rather than taking the losses in sharp intervals. However, the public wasn’t told about this strategy. Instead, everytime there is any upward movement in the marketplace, it is deemed a victory….”We’ve reached bottom!!” “Time to buy!” The “rally” in Irvine in 2009-2010 was a false market. With upwards of those ‘buyers’ paying cash, many here on tourist visa’s, a temporary buying surge happened. NOT a market recovery.
“Don’t you all think this will be the case for the foreseeable future? IMO, the move away from foreclosures and toward short sales was designed exactly to deflate the bubble over a longer period of time rather than taking the losses in sharp intervals.”
Yes. I also think the new crop of buyers will be less distressed, so they will hold out for their wishing prices longer.
All of this will make for lower transaction volumes and many hungry realtors.
Wow, $8300/month cash outlay to “own” this place with 20% down. That’s a bitter number to swallow! Good luck selling this place, but I’m sure there’s a FCB waiting in the wings…hahahaha.
I’ve seen a lot of anecdotal evidence that this is happening, but it’s interesting to see the stats back it up. On my street two very similar houses were listed – one at $689k and one at $795k. Guess which one sold within a few weeks? I think there’s a year or more of this silliness built into the system, as sellers desperately cling to the illusion that they didn’t over-borrow. And yes, some of them will win the lottery, with foolish buyers (i.e. non-IHB readers) stepping in to save their shirts. There’s a very limited number of those buyers tho, and really, even the people who bought that $689k house overpaid and will be trapped for years…
Didja hear? Obama is gonna save all those underwater homeowners, um, loan-owners, next week.
And he’ll screw us savers and renters.
No justice.
Isnt Portola Springs located right next door to the Orange County landfield (OC dump) ???
Who is their right ming would pay lots of money to live near a toxic dump?
Ewwwwwwwwwwww……..
Is that an active dump?
Turtle Ridge is near an inactive dump. The odor is strong (swamp/gargage odor) at time along Culvert. The kids said they could smell it. I looked into it more and found the old dump site.
I don’t know the toxicity level, but the smell was a factor in not buying for me and feeling that the nice looking houses were way over priced for the location that smelled.
Yes… the dump is active:
Bowerman Landfill
You can hear the trucks going up Sand Canyon all the time.
Wait, is that what is causing the loud sound/vibration I hear periodically in the daytime and early evening? I live near Irvine Blvd/Yale.
If not the trucks, does anyone know the answer to this mystery?
2 weeks without Hedonic Data… I’m going through withdrawal.
The one remarkable thing about today’s listing is the large 8300sft view lot… but it’s next to the toll roads. I’m actually surprised that StanPac was able to sell these Serra homes for over $1mil during the bubble’s deflation.
View lots?
I looked through the pics, and saw neither coastline, nor Catalina.
I didn’t say what kind of view. 🙂
I do think you can see those things claimed in the listing… on a perfectly smogless day.
I have been up on the ridge in Portola Springs on a clear day, and you can see the ocean. It is a very thin line on the horizon, but it is visible. The views are just okay compared to some of the more interesting views in Turtle Rock and Turtle Ridge.
“View lots?
I looked through the pics, and saw neither coastline, nor Catalina.
”
But you can smell the active landfill right next door! hahaha LOL
People are soooo very STUPID to be paying $1 million for a house, that is located right next door to a toxic shithole landfill.
Just goes to show you just how STUPID some people are….
@IHO: Glad you enjoy the hedonic analyses. I’m going to have to ask irvinerenter to keep your withdrawl trembing down with a pleasant drip of daily, though non-hedonic, real estate analysis for the coming weeks.
That said, the hedonic analyses work well on a quarterly basis, and I’m very interested to see what the Q3 numbers look like. Q3 includes July/Aug/Sep months in which we’ve heard a lot of anecdotes about continued declines in price. The data will allow us to see exactly what the Irvine price trend has done in Q3. Should be ready towards the beginning of October.
Q4 should be even more interesting, as it represents a seasonally downward quarter coupled with renewed concern about a slowing economy.
Hello? What, suddenly “owners” set the opening price on residential property, not real estate agents after that famous “free market analysis!” Agents have 95% of all sales go through their hands and MLS. What, no agents help set too high a price? gosh. Well, in the real world, Agents have and will always promise anything, especially an unrealistic price, to get the listing first and foremost; one can cut the price later when the owner is beaten down, and thanks to the cozy deal where real estate agents don’t offer more than 3% off any other agent’s property even with the “real” price, well, who’s to challenge this age old game? The real estate agents are as opportunistic and trained to get that listing at all costs, as a car salesman or time share salesman or mortgage salesman is at their unique and disturbing manipulative craft(while appearing “professional” to gain that trust, natch).
Turtle Ridge is next to a dump..and the smell of methane gas is present. Portola Springs is next to an active dump. 5,000 homes have been approved for the “Great Park”, which sits on decades of toxic material. I wonder how the One Ford Road residents in Newport are feeling these days. Their beautiful homes were built on remediated soil after decades of toxic dumping by Ford/Loral/Lockheed. But I’m certain that they were assured that everything is within tolerance. Nothing to see here.
So true. And Sage Private School is built right on top of methane deposits the equivalent of small bombs.
Just think of what could occur during a movement of the Newport-Inglewood fault?
~Misstrial
Something actually newsworthy happened today. I got an e-mail solitation from Lennar to me as a Broker to sign up to be a VIP Agent @4% commission for any and all of their projects in San Diego, Orange, Riverside, and San Bernardino Counties. IMO that is signaling a major change in the way new homes will be sold. Most other states operate this way and have for years. They may continue to have a reduced on-site sales staff, but rely on local realtors for more than just close-outs.
Misstrial – How can that be true? Is there a way to verify the Sage Hill/methane? That is scary.
IHB- I like and respect this blog tremendously, which is why I beg you not to use awful business speak like “takeaway.” Unless of course you’re talking about take out food in Australia.
Ken Smith’s “Junk English” shows how phony our corporate language really is, e.g. “skill sets” instead of “skills.”