Sales volumes are still 20% below historic norms, and inventory just hit a new 23-month high. Will prices hold up, or will they weaken and move lower?
Irvine Home Address … 59 DEL CAMBREA Irvine, CA 92606
Resale Home Price …… $610,000
I feel too close to be losin' touch
By givin' in, what am I givin' up
Am I losin' way too much
Hey
California waiting
Every little thing's gotta be just right
Kings of Leon — California Waiting
I wish I could be bullish on Irvine or Orange County real estate. I am bullish on the beaten down fringe markets like Riverside County or Las Vegas because prices are in line with incomes, and with low interest rates, the payment affordability is fantastic. When people go back to work in these areas, particularly in Las Vegas, prices will rebound. Orange County in general, and Irvine in particular, has not corrected enough for me to be bullish on pricing here. We are all still waiting.
In Friday's astute observations, I was asked about my predictions for the future. I replied:
With all the government manipulation and the cartel behavior of the lenders, it is really hard to tell when prices will reach a bottom. Much will depend on interest rates.
I suspect we will see a bottoming of payment affordability in 2011 with the combination of high inventory and low interest rates. As interest rates go back up, prices will continue to go down, but as inventory pressures abate, payment affordability may not be as good. I could easily see a scenario where the low interest rates make the median home affordable with a 25% DTI in 2011 and by 2013, the prices may actually be lower, but in order to purchase a median home, the median household income may require a 28% DTI.
Further, I think we will see affordability bottom at different times for different market strata. The low end will bottom first, and we are close to that now. The high end will bottom last as the gap between the low end and the high end recompresses to its historic relationship. The low end may bottom in 2011 while the high end may slowly deflate through 2014.
Sales Volume 20% below historic norms
A recent OC Register article noted that O.C. home sales hit 4-year high. That sounds great, but the very first item published in that article was the chart below showing sales are running 20% or more below historic norms of the last 22 years.
July 13th, 2010 — posted by Jon Lansner
The article does provide some context for its occasionally bullish statistics.
- June buying is 21.7% below the average sales activity of June from 1988 through 2009. (See chart above comparing sales activity of the most recent 12 months compared to their respective 1988-2009 monthly averages.)
- In the 12 months ended in June, Orange County home sales totaled 32,813 – that is 26% below the average sale activity of 44,344 for a year from 1988 through 2009
- … sales in 2010’s second quarter sales were 24% percent below the 1988-2009 average.
Those numbers are pathetic. Lenders are afraid to process too many foreclosures or complete too many short sales with those grim absorption numbers. There simply isn't enough buyer interest to absorb the distressed inventory, so lenders are preventing it from hitting the market.
Uncle Sam likely had a hand in this sales bump. House shoppers who entered escrow by April 30 were told they had to close the deal by June 30 to possibly collect up to an $8,000 federal tax credit. Just after the June 30 deadline — which spurred a deal-closing flurry — that deadline was extended by Congress to Sept. 30. (DETAILS HERE!)
“This is good news, even if part of it is due to stimulus programs such as tax credits and very low interest rates,” says Kerry Vandell, director of real estate studies at the Merage School of Business at UCI. “Consider how we all would feel if, after all the stimulus activity, sales and prices continued to drop. The fact that a broad array of economic indicators — including Wall Street hiring — is pointing toward recovery is a very good sign. However, in the end, recovery will not be complete until job growth in the private sector turns solidly and significantly positive. We are not there yet. However, I anticipate solid job recovery by year end.”
Do you get the feeling Dr. Vandell was reaching for something positive to say? Consider how we would all feel if… people in the industry told the truth! Why am I the only voice bothering to point out that not everything is perfect in the housing market? Sometimes I think these people forget that not everyone expects or wants house prices to rise at double-digit rates.
The tax credit program in combination with low interest rates and withheld inventory has provided a brief respite on the way to the bottom. Perhaps the tax credit made for a higher bottom by giving some false hope to those contemplating accelerated default. Perhaps it was a massive waste of taxpayer dollars subsidizing those who were going to buy anyway. It was likely a little of both.
And post tax break, there’s talk that the market is cooling …
- Steve Thomas of Altera Real Estate calculates a “market time” benchmark tracking how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made. By this Thomas logic, as of last Thursday, it would take 3.78 months for buyers to gobble up all homes for sale at the current pace. This is slower pace than the 3.37 months of inventory found two weeks earlier or 2.66 months of a year earlier. (See more of “‘Unrealistic’ sellers flood O.C. home market” by CLICKING HERE!)
Even Steve Thomas's unreliable, made-up numbers based on escrows rather than closed sales is showing undeniable weakness.
- Holly Schwartz of Torelli Realty in Costa Mesa concurs, saying her firm sees a drop in activity as tax-break deadlines passed. “The first half of 2010 was strong; the tax credit incentive helped,” she said.
An honest view of what is happening in the market. I hope her broker doesn't get too angry with her for failing to shovel manure at the OC Register. Not to worry, the two interviewed from Seven Gables scooped the poop:
- But Carolynn Santaniello of Seven Gables Real Estate hasn’t seen that much buyer drop-off: “I have seen a slowdown in the under $450,000 range since the tax credit expired. In the mid and upper range, I have not see as much as a drop in buyer demand. The first half of 2010 has been very busy and I don’t see an end in sight for me, personally. Serious buyers are still buying.”
- Amanda Wernick of the Sandy DeAngelis Team at Seven Gables adds: “Post tax credit has not shown any loss of activity. We’re constantly speaking to possible new buyers, though sellers are re-evaluating their sales strategy.”
What does it mean to re-evaluate a sales strategy. Is that realtor talk for backing off their WTF asking prices?
Beach town home sales swoon
July 18th, 2010 — posted by Jon Lansner
While the affordable slice of the housing market enjoyed a sales boost from an expiring federal tax credit, Orange County’s beach communities had falling sales activity as the June 30 tax-break deadline arrived. (Then it was extended to Sept. 30.)
In June, DataQuick shows 553 homes sold in 17 Orange County beach cities ZIP codes — off 3% from May and just up 5% from a year ago. In May, beach homebuying was running 40% above a year ago. And, perhaps most stunning: News that owner of “Portabello” has cut the seaside, blufftop mansion’s asking price by $25 million!
Now in beach towns where the median selling price if $685,000 — up only 1.4% vs. a year ago — a tax break of up to $8,000 is no market mover. Still, in today’s climate, anything should help. But as beach sales fell 3% from May to June as the rest of the market saw sales rise by 7%.
Very little is selling in the beach towns because prices are way too high. Anything requiring financing in excess of the jumbo conforming limit of $729,750 is selling at an extremely slow pace. First, the cost of financing is considerably higher (5.5% instead of 4.5% at Wells Fargo), and second, now that people have to be qualified for these loans with their real incomes rather than the fantasies they were allowed to put on loan applications in the past, there are very few qualified buyers. With the huge default rates on over $1,000,000 loans, expect to see a great deal more inventory in the beach communities.
Irvine's Inventory hits 23 month high
We have been watching the inventory in Irvine rise steadily throughout 2010. From a low of 440 homes on 1/2/2010 to the current 794, the inventory has now entered a more normal range. If sales rates were near historic norms, the current level of inventory would pose no problems for absorption, but with buyer demand weak, the current level of inventory should blunt further price increases, and if this trend continues through the end of the prime homebuying season, we will begin to see price weakness this fall and winter despite lower rates. For now, it is still a seller's market, but the balance of power is shifting, and a few months from now, buyers may not need to be so aggressive to obtain properties.
It is typical for inventory to peak in July or August as new sellers quit entering the fray. Lenders may also pull back on new listings for fear of what it will do to the market. This fall and winter will be the first test of the strength of the lending cartel. If all the members of the cartel stop adding inventory, pricing may hold up during the off season; however, if some members of the cartel choose to keep the liquidation going at full speed, inventory will continue to climb, and prices should soften.
IMO, lenders would be foolish not to take advantage of very low interest rates and still inflated prices to offload some inventory. Those banks that choose to break from the cartel will be rewarded with higher prices whereas those that try to hold on will be stuck with increased REO inventory and the likelihood of lower prices next year.
Two failed loan modifications and over three years of squatting
The owners of today's featured property set a new standard for HELOC abuse and gaming the system.
- Today's featured property was purchased on 9/15/1998 for $299,000. My property records show this was purchased with a $90,000 first mortgage and a $209,000 down payment; although, it is possible that my data source is not correct and missed the first mortgage.
- On 12/15/1998 they obtained a $40,000 HELOC.
- On 12/28/1999 they opened a $60,000 HELOC.
- On 7/2/2001 they refinanced with a $200,000 first mortgage.
- On 5/29/2003 they refinanced the first mortgage for $270,000.
- On 9/19/2004 they needed more money so they refinanced yet again for $400,000.
- On 1/27/2005 they went back one more time and obtained a $448,000 first mortgage.
- Total mortgage equity withdrawal is $358,000.
-
Total squatting time is at least 40 months, although the borrowers may have made a few payments during the period from July 2007 through December 2008.
Foreclosure Record
Recording Date: 05/20/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/19/2010
Document Type: Notice of Default
Foreclosure Record
Recording Date: 06/29/2009
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 12/10/2008
Document Type: Notice of Default
Foreclosure Record
Recording Date: 07/25/2007
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 06/13/2007
Document Type: Notice of Default
It is pretty obvious these borrowers cannot afford their home. Since they still had equity, the bank was willing to go above and beyond the call of duty to modify their loan over and over again. These borrowers crossed the invisible event horizon of the Ponzi limit during the refinance of 2004 or 2005. With the amend-pretend-extend dance on its third encore, these owners are facing the prospect of finally selling their home.
I imagine they are quite attached to the property. After providing several hundred thousand dollars of spending money and over three years with no housing costs, it will be quite an adjustment for them to rent a property that actually costs them money rather than gives it to them.
Irvine Home Address … 59 DEL CAMBREA Irvine, CA 92606 
Resale Home Price … $610,000
Home Purchase Price … $299,000
Home Purchase Date …. 9/15/1998
Net Gain (Loss) ………. $274,400
Percent Change ………. 91.8%
Annual Appreciation … 6.1%
Cost of Ownership
————————————————-
$610,000 ………. Asking Price
$122,000 ………. 20% Down Conventional
4.59% …………… Mortgage Interest Rate
$488,000 ………. 30-Year Mortgage
$120,477 ………. Income Requirement
$2,499 ………. Monthly Mortgage Payment
$529 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$51 ………. Homeowners Insurance
$156 ………. Homeowners Association Fees
============================================.jpg)
$3,234 ………. Monthly Cash Outlays
-$419 ………. Tax Savings (% of Interest and Property Tax)
-$632 ………. Equity Hidden in Payment
$209 ………. Lost Income to Down Payment (net of taxes)
$76 ………. Maintenance and Replacement Reserves
============================================
$2,469 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,100 ………. Furnishing and Move In @1%
$6,100 ………. Closing Costs @1%
$4,880 ………… Interest Points @1% of Loan
$122,000 ………. Down Payment
============================================
$139,080 ………. Total Cash Costs
$37,800 ………… Emergency Cash Reserves
============================================
$176,880 ………. Total Savings Needed
Property Details for 59 DEL CAMBREA Irvine, CA 92606
——————————————————————————
Beds: 3
Baths: 2 full 1 part baths
Home size: 1,350 sq ft
($452 / sq ft)
Lot Size: 2,352 sq ft
Year Built: 1994
Days on Market: 17
Listing Updated: 40371
MLS Number: S623648
Property Type: Single Family, Residential
Community: Westpark
Tract: Posi
——————————————————————————
Positano Plan A in a quiet inside tract location. Upgraded flooring,custom interior painting and low maintenance backyard. Main floor bedroom with full bath, direct access garage and high vaulted ceiling.Walk to Plaza Vista school, pools, parks and tennis courts. Must see.
Trustee Sale Hedge Fund
Pooled-investment funds have been on my mind lately, so when I saw the cartoon below, I thought it was particularly funny.
If anyone is interested in a bonk in the head and five minutes of memory loss, contact me at sales@idealhomebrokers.com.
Irvine inventory is still very low and what percent is a pending sale in back up offer status, 30%?
There is no end in sight to negative pressure on Riverside and Las Vegas. Will the job market ever come back in Riverside?
Planet Realty,
It is an absolute crime that, in a few months, you will be able to quietly retire this soon-to-be-discredited account and open a new and completely anonymous account. No doubt you will drop in and cheerfully tell us how glad you are that you just found this blog and how you’ve been telling everyone you know that Irvine prices are crashing mid-2010. I suppose that your screen name will be “I Predicted The 2010 Alt-A Implosion” or “I Told My Broker Irvine Wasn’t Immune” or “I am God” or something equally suitable for your ego.
Usually I’d rather not know the people I’m typing at, but when someone has made as many snooty and incorrect predictions as you have, there should be some sort of accountability.
-Darth
That cartoon summarizes the investment pool idea very well. It will never work, it takes time and money to make money from the invested money in the trustee market. You either do it yourself, or pay the margin and diminish the quality of the investment. On paper it’s a great idea until you start adding up the expenses and include down side risk.
If I focus on flipping in Riverside County, I can count you in for $100K, right?
🙂 I may as well light the money on fire. If you are able to create the trust necessary through a blog that will be impressive in itself. If you take a salary and keep your money out of it, it’s a no lose proposition for you.
Actually, I am not taking a salary out of it, and I will be putting my money into it….
I like your idea though 🙂
If you really aren’t charging fees outside of transaction cost, and you are good at it, you will make nice returns for your investors. I figured this was the only way you could pull it off but couldn’t imagine you not taking some form of payment for your time. The interest free money is worth something but far less than the law suit potential. If you lose money you can count on the fact that you will be sued.
PR, what in the world about IR and this blog bothers you so much that you invest so much time in criticizing both? I understand why Larry invests time in it, but why do you? I don’t think that you posted one time while Larry was on on vacation, but you did again on his first day back. It’s like you gave yourself a reminder on your Outlook for that day. It is very telling about you.
IrvineRenter: “When people go back to work in these areas, particularly in Las Vegas, prices will rebound.”
And when do You expect rebound of tourism and gaming in this economy?
IMHO, I see falling incomes, rising taxes, growing poverty, unsustainable government debt and nothing good.
Based on the trend from the last economic downturns, I would expect gaming in Las Vegas to rebound the moment people feel secure in their jobs. Las Vegas will recover economically before Riverside County because there is an economic base in Las Vegas. Riverside County still needs to go through a painful adjustment where many of the people who were dependent upon homebuilding are retrained for other work.
I want to clarify that I don’t believe Las Vegas will see a major rebound in house prices because so much of the housing stock there must go through the mortgage meat grinder. I am bullish on Las Vegas because I believe the cashflow opportunities for buy-and-hold investment is outstanding.
I have trouble understanding why you think the future of Las Vegas is so bright. Their customer is aging and entertainment consumption is changing drastically. What time frame are you looking at for a prosperous Las Vegas? There is only on trend that is positive for Las Vegas and that is people are living longer.
Riverside is even more baffling to me. What do you see a blue collar construction work force doing other than being foreclosed on and moving?
Blue collar cities have a poor history of development in the US. I expect both will follow the trend of history into decline.
Planet Reality: “I have trouble understanding why you think the future of Las Vegas is so bright.”
Las Vegas economy (tourism, gaming, conventions) is not diverse enough. Economic “monoculture” works like multiplier. It increases deviation from fair market price.
If IrvineRenter correctly predicts market bottom, Las Vegas may be good place to bet on real estate.
People still like to vacation.
Driving to Vegas is a way cheaper than the HELOC to fly to Europe …
The Asians gamble baby! Is there a more superstitious culture in existence? Increasingly poorer americans will be less of a driver for Vegas economy, but they will be able to deal cards and bring drinks to the Asians. We are, after all, a service economy.
I’m no expert on the Vegas real estate market or demographics, but what percentage of the available population who doesn’t own a home are ‘quality’ renters, who would pay on time? That’s one thing to factor in to your long term buy-and-hold cashflow strategy.
From what I’ve seen, most of the neighborhoods that are full of rentals are also full of less-than-desirable tenants. I tend to believe that in places like Las Vegas where homes are sufficiently affordable, many people with stable incomes and decent credit are more likely to purchase a home since it’s much cheaper than renting and they have no trouble getting a loan (however I don’t have any data to back that up).
I do know a friend of a friend who owns a rental home in LV that is currently rented out to Section 8 tenants; the neighborhood is sketchiest of the sketch, but the cashflow has been very stable and so far he hasn’t had any issues with damage.
Riverside County also has a big logistics industry for warehouses and distributions centers. There are jobs that rebound when the economy rebounds.
The bigger problem with the Vegas (and SoFla for another) is that a huge portion of the home inventory was held by specuvestors and there aren’t enough wage-earners to occupy all the homes, even if employment comes back. This excess inventory is being soaked up in FL by people buying vacation homes, but I don’t think that market is very strong in Vegas.
You can have a solid economic base and still have supply way out of line with the size of that base.
It a good thing the banks are finally cleaning house. They are kicking out the trash in Irvine that cant afford the houses. To make way for the truly rich that planet reality keeps telling us about.
every day I wish there was a blog like this for the bay area.
Hi es.
socketsite.com servers SF well, and burbed.com
has a little coverage of the South Bay.
But I’m sure IrvineRenter spends 40 hours a week
on this blog, so wishing for a Bay Area version
won’t happen.
Also the Bay Area has too much variation for one
blog to effectively cover it, often being unique
down to the street level.
SanJoseRenter
The closest is Burbed:
http://www.burbed.com
Lowdry,
We’ve been landlords for about 15 years. Even with 800 credit, there can be issues (i.e. paid the bills on time, but had an OCD-type personality..lets just say that her move-out was a bit of a nightmare). I have lots of stories about tenants, as well as the rentals that we’ve looked at in Irvine over the past 6 months. Renters on the whole, in my experience, don’t treat their homes well at all.
I’d factor that into the cash flow as well as the “piece of mind”. Who has to arrange for and monitor any improvements/repairs? The owner. It can get time-consuming.
Renters on the whole, in my experience, don’t treat their homes well at all.
That’s because it’s not my home. It’s your house. I treat it well enough to stay in clean, livable shape for the time that I live here. I don’t care what happens to it after that, and I’m certainly not going to make any capital investment in your investment.
-Darth
Not to worry, you only have to drive 5 hours to vegas everytime some meth addict loses gov/t handouts and decides to squat.
Gov/t should give section 8 “benefits” to all renters, thus stabilizing rents and vacancies and consequently property values. US voters could as the politicians to create a government sponsored entity to specifically back renters. Why not increase Section 8 benefits so as to raise rents across the board and increase property values! This would be a less worse option comparable to all the rest. I’m a born politician. My logic is second to none.
matt,
section 8 in many areas pays better than actual rent and offers a steadier income stream.
I think LV is a hard climb. There too many houses for the population.
But as in the movie “The Road to Predition” …there’s not enough money for food and rent, but there’s enough money for gambling, booze and whores.
Luckyguy,
only 1-2% for back taxes and others. The average NOD is 400 plus days. Likely a two years of back taxes now. 3% or more just for back taxes and M-R.
This property was already sold in trustee sales last month.
Lowdry,
1) to maintain an 800 FICO, one has to be OCD
about payments and billing problems. 🙂
2) a good credit score and a good rental score
are 2 different things.
Most busy entrepreneurs do not have 800 FICO (since they have dozens
of accounts payable to stay on top of, plus
travel.) However they usually have no problem
paying rent on time.
All the millionaires I know have had credit
cards suspended for non-payment while out of
the country. They just call in when back in the
USA and reactivate them – with a very annoyed
tone of voice. 🙂
SanJoseRenter
Half of the millionaires I know use the private banking arms of one of the big banks here in Australia, and therefore have personal account managers to handle such mundane matters as credit card payments.
The other half have automatic payment-in-full arrangements for their credit cards.
But then, I know exactly two millionaires . . . 🙂
Predicting a timeline for the bottom is only half of the equation. The other half is how much lower.
If the bottom is for sure in 2014 but prices in Irvine are only 5-10% lower… why wait? Especially if you think interest rates will be higher then.
I think things have changed from 2 years ago when so many people were sure that Irvine prices were going to drop 40% and that there was nothing banks or the gov could do to stop that. Now that there is actual evidence that some bandaids actually do stop (or at least hold back) the bleeding… the uber-bears are no longer making the hard number predictions.
I still don’t think that rising interest rates will create enough downward pressure to lower prices accordingly where the payment affordability will change drastically. At least not in the more stubborn areas.
I have $1m fund that I would use to flip foreclosure houses by myself part time as I run a small company full time. I just purchased my first property in front of the courthouse. By my estimate, the margin is only 8% after all the fees (5% realtor fees, 1% closing cost, 1-2% for taxes, remodeling, cash for key, etc) for properties in Irvine. Of course it’s much better than 0.5% from the bank.
Your foreclosure service charges 6%, which is too high as most of the information is available from foreclosureradar.com at $49/mo. If you can provide more valuable information to help me flipping, then I will give the listing to you.
We are no longer changing 6% trustee sale fees. Your estimate of the fees and profits are quite accurate, as we operate under the same basic structure. Contact me. We should talk further.