Boo Hoo — Guy Lombardo and His Royal Canadians
One of the first new communities in Irvine to start showing stress as prices weakened was Northwood II. I first profiled the abundance of listings in this small neighborhood back in March of 2007 in the post Bamboozled. I have also featured this neighborhood in Is fear gripping the market?
In the first post, Bamboozled, I had this little chart:
“Real estate always goes up, or so buyers are bamboozled into
believing by realtors. It only takes a few nervous neighbors to drive
down property values in an entire neighborhood. Comps are set at the
fringes where the transactions take place.”
Remember when prices used to look like that? Pay careful attention to that last listing as it is also today’s featured property.
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In the second post from September of 2007, I had this observation:
“Another neighborhood showing increased listings and more racing to find the bottom is Northwood II.
Like all the new neighborhoods in Irvine, this one is populated by
specuvestors who are starting to realize they made a terrible mistake.
The homes priced in the $750K to $950K range, so these are not the
small condos we are seeing struggle everywhere else. This is the first
sign of fear spreading from the low-end of the market to the move-up
SFD market.”
So what is going on there now?
Today, there is 1 bank owned property, 4 scheduled auctions, and 5 in pre-foreclosure. There are also 15 homes offered for sale on Redfin (some of which are also one of the aforementioned categories). This is not a big neighborhood, and there has already been a lot of turnover from original owners selling out.
Perhaps it is just my perception, but I always saw this neighborhood as being full of speculators and flippers. I feel sadder for many of the young families that bought into Woodbury who were just starting out. The homes in Northwood II are generally larger, move-up homes. So for all the speculators and flippers who are getting burned, I proffer my phony boo hoo for you.
While we are taking a trip down memory lane, I came across this post from 2007. It is a letter to the editor at the OC Register from a realtor who just lost over $100,000 on a flip in Irvine. For people who want to understand why I often do not have the best opinion of realtors, you need to read what this guy wrote. Besides, in historical context, it is hilarious.
Asking Price: $780,000
Income Requirement: $195,000
Downpayment Needed: $156,000
Monthly Equity Burn: $6,500
Purchase Price: $950,000
Purchase Date: 11/16/2004
Address: 64 Bamboo, Irvine, CA 92620
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,460 |
| $/Sq. Ft.: | $317 |
| Lot Size: | 3,970
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Contemporary |
| Year Built: | 2004 |
| Stories: | 2 |
| Area: | Northwood |
| County: | Orange |
| MLS#: | S560596 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 2 days |
location with full driveway. Custom granite counters in kitchen with
stainless steel appliances. Plantation shutters, built-in entertainment
center. Fourth room/loft is currently used as a gym on the second
floor.Additional office space on the second floor. Cozy fireplace in
living room. Hardwood floors. This gorgeous home is located in the
gated community of Northwood II. Association offers pool, spa, BBQ.
Home is located in the with in walking distance of shopping and
restaurants. Located in the Northwood high school district.
Move in condition? As opposed to trashed out in foreclosure…
This property was purchased on 11/16/2004 for $950,000. The owner used a $758,450 Option ARM first mortgage with a 3.94% teaser rate and a $191,550 downpayment. The guy first tried to sell this place in early 2007 when he was asking $1,049,900. Notice the extra $900 on the end? That is my greed indicator. Notice his current price doesn’t have this $900 added to it. That is a sign of capitulation.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss would be $216,800. In all likelihood this is a short sale. The $191,550 downpayment is gone.
This property is being offered for 18% off its 2004 purchase price. It was new in 2004.
I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
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Speculators need to be wiped out of key human needs:
+ Homes
+ Energy Commodities
+ Food Commodities
+ Clothing Commodities
If they want to bid up beanie babies to irrational prices, we can all deal with it. There should be regulations against speculating in key human needs.
Speculation in homes would not be possible if it weren’t for the low-interest, easy-money policies of the Fed in tandem with the implicit and stated government guarantees for lenders that pretty well insured them against the risks they were taken.
Make everyone up and down the chain solely responsible for the results of the risks they assume,and housing speculation goes away without regulation.
We haven’t failed in the regulation dept- where we have failed is in policies that made asset inflation (housing appreciation) and debt creation the engines of economic growth, and backed it with agencies like FNMA, FHA, GNMA, and other loan buyers who were there to buy all the crap paper that no one would want without government guarantees.
With the bailout, we have in effect told the financials that we will insure them against their own bad behavior, so you can believe we’ll have another debacle not far down the road and that our system will never regain its credibility.
AS for speculation in energy,food, and other life-necessity commodities, speculators may drive the market for short periods of time, but cannot sustain an artificial market for very long, since runups in commodity prices trigger mass adjustments in the consumption of the commodities. For example, the runup in oil prices triggered demand destruction that has driven oil to low prices. As long as consumption drops and stays relatively low, the prices will stay level-until supplies drop, which will trigger another runup.
Same with food prices. Higher food prices trigger more planted, and the allocation of more land to farming, which often produces surpluses, driving prices back down again.
People conveniently blame commodities speculators for massive increases in food and energy prices, forgetting that the prices would not be supported in spite of speculators’ desires were the fundamental conditions not in place to support them. If those conditions are not there, prices quickly level off. If the prices stay high, look for another reason, a fundamental reason.
In short, regulation will do no good here, and possibly will do great harm, because it will muffle the “feedback”, in the form of higher prices, that will tell us we are overconsuming, and trigger the adjustment we need to make.
First off, call it what you want, regulation or policies… we both agree on housing. The point is that rules need to be put in place to prevent wild experimenting in financing.
Commodities like housing will eventually fall to fundamental levels until they are bid up again. The swings in prices create huge socioeconomic problems around the world. If you allow speculation in key human needs the results can be catastrophic. Food shortages for one create a huge disruption in human life. Irrational energy spikes can and will roll over into other sectors of the economy creating a negative feedback loop. The price fluctation caused by this type of speculation hits the global supply chain hard.
It is herd mentality of speculators that creates the bubble, the short term “fundamentals” of commodity bubles are the equivalent of realtor lies like “they are not making any more land”.
“Speculation in homes would not be possible if it weren’t for the low-interest, easy-money policies of the Fed in tandem with the implicit and stated government guarantees for lenders that pretty well insured them against the risks they were taken.”
Laura, have you considered that the exact same thing happened with commodities from 2001 – 2008. Speculators were allowed to make bets on basic human needs at 50 to 1 leverage ratios. They hyper inflation commodity bubble that resulted was just as detrimental to the global economy as the housing bubble.
Get rid of the Federal Reserve, fiat currency, and fractional reserve banking, and you will get rid of extreme speculation in any asset.
even the fiat commodity gold 😉 ???
I’m not sure Americans could stomach that liberating “soft landing”.
I guess I get a little irritated when folks blame the current circumstances on a “lack of regulation”, and they have not done the homework to figure out that extreme speculation, currency, and interest rate cycles can not occur in a true free market. It is not a free market as long as the Federal Reserve manipulates the creation of money and interest rates. And all the “regulation” is a smoke screen designed to hide this.
exactly what homework would you suggest?
would you like to play an unregulated tournament of liars poker?
You’re so right. I’m halfway through Creature From Jekyll Island. Everyone should read this book about the Fed.
The Creature from Jekyll Island to start. Maybe The Constitution after that. And there is a book with many letters written by the founding fathers explaining what they were thinking. Can anyone remember what it is?
I agree, blow it up, make the changes and create a true free market. When we start playing the game, can I have the role of one of the founding fathers kids?
If that role is already taken, I would gladly take on the role of rich multi lingual merchant. I promise to follow all rules (or lack there of) in the best interest of my fellow man. OK, well, let’s get started. I can’t wait to see how things turn out in 250 years.
The Federalist Papers!
I don’t think you understand what a negative feedback loop is. A negative feedback loop would help stabilize the system, in your analogy as the input of irrational energy spikes occurred the negative feedback would help attenuate the input, stabilizing the system. You meant a positive feedback loop which would in turn destabilize the system.
jwinston, you must be a control system engineer and not an economist. I’ll place my bet on the control system engineer and not the economist any day.
The other role I would accept is employer of engineers or employer of “makers of things”. Engineers are brilliant and under paid. They are easy to take advantage of in new ventures of “free market” capitalism.
“With the bailout, we have in effect told the financials that we will insure them against their own bad behavior, so you can believe we’ll have another debacle not far down the road and that our system will never regain its credibility.”
Even if this were true and we hadn’t seen the massive financial failures that we’ve seen (Lehman, Bear, WaMu, etc.), it’s not an accurate description of the incentives that are in place. What this argument fails to account for is that corporations aren’t sentient beings. They don’t act of their own accord, rather they’re nothing more than the sum of their employees, who have their own incentives. Even at the banks that have received the most in federal backstops (Citi for example), tens of thousands of people have lost their jobs (in a market where the ability to find new work is limited at best). Even the CEO has gotten the boot. Sure, there were people who made a LOT of money at the expense of the organization selling this junk, but the people in charge of them are properly incentivized to make sure this doesn’t happen again. That doesn’t mean it won’t, but if it does, it will be because of ignorance, not bad incentives.
I don’t think we can completely discount the quote here.
The current mess was in part caused by the bailout of LTCM in 1998. The LTCM bailout put wall street on notice that it is OK to take huge risk and over leverage, because the government will bailout the `too big to fail` players.
I am not convinced wall street is learning the right lesson with TARP, TARP II, son of TARP, etc.
in fact wall street has now made it easy for the average joe to speculate on the TARP with a TARP etf
“Even at the banks that have received the most in federal backstops (Citi for example), tens of thousands of people have lost their jobs (in a market where the ability to find new work is limited at best). Even the CEO has gotten the boot. Sure, there were people who made a LOT of money at the expense of the organization selling this junk, but the people in charge of them are properly incentivized to make sure this doesn’t happen again.”
Disagree! The people at the bank who make the decisions, have walked away with huge paychecks and bonuses, even in 2008. Check out Thain and Merill Lynch last year: Thain may have declined to take a bonus (under pressure, he wanted/expected to get it) but he still got $83 million in salary, signing bonus, etc. And he moved up the payout date for $4 billion or so in bonuses (for fantastic performance?) to December so the money would get paid out before the B of A takeover. All that money added into the huge losses by the company. The system is rotten to the core – the incentives are to grab huge amounts and leave the company bankrupt or to be bailed out.
IMHO, for this particular community, IAC and builder should hold the fully responsibilities, this is 2004, with the sophisticated manipulated methods already been developed and imbalanced info between the IAC and buyer, the greedy is IAC and the fear is buyer’s only fault.
In order to manipulate prices, IAC/builders first made public announcement of first-come-first-serve policy, so everyone jam into computer to apply online on the opening day for registration day with all the detailed income info. After getting this couple thousand applicants info, the policy changed to based on the buyer’s financial strength to determine the properties – meaning if the buyer have more cash and higher income will get high number to buy even he/she come in late. This is based on few samples I gathers (include myself) during the grand opening day.
This is totally illegal and unconstitutional, IMHO.
if a buyer is qualified to buy a house, just he is a littler ‘poor’ than another buyer, then he is push to later phases.
Remember, the phase is very important for my augment, for example the first phase for the Bella Rosa model is around $650K to $720K and last phase (not include model homes) is around $850K – $900K.
Back to grand opening day, now IAC have a few thousand applicants in front model homes and they made another announcement for a lottery draw, which a lot of secrets and lies in it (maybe we should check who is put into first two phases).
Anyway, I don’t blame to buyer’s for this particular community, the greedy is IAC and the fear is buyer’s only fault.
Mass law suit against IAC for NW2 coming ? Don, watch out, save your money form donation to politicians and ready to give back.
Oh we are oh so manipulated—about time we wake up!!!
I was surprised that the tax code didn’t slow them down much. For a nonresidence flipped within a year, the flipper should pay short term capital gains tax on the flip.
Unfortunately, a lot of people thought that any home had a similar exclusion to primary residence. A lot of other people simply didn’t care, since profit on a flip doesn’t generate a 1099.
MR – Are you sure about that? I thought the sale of a personal residence generates a 1099-S by the escrow company.
Just looked it up and yes indeed, “For sales or exchanges of certain real estate, the person responsible
for closing a real estate transaction must report the real estate
proceeds to the Internal Revenue Service …”, and the form the escrow company reports on is a 1099-S.
“certain real estate”? Does that include single family homes which were not owner occupied?
That is one of the reasons I said in the post on Monday that “With housing, most people either qualify for the tax break, or they claim they do and don’t get caught.”
If the escrow companies were putting out 1099s, I suspect awgee’s tax representation business will be doing quite well in the coming years.
clothing isn’t a commodity. cotton is.
Don’t forget about these other two key needs:
+ Education
+ Heathcare
Are you sure the govt. didn’t create the bubbles for a crisis to complete a power grab and complete the Federal Reserve system started about 100 years ago?
Regulations should be on transparency, true specifications, making true free market, not jungles or fixed/rigged markets. My analysis is the market has been fixed.
Who’s more to blame for the mess we are in? Guys like the agent who wrote that letter, or the general public for believing such crap for the last ten years? How about the banksters? I’m with IR, despite the fact that banks offered risky and unsustainable loans and real estate agents lied through their teeth, people were not forced to put themselves in crushing debt. They CHOSE to. They were selfish, greedy and short-sighted. Moreover, if we Americans are really so stupid that we can’t read the fine print or understand simple market principles (like debt to income ratios) then we probably don’t deserve democracy. Or prosperity. And we probably won’t have much of either for a long time…
Exactly. In addition, I believe all mortgages and loans should be recourse loans. This will make one thinks twice as hard before one takes out the loan.
I had never heard of a debt-to-income ratio before reading this blog. There’s only one simple market principle most people ever hear about: supply and demand. For the bubble, it looked like supply was fixed and demand kept growing; the simple economic principle that everyone knew about predicted never-ending growth. A little bit of knowledge is a dangerous thing.
Maybe we ought to integrate economics into high school educations so that DTI’s become commonly understood.
Don’t you think that putting realtors on par with used car salemen is a bit harsh on used car salesmen? Just kidding Deuce.
The great part about that letter is the genius of its satire. Any great satirist would be proud to have written a piece that so brilliantly captures the angst of kool aid intoxicated fools everywhere. The fact that the letter was not satire, and it was in fact written by someone who truly believed and felt the things he was writing about makes that letter a true masterpiece. That letter is so good, I may resurrect it as an update post.
Not only do they have granite countertops, but they’re CUSTOM granite countertops. That’s much better than when they take a random slab of granite that doesn’t fit and stick it in the kitchen.
LOL! I never stopped to think about that before.
For all those who call for more regulation and oversight – THERE WAS PLENTY OF BOTH!
The rules were broken and bent because of plain old greed, corruption and – yes – political correctness.
If you like more regulation and oversight, you have to love the IRS. That agency is the poster child for both regs and oversight. Don’t you think?
I’m all for transparency and following ‘clear-cut’ rules.
Laws and regulations require enforcement.
There was scant oversight.
I’d never buy that place: the family room design is lousy for watching TV and let’s be honest, isn’t that what everyone does in their family room? Kitchen cabinets are cheap and the master tub is godawful as well.
IR – you’ve been on an amazing roll the past few weeks – awesome content. Many thanks!
A flipper friend of mine bought a condo somewhere around this Northwood II ‘hood a couple years back. I give him credit, he saw the implosion coming and sold while the gettin’ was good.
The blame for the high prices has to start from the bottom on upward-the price of the property (land) the builders taxes paid to Irvine, the build cost of the house. The expected profit margins for the builders in order to pay the taxes.
The blame is the overspending government and their high pay redirected to the taxpayer. So what did they allow a total break down in regulation. My first house I had to have PMI insuance and downpayment this just disappeared–Dept to income ratio–GONE-
Mortgage brokers were paid in commissions just like the real estate agents–everyone had their hand in the kitty–
The growth fed itself on cheap money from the fed. Thus ten years later our bubble. And now job losses because of the unwinding of this bubble fueled by growth in housing, speculation and flipping.
Where does it end? The real key is true valuation for these homes.
One way as IR has mentioned is income ratios as these fall so will homes? Will equilibrium happen between wages and home prices? This is the question.
http://www.ocregister.com/ocregister/money/article_2287266.php
oc layoff list—fyi
Somewhat in line with part of the sentiment in the 2007 letter posted today is the realtor’s admonition in this Redfin listing posted today
http://www.redfin.com/CA/San-Clemente/2926-Camino-Capistrano-92672/unit-6a/home/5433093?utm_source=myredfin&utm_medium=email&utm_campaign=listings_update&utm_nooverride=1
“Dont miss what could be the bottom of the market!! ACT FAST!!!!”
(The condo has been on Redfin for 171 days and sold in 1998 for $116,500 and in 2005 for 450,000.)
Once again, hope triumphs over reality! The price/sq ft is under $300. which seems to be happening more frequently lately.
I’m curious. Is everyone who lives in Irvine a high priced lawyer or medical doctor?
Who else is making $200,000 in these times. Every house on this blog seems to need a six figure salary.
You did not need 200k with crazy lending that was going on the past few years, that’s why prices are dropping like a rock, sales above 750k according to a morg guy I spoke with recently are very hard to come by due to financing.
now with the economy taking a nose dive, even if a couple are making 200k, they will worry about their jobs before buying(provided they have not bought)
All you need to do is talk to people living in San Diego, from what I hear it aint fun 😆
Just my assumption when I moved here I figure two young working couples making 100k each. Young children–so no college costs could afford 50% or more of their income towards these very expensive homes and mello roos tax –plus high HOA fees.
Anticipation of higher prices fueled further increases in home values. It appears this was not fueled by higher pay except for those in the financial markets.
Now I wonder what market is going to keep Irvine so highly priced?
One small problem — almost everybody who went to college in the last 30 years has huge student loan debt that you can NOT write off in bankruptcy. Those loan burdens among educated folks are probably a good reason why liar loans were so popular.
Student loans? They pale to the cost of daycare and child rearing. Our 3 year old cost us 15,000 in daycare fees alone in 2008. (NorCal 94040 zip).
When you add up responsible 401k contributions, rainy day savings, education savings, medical and etc. expenses, there’s less left over than one imagines.
daycare is a lifestyle choice.
Is it just me or does the front facade of this house have a tripod/rocketship look to it? It looks like this rocketship is coming crashing back down to earth…..
I had not noticed that until you pointed it out. Personally, I think the front elevations that look like this (and there are several floorplans that share it) are extremely ugly and boxy. There are large spans of wall with no visual breaks to provide interest, the openings seem small and out of scale, and absence of a front door makes the place seem grim and uninviting. It looks like the debtor’s prison it is.
What stage of the decline are we in? Fear? Capitulation?
Denial.
Yes, the over $650,000 market is in major denial. $400K-$650K is in fear. Under $400K has already capitulated.
Being the patient renters we are, my wife and I have been looking at potentially moving to one of the apartment communities in this Northpark II or Woodbury area. Anyone beside me notice this week the IAC authorized one of their property managers to lure renters thru Craigslist with a teaser of $1270 per month for rental? The lowest listed rent price on any of the apartment complexes is $1420 per month for a 1-bed postage stamp size 555 s.f. That’s a minimum $150/mo drop. And at least two of them I’ve called are (or were at least) offering a free month’s rent, etc. to lure renters into their half-empty buildings. Would it seem that the Irvine Company is finally being forced to admit even the rentals in this area are fundamentally overpriced? Hmmm….
I’ve seen apartments (Brittany, Sonoma, Oak Glen to name a few) on the MLS listings. I wonder if I could renegotiate my rental contract to what they’ve got listed? It would mean an extra $200-300 per month!
Yes, the IAC is pedaling hard to fill all of the new units around Woodbury. Early last year they stopped all of the new home building and instead focussed on throwing up large new apartment communities around the Sand Canyon/Irvine Blvd intersection. Irvine is even building a new elementary school (Stonegate) on the Irvine Blvd side to accomodate all of the families expected to move in. These apartments are very modern and look like an upgrade from the slightly older apartment communities inside Woodbury. From observation it looks like many 909ers are re-emigrating to Irvine to live in these apartments after losing their IE McMansions. There are definitely some nice incentives available.
I puzzled by the low vacancy rates in apartments and condo. In one condo/apartment, there were only about 10% of the parking spaces used. Only 50% “occupied” most by corporate housing (purchased condo) with very little people staying in the units. I think there were only 4 units with people out of 10 units on my wing’s floor. ~500 total units. One month free with 12 month lease. Not willing to lower month rate of $2500 for a 2 bd. They are still building. How do the investor’s make money? Possible they can pay for construction cost if the land is near free and no Melo-Ross.
I’m sorry it took me so long to post. I live on Bamboo in NWll. We have one of the least expensive home in the community. It is awful to see what is happening to home values. We are normal people making a normal amount of money. No foreclosure problems.
Very upsetting our “neighbors” are ruingin the neighborhood.