This one went back to the bank on 2/4/2008 for $616,250.
Our house, in the middle of our street Our house, in the middle of our Our house, was our castle and our keep Our house, in the middle of our street Our house, that was where we used to sleep Our house, in the middle of our street Our house, in the middle of our street
Beds: 4 Baths: 3 Sq. Ft.: 2,344 $/Sq. Ft.: $299 Lot Size: 5,940 sq. ft. Type: Single Family Residence Style: Other Year Built: 1972 Stories: Two Levels Area: Northwood County: Orange MLS#: P595176 Status: Active On Redfin: 37 days
From Redfin, “This house features 4 bedroom plus a bonus room, 3 full bath, remodeled kitchen with new appliances, granite countertop and travertine backsplash, dual panel windows and located close parks and tennis courts, schools, restaurants, shopping centers and easy access to I5 and most of all a motivated seller.”
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You have to admit, this is an impressive rollback. The asking price is a full 20% under the purchase price, and this property was purchased before the 2006 peak. If the seller manages to get their full asking price, they still stand to lose $211,094.
Realistically, this one is headed to foreclosure. This was another 100% financing deal, so the seller is motivated to walk. The bank will foreclose before they take a hit on their first mortgage, so any loss in excess of $173,800 will not get approved. The second mortgage holder… well, that is probably going to be a total loss. These are big numbers. How many of these can the banks absorb?
BTW, all the “moderates” who think we are only due for a 10% to 15% correction should be rejoicing. This must mean we are at the bottom.
You know, it doesn’t look or feel like the bottom to me…
Housing market bulls must abandon all hope. We are witnessing a collapse of house prices not seen since the Great Depression. There are no signs of bottoming or even a slowing of the decline at this point in time. The secondary mortgage market is in shambles; despite the best efforts of the Federal Reserve, mortgage interest rates are rising; credit is tightening; sales volumes are anemic; if it were not for the persistent talk of government bailouts, there would be no hope at all.
We need hope. Hope is as essential as food or water. Presidential candidate, Barack Obama wrote about “Hope in the face of difficulty. Hope in the face of uncertainty. The audacity of hope!” We all want a bright and hopeful future, and for people renting and saving their money, the collapse of house prices is reason to hope; however, for those who speculated on real estate; for those who are overextended on their mortgage obligations needing to refinance; for those who are depending on their home equity for a comfortable retirement; for those people, the market reality is pretty bleak, and denial and hope is all they have left.
During the Great Depression, the last time the nation witnessed house price declines on the scale we are seeing now, America turned to a new president for hope. Franklin Roosevelt gave radio addresses known as “fireside chats.” He used these chats to outline his policy programs (many of which made the depression worse,) but the primary service President Roosevelt provided the nation was the dispensing of hope. There was not much the President or anyone else could do about the problems of the Great Depression, just as there is not much anyone can do about the Great Housing Bubble. Franklin Roosevelt’s chats during the Great Depression and Ronald Reagan’s speeches during the worst of the recession of the early 1980s gave Americans comfort and hope. If we are in a deep recession at election time (which seems likely,) our next President will be called on to do the same. The election will become less about issues and intellectual competence and more about inspiration and emotional comfort. People vote for emotional reasons; people want to believe in their leaders and be inspired by them. When Barack Obama wrote “The Audacity of Hope,” he hoped to inspire a generation with his words. Given the sorry state of our national economy, Americans may turn to this man, not because he is the best qualified to be President, but because is the best at dispensing hope.
Great corner unit with private balcony above garage. Spacious and large living room. Custom paint, Berber carpet, & paneled flooring. No one above or below with only one shared wall. Parks and all recreation just steps away. 2-car tandem garage with lots of storage.
Love those tandem garages…not!
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Look at this rollback — 15% off a 2004 price. If this isn’t hell for homeowners, I don’t know what is. Price declines of this magnitude certainly cannot be inspiring much hope.
This unit was purchased in September of 2004 by a flipper using 100% financing through Accredited Home Lenders. The loan was sold off to a CDO managed by the Bank of New York Trust Company. Our flipper walked away, and the property went into foreclosure on July 12, 2007. The trustees paid $457,854, and they have been trying to sell it ever since. Apparently the trustees are not skilled at disposing real estate because we are 8 months later and this property has seen two listings and six price reductions.
Date Price
Original List $535,000
Jul 03, 2007 $519,000
Sep 27, 2007 $499,000
Sep 28, 2007 $495,000
New Listing
Dec 25, 2007 $469,900
Jan 23, 2008 $460,500
Feb 15, 2008 $439,900
Mar 20, 2008 $399,900
It is difficult to say exactly how much the CDO will lose on the deal. The trustees managing the CDO have likely been accumulating unpaid interest and fees associated with this property and added this to their basis. In other words, they probably have upwards of $550,000 tied up in the property that collateralized the original $470,000 loan. Let’s assume they have a $535,000 basis based on their original asking price back in July of 2007, although it is likely much higher. If the trustees gets their asking price the total loss to the CDO bond holders will be $159,094 after a 6% commission.
Remember, this is on a 2004 purchase. When the lenders start losing this kind of money on loans they made in 2004, imagine the losses they will take on loans made later at higher prices. What is going to happen when all the 2004, 2005, 2006 and 2007 buyers — who are currently underwater — start walking away from their properties? This is what the people who manage our economy fear most, and it is probably what is going to happen. The losses to the lenders and to those holding their toxic waste are going to be staggering.
Prepare yourself for financial Armageddon.
That concludes another week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’
In the era of 100% financing, speculation was widespread. Why not, speculators had nothing to lose other than their credit score, and if prices had gone up, they would have reaped a huge windfall. We have documented case after case of this behavior right here on this blog. Are we flagellating the equine after it has already perished? Perhaps, but until this behavior is seen for what it was, lenders will not learn their lessons, and they will do it all over again. Realistically, the only thing that could save housing prices would be a return of 100% financing and the elimination of lending standards like we saw during the bubble. There is only one problem with that: people cannot afford the payments — They have proven that much. The continued use of 100% financing through 2007 was the only thing delaying the crash. Now that the FED is lowering interest rates, they are hoping this will translate into lower borrowing costs and help knife-catchers finance the huge sums necessary to afford today’s pricing and slow the decent of prices. There is only one problem with that: as the FED lowers interest rates it increases inflation expectations, and mortgage interest rates go up. Hmmm… It is really quite a quandary.
The low interest rates we are experiencing now may prompt a few sales in 2008, but the FED will not be able to keep interest rates low for long or inflation will get out of control (anyone remember the 1970s?) If the FED starts raising interest rates later this year to curb inflation, mortgage interest rates will again rise — not because of inflation expectations but because base rates will have increased. Mortgage interest rates hit the floor in 2004. The Federal Funds rate was 1%, inflation was low, and risk premiums were artificially low because investors in mortgage backed securities did not recognize the risks. 5.8% is as low as interest rates on a 30-year fixed-rate mortgage can get. Higher inflation and more rational risk premiums will prevent interest rates from getting that low again. It seems very unlikely mortgage interest rates can get any lower than 5.8%. We will not see 4% mortgage rates to prop up prices.
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Have you noticed when the real estate market bulls are proven wrong, there is always some unforeseen outside factor to blame? David Lereah had the nerve to claim nobody saw the subprime crisis coming despite the fact warnings about subprime lending were widely known and reported. Remember that you read this here: Mortgage interest rates are going to rise. You will probably not see mortgage interest rates on 30 year fixed rate mortgage below 6% again in your lifetime. Sometime in late 2008 or early 2009, the federal reserve will start raising interest rates, and mortgage rates will rise with them. This will be blamed for the big drop in prices and it will be held up as the reason for the faulty forecasts of bullish realtors. If it wasn’t for the FED, trees really would grow to the sky, right?
One of the primary functions of the FED is to provide a stable financial system. Once the Federal Reserve begins to see economic growth and liquidity in the debt markets, interest rates may rise as quickly as they fell in order to stop hyperinflation from occurring. The FED does not want to see its member banks receive worthless currency in return for the loans it made; although I suppose this is better than receiving even less currency in a default.
Mortgage Interest Rates 1972-2006
When a country knowingly devalues its currency, it causes a severe recession as the prices of imported goods and raw materials increases dramatically. Perhaps a severe recession and price inflation is preferable to an economic depression like the one of the 1930s in America, but it is certainly not desirable. There will be some benefits to a devalued currency. A less valuable currency is a boon to exporters. The United States has run a chronic trade deficit for many years, and much of the recent deficit has come from inexpensive goods imported from China. The trade imbalance may correct itself with currency devaluation. Of course, this rebalancing of trade will come at the cost of more expensive imported foreign goods and a commensurate decline in spending power from US consumers. Also, prior to currency devaluation, wages in the United States were so high that jobs were being outsourced to foreign countries where people can be paid much less. Wages could not rise significantly from where they were without devaluing the dollar to prevent wage arbitrage from moving jobs overseas. The devalued currency provided some room for wage increases, and these wage increases could theoretically provide additional support for housing prices. If the FED does chose hyperinflation, there needs to be wage inflation to go along with it or the economy will experience a very deep recession due to the steep drop in consumer spending (It may anyway.) If wages rise, houses become affordable again. I wouldn’t mind paying today’s prices if my salary doubles.
Put today’s problems in perspective: the Federal Reserve is being forced to chose between stagflation and depression, house prices are crashing, and homeowners are being foreclosed on in record numbers. This situation is the result of declining home prices; the declining home prices are a direct result of the unsustainable price levels created during the bubble rally; the unsustainable price levels were created by widespread use of 100% financing and the elimination of lending standards, so this is important stuff worthy of daily exposure on blogs like this one. In today’s 24 hour news cycle, it is easy to focus on the sensational and forget about the root causes of our problems. The roots are here in properties like this one and in borrowers like this one who used 100% financing to speculate in the real estate market at the expense of our banking system.
6 bedrooms total – 4 bedrooms upstairs, 2 bedrooms, 2 dens downstairs, with 2.75 baths. Wood flooring downstairs. Remodeled kitchen with double ovens, flat top cooking surface, large pantry & newer cabinets. Leaded glass front doors, plantation shutters, newer central A/C, newer tile roof, 8 ceiling fans and recently painted in & out. Large backyard. Close to park and community pool.
$241 / SF is real progress.
The price will have to be reduced for the cost or repainting. The pink and green colors are truly ugly.
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This property was purchased less than one year ago, and if the short sale is approved, and if the seller gets their asking price, the lender (NBGI Inc.) stands to lose $207,400 after a 6% commission. There have been some comments on my equity burn calculation where I take 10% of the purchase price and divide it by 12 to get a monthly equity loss on the property. How much was this lender’s equity burn? $17,283 per month. If this flipper had any of his money in the deal, that would have been his loss, but since it was the lender…
Anyone looking to buy in today’s market really should pay attention to the equity burn number. In today’s market, borrowers have to put money down. It is their money evaporating into the ethers. The phenomenon is real, and it will continue for the foreseeable future.
It is a good time to be a renter.
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Tonights the night well make history, honey, you and i
And Ill take any risk to tie back the hands of time
And stay with you here tonight
I know you feel these are the worst of times
I do believe its true
When people lock their doors and hide inside
Rumor has it its the end of paradise
But I know, if the world just passed us by
Baby I know, you wouldnt have to cry
The best of times are when Im alone with you
Some rain some shine, well make this a world for two
All methods of predicting future price action rely on the same basic premise: prices are tethered to some fundamental value, and although prices may deviate from this value for extended periods of time, prices eventually return to fundamental valuations. This premise has been reinforced by market observation; in fact, many estimates of fundamental value are based on market action. Since many market participants believe in buying and selling based on fundamental values, there is also an element of self-fulfilling prophecy contained therein. The efficient markets theory is based on this idea, and although the behavioral finance theory is needed to explain the wide deviations from fundamentals real-world prices exhibit, both theories share the same notion of an underlying fundamental valuation to which prices are ultimately based. The challenge to market prognosticators is to select a fundamental valuation to which prices will return, and then extrapolate a period of time in which the return of prices to fundamental valuation will take place.
Notice of Defaults and Trustee Sales as a Percentage of Total Sales, San Diego, CA 1990-2007
The timing of the decline is the most difficult parameter to evaluate and estimate. House prices are notoriously “sticky” during price declines because sellers are loath to sell at a loss. The timing of a decline is impacted both psychological and technical factors. The motivations of sellers based on their personal circumstances and emotional states will determine if there is a heightened sense of urgency to sell which would push prices down quickly. During the price correction of the coastal bubble of the early 90s, prices declined very slowly as unmotivated sellers held on and waited for prices to come back. The market experienced denial and fear, but there was not a stage of capitulatory selling that drove prices down quickly as is typical in the deflation of a speculative bubble. The primary technical factor impacting the rate of price decline is the presence of foreclosures and real estate owned (REO.) REOs are a form of must-sell inventory (as are new homes.) If there is more inventory of the must-sell variety than the market can absorb, prices are pushed lower. The more of this must-sell inventory there is on the market, the faster prices decline. If the pattern of the early 90s is repeated, the price decline of the Great Housing Bubble may drag out slowly while fundamentals catch up to market pricing. In fact, this probably what will occur on the national market unless the foreclosure numbers and resultant REOs overwhelm market buyers. In the extreme bubble markets like Irvine, California, the combination of high foreclosure rates and general market panic will likely push prices lower much more quickly. Even though the percentage decline in house prices is projected to be double the decline witnessed in the bubble of the early 90s, the duration of the decline may be similar as capitulatory selling pushes prices lower at a faster rate.
Projected NODs and Trustee Sales as a Percentage of Total Sales, San Diego, CA 1990-2012
The importance of the foreclosures cannot be overstated: sellers will not lower their prices voluntarily. Prices will not drop quickly without massive numbers of foreclosures to push them down. The entire “soft landing” argument boils down to one supposition: the number of buyers in the market will be able to absorb the must-sell inventory on the market. If this is true, prices will not drop. If this is not true, prices will drop until enough buyers are found to purchase the foreclosures. There will be a number of buyers on the way down, some will be long-term homeowners who are present in any market, but many will be speculators betting on the return of appreciation. These people will be few in number, but there may be enough to them to buoy the market if there are not many foreclosures. If foreclosure numbers really spike, prices will fall until Rent Savers and Cashflow Investors enter the market and absorb the excess. If current trends continue, the number of foreclosures will be too great for long-term owners and speculators to absorb. Foreclosures also control the depth of the decline to some degree. Once prices fall down to their fundamental values, new buyers enter the market and begin to absorb the inventory. If there are not enough buyers at this price level to absorb all the foreclosures, prices could overshoot fundamentals to the downside; in fact, this does tend to happen at the bottom of the real estate cycle.
WELL-APPOINTED BELLA ROSA HOME IN THE EXCLUSIVE GATED COMMUNITY OF NORTHWOOD II. PRIME INTERIOR LOT LOCATION OFFERS GREAT CURB APPEAL, CUSTOM LANDSCAPING, UPGRADED TEXTURED CARPETS, DARK WOOD FLOORING, CUSTOM PAINTS, CUSTOM WINDOW TREATMENTS, STAINLESS APPLIANCES, WINDOW CASINGS, UPGRADED CABINETRY, RECESSED LIGHTING, HUGE MASTER SUITE W/ SITTING AREA, WALK-IN CLOSET, AND DUAL VANITIES. MAIN FLOOR BONUS ROOM MAY BE CONVERTED INTO 4TH BEDROOM. UNIQUE FLOORPLAN. ONLY 2 HOMES IN DEVELOPMENT WITH THIS FLOORPLAN. CONVENIENTLY LOCATED NEAR THE IRVINE SPECTRUM, SHOPPING & DINING. AWARD WINNING IRVINE UNIFIED SCHOOL DISTRICT.
TURN OFF THE CAPS LOCK.
UNIQUE FLOORPLAN. ONLY 2 HOMES IN DEVELOPMENT WITH THIS FLOORPLAN. I thought “unique” meant one-of-a-kind? I guess 2 copies is as unique as an Irvine tract home gets.
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This property is priced 17.6% below its 2004 purchase price. This isn’t 17.6% off the peak, it is 17.6% off a 2004 price. As properties like this one set the comps in Northwood II, it is becoming apparent that the entire neighborhood is now selling for less than its purchase price.
The seller of this property originally purchased with 5% down utilizing a $737,935 first mortgage, a $138,363 second mortgage, and a $46,202 downpayment. In September of 2006, they refinanced $800,000 in a 1% Option ARM and simultaneously opened a $100,000 HELOC with Greenpoint Mortgage Company. I don’t know if they have tapped the HELOC, but what would you guess? If this property sells for asking price, the total loss on the property will be $208,100 after a 6% commission. It is difficult to determine how the parties are going to split this loss as it depends on how much of the HELOC has been taken out. I would surmise that nobody will be happy with the outcome.
In all likelihood, this will not sell as a short sale because of the inherent difficulties that process entails. This will probably end up as a foreclosure and become REO adding another story to the statistics shown in the graphs of this post. Each one was the shattering of someone’s dreams and hopes for the future.The huge numbers of foreclosures all have a story, and we will tell those stories here: one property at a time…
Hurry on down to Columbus Grove and get a sweet deal on a honey of a property!!! Over 20% off!!! Wow!!! GOURMET kitchen, PERGRANITEEL, this ONE is TURNKEY!!! This one will not last!!! Hurry!!! Buy now or you will miss your chance!!! These prices will not last forever!!! Real estate only goes up!!!
Are you catching the fever of the spring rally yet? Sellers like this one hope you will. I imagine they would rather someone else lose the next $250,000 in depreciation on this property.
Absolutely beautiful single family home in the master planned community of Columbus Grove. Family room with fireplace and media niche. Hardwood floors. Gourmet kitchen with GE Monogram appliances and granite countertops. Preparation island. Breakfast nook. Master bedroom with fireplace and jetted whirlpool tub. Oversized walk-in closet with organizers. Laundry room with storage space and sink. 2-bay expanded garage. Porte cochere. This home has everything!
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Did you notice how close the power lines are to this property? One of our regular readers did, and he sent me this song.
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If this seller gets their asking price, Indymac stands to lose $295,440. I know we profile these daily, and after a while you get used to it, but sometimes you have to wonder, “what in the hell were these lenders thinking?” How do you loan someone over a million dollars when the borrower has put less money into the deal than many of us have put down as a rental deposit? (I suppose in some ways it really was cheaper to buy than to rent.) There has been much discussion here and on other blogs about the willingness of borrowers to walk away from their obligations. The obviousness of it becomes apparent when you imagine yourself in the various circumstances.
Imagine you are today’s homedebtor/bank renter/whatever you want to call him. You have put a modest security deposit ($3,464) into a property, and it has declined in value about $300,000. This property is costing you twice as much as a comparable rental, and it will be many years before resale values would provide you any profit. Wouldn’t you stop renting from the bank at that point and go find a cheaper rental? Of course you would; why wouldn’t you?
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That concludes another week at the Irvine Housing Blog. As you may have surmised, I am making progress toward completing my book on the Great Housing Bubble. You will likely be treated (or you will have to endure) more of the combined analysis and property profile posts in the future. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
