A time to cast away stones, a time to gather stones together
A time of love, a time of hate
A time of war, a time of peace
A time you may embrace, a time to refrain from embracing
A time to gain, a time to lose
A time to rend, a time to sew
A time to love, a time to hate
A time for peace, I swear its not too late
To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time for every purpose, under heaven
Turn, Turn, Turn — Pete Seeger / The Byrds / Bible (Ecclesiastes 3, verses 1–8)
Sorry to recycle this song, but it is very fitting for today’s post…
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If you compare the cycles of the housing market to the cycles of the seasons, our local housing market is entering Autumn. Spring was from 1997-2001, Summer was from 2002-2006, and Autumn began in 2007 and will likely continue through 2009, Winter will be here from 2010-2012. Spring will come again, but only after a cold, dark winter.
LENDER OWNED. Fantastic detached end unit home with 2 master suites, one upstairs and one on main floor. Large living room with french doors that open to a private patio, inside laundry room, beautiful tile floors, and a nice quiet location at the end of the street. Walking distance to Homestead Park.
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It is nice to document asking prices, but it is even better to document final sales prices in the market.
Today’s listing is sale that closed at 25% off its peak sales price in 2006, and it is a 2003 rollback.
The REOs are obliterating the market, and in doing so, they will drive more homeowners underwater which will create even more REOs: a downward spiral. This is the dynamic of the market, and it will continue to be until enough buyers enter the market to absorb all the inventory. Right now in the market, the desire is there (remnant kool aid intoxication,) but the lack of available credit is getting in the way (just as was predicted in Houses Should Not Be a Commodity.) The realtors are out right now trying to convince people it is the negative media creating the problem. This is not accurate. The credit markets are creating the problem. Market psychology has not changed yet, and people are still trying to buy. Later this year, market psychology really will change as people fully accept the price rally was a bubble and prices will decline further. This change in market psychology will fuel the next leg down in the market continuing through 2009.
Human nature is to spend everything you make. It takes discipline to save money and accumulate wealth, and most people do not have it. When house prices were rising, every homeowner suddenly faced with a dramatic increase in their yearly “income,” if they drank the kool aid and learned to view appreciation as income. Many, many people did what human nature would compel them to do — they took this free money and spent it. Given the pressures in Orange County to look and act rich, the temptation of all this “unliberated equity” was too much for many to resist. Pretending to be making a great deal of money and being rich became a way of life to many in Irvine. It went on for so long, it became part of their identity. These people actually believed they were rich. The influx of free money through appreciation was considered an entitlement for homeowners; something that would go on forever.
Some have argued rampant equity extraction was not widespread, and it will not be the cause of many foreclosures. As an observer of human nature, I would argue this was very widespread; it had to be. The chart above illustrates the dramatic increase in mortgage equity extraction. It serves as a testament to the foolishness of many homeowners. Your average person cannot stay out of credit card debt, what would lead someone to believe they would treat mortgage debt any differently, particularly when they believed their house would go up in value and pay for it?
Often times the lessons we learn in youth stay with us for a lifetime. When these are good lessons, they serve us well for our lives; when they are bad lessons… I did not pay much attention to mortgage matters in my household growing up, but I know my parents never overextended themselves to buy a house, and they never took out equity to spend on things. In fact, it would have never even occurred to them to do so. Perhaps it is my Midwestern upbringing, or perhaps it is just not growing up in a bubble market where such things are possible, but when I see the financial behavior of people during the bubble, I am simply astonished.
Perhaps the big picture is easier to grasp when you see specific examples of this phenomenon in action. Today’s post is a profile of two pretenders: people who faked being rich for several years by living off their appreciation through mortgage equity extraction. Sometimes I cannot decide which is more amazing, that people would do this at all, or that they could sustain this lifestyle for so long.
Charming family home with an open floor plan. Enjoy the convinience of a main floor bedroom & bathroom. Inviting living room with high ceilings and fireplace. Remodeled kithchen with granite counters and a center island. Cozy family room is adjacent to the kithen and it boasts wood floors. Master bedroom is extra spacious and it has its own balcony. Enjoy your own swimming pool and still lots of space to enjoy gardening and entertaining outside. Front, back and side yard are landscaped and hardscaped with lots of fruit trees. Inside laundry for your convinience. Wonderful location is central to shopping, schools, and library; all within walking distance.
convinience? kithchen? kithen?
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So how did these people manage their mortgage debt? They bought the property in December 2001 for $328,000, and they had a $307,263 first mortgage. They put just over $20,000 of their own money into the deal. One year later, they opened a $80,000 HELOC. In 2004, they refinanced for $490,000 taking out about $180,000. Hopefully, they paid off the HELOC, at least temporarily. Later that year, they took out a new $30,000 HELOC. Then in July of 2005, they refinanced again for $650,000 with a 1% Option ARM. They have owned the house for less than 4 years at this point, and they have withdrawn $342,737. I guess this wasn’t enough, because later in 2005, they took out three more HELOCs for $24,000, $82,000 and $24,000 respectively. This property has at least $650,000 in mortgage debt, and assuming they took out and spent the HELOC money (it would be a continuation of their pattern,) they have over $750,000 in debt to pay off. So when you look at the $799,000 asking price, and think they are doubling their money, think again: if they don’t get their asking price, this is going to be a short sale.
SHORT SALE PROPERTY. Cozy fire place in Living room, Step to School, Park. Close to major FREEWAY (5 & 405,Toll Rd), shopping center, professional offices and restaurants. Custom window coverings, Custom Office, Built in closet organizer, spacious Patio next to kitchen. Former MODEL HOME W/ low HOA.
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The price is double what they paid, but it is a short sale. There is only one way to do that: borrow and spend your equity. This seller is an example of someone who tried to be good, but they were seduced by the dark side. They bought the place in 1999, and they put $58,200 down. For three and a half years, they were fiscally responsible and did not expand their mortgage. In late 2002, they gave in an refinanced for $300,000 taking out their downpayment and a few dollars more. Apparently, this “equity liberation” was rewarding because they opened a $90,000 HELOC in the spring of 2003. At this point, kool aid intoxication had set in and their journey to the dark side was complete. The refinanced in late 2003 for $390,000 apparently paying off their first HELOC, but they opened another one for $100,000. That one only lasted until summer of 2004 when they refinanced again for $497,000 to pay off their other mortgages. Having not learned their lesson, they took out another $88,000 HELOC a few months later. By spring of 2006, they were broke again, so they refinanced for $547,000 and took out another $100,000 HELOC. From 2002 to 2006, they took out and spent $414,200 assuming they spent the final HELOC. So now they have $647,000 in debt on a property they paid $291,000 for. A sale at $600,000 will not pay off the debt, and it will be a short sale. It was a great run, wasn’t it? They had 4 years of pretending they were rich.
So what do you think about this behavior?
Think about the impact this money had on our local economy, and think about what it will mean when this money disappears. Do you see why I contend we will have a severe local recession?
Pretending…
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I would like to take this opportunity to thank Brittney for researching these properties and providing me with this information. Without her hard work, I would not be able to bring these stories to you, and these stories need to be told. Some people feel our work here is an invasion of privacy (despite all the information being public record.) These people and those who behaved in a similar fashion deserve to be exposed to the general public. This behavior should be scrutinized for what it is: irresponsible. If these owners find it humiliating, then perhaps they won’t do it again… No, who am I kidding? They will do it again.
We have a sale to report. 111 Tall Oak was asking $659,000 in the summer finally sold for $590,000. The unit was purchased on 3/6/2006 for $725,000. That is 18.6% loss in less than 2 years not including commissions. Basically, the second mortgage was a complete loss.
It looks as if our seller at 111 Tall Oak gave up trying, but the REO at 113 Tall Oak doesn’t have that luxury. When these properties were first profiled on July 30, 2007, the property at 113 Tall Oak was asking $689,000 — a wishing price. Now they are asking $579,000, and it still hasn’t sold. That is a $110K reduction in asking price (almost 20%) in about 100 days. The property was purchased by an FB on 3/6/2006 for $725,000.
Talk about a comp killer…
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…”
Does this quote from A Tale of Two Cities resonate today? The two properties I am featuring today illustrate this dichotomy. First we have a distressed homeowner about to lose a lot of money and thinks it is the worst of times, and his next door neighbor is a knife-catching flipper who thinks the market is going strong and we are returning to the best of times. It is the age of wisdom and it is the age of foolishness — depending on what happens next.
Beds: 3 Baths: 3.5 Sq. Ft.: 1,607 $/Sq. Ft.: $410 Lot Size: – Year Built: 2004 Stories: 3 Type: Condominium County: Orange Neighborhood: Quail Hill MLS#: S485520 Status: Active On Redfin: 92 days Unsold in 90+ days
From Redfin, “SpleSplended DETACHED – 2 YR old Villa in Quail Hill. ULTRA-HIP Floorp lan for 21st Century-3BR/3.5BA+Tech Desk. Granite Counter-Tops, Shutters, Berber Carpet, Wood flooring, Stainless Appliances, Courtyard location. 5-Star resort amenities w/ pools, sport court, tot lots, tennis, fitness gym, several parks+walking trails. Next to Spectrum, Retail Plaza already opend, Walk to Top-Tier Alderwood school. UNI-HIGH School. This is a pre-foreclosure sale! Sale subject to lender approval.”
What makes a floorplan ULTRA-HIP?
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Over 90 days on the market with no sale at this drastically reduced price. Where are the multiple offers over the asking price?
If the short sale is approved, the bank stands to lose $103,540 after a 6% commission. Since this is a 100% financing deal, The seller will undoubtedly try to simply walk away. My guess is the bank will probably approve a sale down to the total loss of the second mortgage, but they won’t take a hit on their first. That is pure speculation, and I could be wrong.
I suspect the flipper who purchased this neighboring property was not counting on 111 Tall Oak becoming a distressed , pre-foreclosure right after he purchased 113 Tall Oak as a flip. Such is life…
Beds: 3 Baths: 3.5 Sq. Ft.: 1,610 $/Sq. Ft.: $428 Lot Size: – Year Built: 2004 Stories: 3 Type: Condominium County: Orange Neighborhood: Quail Hill MLS#: S486686 Status: Active On Redfin: 85 days
From Redfin, “* * * PRICE REDUCTION * * * A chance to own a detached home in the prestigious Quail Hill community with it’s resort style amenities to enjoy!! This tri level home boasts a modern floorplan which is functional and comfortable. Repairs are scheduled to begin soon and will include new paint, carpet and stair repair. This home features 2 balconies, plantation shutters, a romantic two-sided fireplace, and a computer niche. .. .. don’t miss out!!”
This realtor only uses two exclamation points. I guess he is trying to restrain his enthusiasm. * * * PRICE REDUCTION * * * Is our flipper losing confidence in the market? After watching your neighbor languish on the market for 90 days at a lower price, I probably would.
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. If this flipper gets the asking price, he stands to make $44,660 after a 6% commission. Not bad for doing absolutely nothing (You can see from the pictures the property was not renovated.) Of course, when your own purchase and that of your neighboring property establish the market in the low $600,000s, It is going to be a difficult sell at the asking price.
This flip was purchased during the Spring of Hope, will it end in the Winter of Despair?
First Mortgage $484,000 Second Mortgage $121,000 Downpayment $0
Beds: 2 Baths: 2 Sq. Ft.: 1,400 $/Sq. Ft.: $400 Lot Size: – Type: Condominium Style: Mediterranean Year Built: 2002 Stories: Two Levels Area: Northpark County: Orange MLS#: U7004832 Status: Active On Redfin: 22 days
From Redfin, “Upgraded home with new marble flooring and travertine bathrooms is turnkey. Beatiful balcony. Top rated school district. Great school district.”
We have another nominee for the worst picture on the MLS…
When you read the word “turnkey,” do you read “turkey?” I do.
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Today’s property is a typical profile of an FB. She bought right at the peak with 100% financing. We can speculate why — real estate always goes up, etc., but the main reason is because she could. Some lender provided 100% financing and allowed her to obtain the property, so she bought it. Now she is at least 10% underwater, and more likely 20% by the time a knife-catcher is found. If she gets her asking price, the lender stands to lose $78,600.
Yesterday, we had a great discussion on the morality of short sales. I believe we set the record for the most comments on a blog post. There was a wide variety of opinions, and no consensus was reached. Regardless of what anyone thinks about the morality of short sales, we are likely to see a great many of them over the next several years. Each short sale will represent one less potential buyer in the marketplace due to ruined credit, and one more loss for a lender which will serve to tighten credit even further. Both factors will push prices even lower which will in turn create more short sales and foreclosures: a classic downward spiral.
Our real estate finance market is broken. It is so full of fraud, corruption, and unstable loan products, they only way forward is to blow up the system and let the chaos clear out the garbage. I have said it many times on this blog — 20% down, 28% DTI and 30-year conventional mortgages will be the norm. It is the only mortgage product known to produce stable housing markets where people do not default in large numbers. All the innovation and experimentation in the mortgage industry has proven a dismal failure. The problems we are seeing in the markets were self created. There was no outside event, no “unexpected” downturn in the economy, no surprise for anyone who cared to look and see the signs. The credit crunch is not like a random asteroid strike, it is the entirely foreseeable outcome of the activities of the industry itself. Just like the Great Housing Bubble is a direct result of the fallacious beliefs fostered by the real estate industrial complex and acted upon by the masses, the mortgage fiasco is the direct result of the foolish actions and unstable loan products peddled by the lending industry. They are about to reap what they sow, and the harvest will have more chaff than wheat.
I needed time to think to get the memories from my mind
What did I see can I believe that what I saw
that night was real and not just fantasy
Just what I saw in my old dreams were they
reflections of my warped mind staring back at me
‘Cos in my dream it’s always there the evil face that twists my mind
and brings me to despair
The night was black was no use holding back
‘Cos I just had to see was someone watching me
In the mist dark figures move and twist
Was this all for real or some kind of hell
The Number of the Beast — Iron Maiden
Are the low prices of yesteryear an old dream? Is selling at the peak prices of yesteryear just a fantasy? Is this all for real, or some kind of hell?
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The love of money is the root of all evil (The Bible Timothy 6:10.) There is a deep truth to that statement. Have you ever wondered why financial markets fail to respond to prayer, wishful thinking, the Secret, divination, or any form of intervention from Higher Powers? It is simple: financial markets are totally created by man, and the movement of prices is totally dependent upon human behavior. As you may have have surmised, I am a big fan of behavioral economics and Robert Shiller. Watch any financial market long enough, and you can learn to read the emotions of the participants in the fluctuations in price. Financial markets are a unique expression of human behavior. Any creation of man, particularly one driven completely by fear and greed, is going to have a sharp edge. There is no room for kindness, compassion or mercy or any advanced spiritual trait in financial markets. As Pink Floyd noted in Dogs of War, ” They will take and you will give, And you must die so that they may live.”
The current downturn in our real estate market has real costs not just in money but in people’s lives. Some people are getting what they deserve. The pathologically stupid who tapped all their equity to fuel consumer spending or those who bought much more house than they can possibly afford are going to lose their homes, and they should. However, some people are getting crushed who probably don’t deserve it at all. Many were simply foolishly ignorant believing the professional realtors and mortgage originators self-serving assessment of the situation. Financial markets make no distinctions. As the old adage goes, “Kill them all, let God sort them out.” Our housing market is going to kill them all. So be it.
Today we are going to see how short sales and REOs obliterate the neighborhood comps. Our featured property is a short sale priced to move. Our comparison property is a WTF nutcase. The contrast between these two nearby and very similar properties is remarkable.
Upper unit a short walk away from the lake. Private Tropical Courtyard Entry with Large Patio area. Vaulted Cilings, Upgraded Carpeting, Neutral Colors, Huge Master Bedroom, Plantation Shutters, , Walk in Closet, Newer Air Conditioner & Heat System, Huge Size Balcony, Lots of Windows, Backs to Greenbelt Breezeway that leads to North Lake & Community Pool & Spa.
Title Case? I Guess Every Word Is Important.
From the property records, this appears to be a 2003 rollback, but the price seems pretty high for 2003, so this may be an error.
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If this seller gets their asking price, their lender stands to lose $106,594 assuming a 6% commission. This selling price won’t be pleasing to the neighbors…
THE PERFECT SINGLE STORY PLAN IN THE PERFECT LAKEFRONT LOCATION Beautiful TURNKEY SINGLE STORY NO INTERIOR STEPS (only 1 Entry Step) Freshly Painted, Smooth Vaulted Ceilings, New travertine surround and mantle above the fireplace, Large family Kitchen, Private Garden Atrium, New Berber Carpet, New Light Fixtures, New Bath Accessories, New Shower Doors, Den can be enclosed as a 3rd BDRM Stunning LAKE & MOUNTAIN VIEWS on a very quiet and private quiet cul de sac. X-tra Large 2 Car attached Garage. Gated Courtyard entry New fences and landscaping, Near Pools, Beach & Tennis Clubs, Shopping & Restaurants. May be purchased furnished. Golf Cart Included!All the furnishings are brand new and may be purchased with the home for $5000. (by the way the flat screen tv is a prop). Near all of Woodbridge’s major points of interst: the North lake Tennis and Beach Club Lagoon with water slides! Near Shopping, Restaurants, Medical Facilities. Short drive to John Wayne airport, Newport and Laguna Beaches.
Golf Cart Included! Oh, that seals the deal for me.
How many times does the word “new” appear in the above listing for a property built in 1979?
If Redfin’s mapping is correct, this property neither fronts on the water nor does it have a view of it.
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Are these sellers kidding? WTF makes them think they can get an asking price $345,000 over a neighborhood comp? Can you just imagine the deluded thought process here…
Once the short sale is gone, buyers will have to pay “market” prices which are actually $345,000 higher than the short sale.
It is amazing the utterly stupid things people believe when they are filled with greed.
Iron Maiden had the coolest album covers, didn’t they? Album covers are a lost art. CDs made them impractical, and downloading made them unnecessary.
Thank you for joining us 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.
