Shady Canyon is a unique neighborhood of high quality homes and great amenities. Will the prices hold up there?

Asking Price: $3,895,000

Address: 58 Vernal Spg Irvine, CA 92603

You’re beautiful. You’re beautiful.
You’re beautiful, it’s true.
I saw your face in a crowded place,
And I don’t know what to do,
‘Cause I’ll never be with you.

You’re Beautiful — James Blunt

I am careful in my life not to take on limiting beliefs, but realistically, I will never own a house with a $3,895,000 price tag (hyperinflation?). I don’t know that I would want to. My family does not need 5,385 SF… I suppose that is why it is called luxury.

This is a beautiful property as many in Shady Canyon are. It is the only place in Irvine where you can obtain lots and houses of this size, which makes it unique; although, North Tustin has some comparable properties nearby. If you want big and opulent in Irvine, Shady Canyon is the place to do it (Turtle Rock has some big lots too).

I recently wrote about Rental Parity and Beyond where I discussed the value beyond cashflow value that real estate can sustain. In that post, I noted, “There are only two things that creates the capacity to hold wealth
beyond cashflow value in real estate; uniqueness and quality.” The properties in Shady Canyon all have uniqueness, and depending on the taste and budget of the owner who improved the property, many Shady Canyon properties are of very high quality. Therefore, Shady Canyon may sustain valuations above rental parity even at the bottom of the market. That is the good news.

Unfortunately, properties in Shady Canyon got bid up to unreasonable levels due to the Immunity Syndrome. Shady Canyon is still due for a significant fall.

CHUNG YOON ART GALLERY — chungy0@yahoo.com

Asking Price: $3,895,000

Income Requirement: $973,750

Downpayment Needed: $779,000

Purchase Price: $4,266,000

Purchase Date: 11/22/2005

Address: 58 Vernal Spg Irvine, CA 92603

Seller
upgraded throughout as her dream home and spared no expense but never
moved in. That is sad, if true.

Seller would
consider a lease option, rent $13,500/mo. Let’s say this trades at a small premium to current rental parity; with a GRM of 200, this property would be worth $2,700,000. Is that where this finds support? Is this property of such high quality and unique that it may store value significantly above cashflow value?

This property is in no danger of being a short sale, but the owner does have a significant mortgage on the property. Sometimes I see a $1,000,000 loan on the property because some foolish financial planner convinced the owner not to have all their money tied up in the house. It tends to be limited to $1,000,000 because there is no deduction for larger amounts. The mortgage on this property is much larger.

If this property sells for its asking price, and if a 6% commission is paid (5% is the norm on such expensive properties), then the total loss of equity will be $604,700. That is a big loss, but selling now may be much less painful than waiting if this bottoms near $2,700,000.

BTW, This parody is better than the real video…

What is it worth just to be in the neighborhood? Why do the houses that surround you make so much difference?

Asking Price: $715,000

Address: 15 Cedarlake #60 Irvine, CA 92614

Down on the corner, out in the street,
Willy and the poorboys are playin;
Bring a nickel; tap your feet.

You dont need a penny just to hang around,
But if youve got a nickel, wont you lay your money down?
Over on the corner theres a happy noise.
People come from all around to watch the magic boy.

Down On The Corner — Creedence Clearwater Revival

Why do properties obtain a premium due to the houses around them? When you look at certain properties, comparable properties in other neighborhoods may carry a 25% premium that is reflected both in resale prices and in rental rates. Why is that?

One obvious answer is the perception of the quality of life within the community. This is what makes Irvine so special. The people who live in Irvine all believe in the Irvine story; low crime, beautiful surroundings, warm community, abundant conveniences, and other intangibles you can name. This makes Irvine attractive to high wage earners, and it makes properties in Irvine carry a premium relative to similar properties in surrounding communities (see Open Thread 7-11-2009 for an example).

Even within Irvine, there are Villages that command premiums over other villages. There are identical floorplans found in many of the Villages of Irvine, but they consistently show differences in rents and resale prices. This reflects a consumer preference for certain Villages that can be measured as premiums (sorry, I don’t have a good data analysis for you yet). This premium is understandable because some villages have a better location and access, differences in landscaping and monumentation, and of course, differences in “trendiness” and the “cool” factor.

Where it gets more difficult to identify and understand is when you get down to the level of the neighborhood. For instance, today’s featured property is very nice, but when you consider it is a duplex with no view and a tiny yard, what makes it so much more valuable than similar properties? It has to be the neighborhood. If you look back at the price history, this property has carried a 25% premium to the median throughout its existence. What is the advantage of being “in the neighborhood?”

I am always most struck by neighborhood premiums when I see pricing in beachfront neighborhoods. The properties right on the water are going to carry a premium because they are very rare and special, but why does the property across the street — the one with no view, no yard and no parking cost much more than a comparable property inland? The ocean air and climate is part of it, but many homes seem to command premiums far in excess of their use or utility. Is proximity to premium a premium itself?

How much of the premium in neighborhoods like this are the result of “keeping up with the Joneses?” Do people overpay for properties like this so they can be close to the really wealthy people who own on the water? Does it raise their status to be near others with status?

Some of these neighborhood premiums are easier to quantify than to explain. In the end, it really doesn’t matter because both rents and resale prices are effected, so the relationship to rental parity is the same. It is fun to speculate on why some neighborhoods are more desirable than others. What is your theory?

Asking Price: $715,000

Income Requirement: $178,750

Downpayment Needed: $143,000

Purchase Price: $795,000

Purchase Date: 5/27/2005

Address: 15 Cedarlake #60 Irvine, CA 92614

It looks like this property was purchased as an investment on 5/27/2005 for $795,000. The out-of-town owner used a $596,450 first mortgage and a $198,550 downpayment. If he gets his asking price, and if a 6% commission is paid, he will recover $75,650 of his downpayment.

Is this a fear listing? Is he selling out of fear before he goes underwater? He has reason to fear….

By 2004, the primary reason people bought homes was to make a profit. A home was a money maker that gave you shelter. What a deal.

Asking Price: $1,199,000

Address: 52 Winding Way Irvine, CA 92620

{book}

Shake your money maker
Like somebody boutta pay you
Don’t worry about them haters
Keep your nose up in the air
You know I got it
If you want it, come get it
Stand next to this money

Money Maker — Ludacris

Real estate is a money maker. Don’t listen to those haters at the IHB. BUY NOW!!!

In the past couple of weeks, we have had a couple of new posters
from beach communities remind us of how much kool aid is still in the
market. The Irvine bulls have been quiet for a while now, and although
the used house salesmen are calling the bottom, we all know prices have
not bottomed yet. As long as interest rates are artifically low,
unemployment is very high, and default rates continue to set new
records, there isn’t much chance of prices stabilizing.

The last bastions of kool aid denial are the beach communities.
Perhaps prices there will defy the downward pull of nearby communities.
Perhaps not. Personally, I think prices there are going to crash very, very hard. We will see.

There is a legitimate financial reason to buy a home: it saves you money versus renting. I have written often about rental parity and waiting to buy when it is cheaper to own than to rent. We are seeing this in neighborhoods all around Orange County, largely due to the artificial affordability in the form of 5% interest rates orchestrated by the Federal Reserve.

However, the primary financial reason people in California buy homes has nothing to do with rental parity or saving money; it is all about speculating on appreciation. Perhaps the collapse of real estate prices and the resulting foreclosures and bankruptcies will change people’s attitudes. With the strength of the kool aid in California, it will take a long and painful collapse to change people’s minds. (For anyone who needs a refresher on the difference between cashflow investment and speculation on appreciation, please read Speculation or Investment?)

Asking Price: $1,199,000

Income Requirement: $299,750

Downpayment Needed: $239,800

Purchase Price: $1,545,000

Purchase Date: 6/21/2006

Address: 52 Winding Way Irvine, CA 92620

STUNNINGLY BEAUTIFUL home: reflects a bit of Hawaiian Style with a
relaxed elegance. Rich hardwood flooring, custom painting tastefully
done, a mixture of plantation shutters and vertical blinds, crown
molding throughout. LARGE GUEST SUITE ON FIRST FLOOR, suitable as a
second master bedroom. Every bedroom has its own full bath. SUMPTOUS
MASTER BEDROOM AND BATH. Double sink vanities with limestone counters ,
polished stone flooring, travertine shower stall with custom tile.
Media niche in master bedroom. UPSTAIRS MEDIA CENTER AND SECOND FAMILY
ROOM. Custom built-in cabinet center holds a large flat panel TV.
EXTRAORDINARY BACK YARD: AN OUTDOOR KITCHEN: large covered grill,
double burners, storage, icemaker, FRIG. supports two umbrellas, a bit
of BBQ Heaven. TWO KITCHENS: INSIDE AND OUTSIDE. Across from one of
Woodbury’s beautiful private parks with pools and a tot lot.

Stunning!!!

Intermittent CAPS LOCK

What? Two kitchens, and neither of them is gourmet?

These are the kind of owners I feel bad for. They purchased right at the peak on 6/21/2006 for $1,545,000. They used a $1,235,700 first mortgage and a $309,300 downpayment. They did not use conventional financing, and I imagine they cannot afford the payment on anything other than the ARM they used. Now that they cannot refinance and the market has gone south, they are being compelled to sell at a loss. If this property sells for its current asking price — 22% off — and if a 6% commission is paid, the total loss on the property will be $417,940. Their $309,300 downpayment is lost, and their credit will be trashed.

That sucks.

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.

🙂