Since it cost a lot to win

and even more to lose

You and me bound to spend some time

wondering what to choose

Goes to show you don’t ever know

Watch each card you play

and play it slow

Wait until your deal come round

Don’t you let that deal go down

Deal — Jerry Garcia.

I would like to thank tonye for suggesting this song and the Grateful Dead.

With the extreme leverage and volatility of residential real estate, it does cost a lot to win and even more to lose. It is a very important decision one should spend some time thinking about. Right now is a horrible time to buy, and here at the blog we watch each property as it comes into play. The game right now is to wait until your deal comes around…

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I profile Turtle Ridge frequently because the prices are so high, it is easy to find WTF listings — they all are. This isn’t to say Turtle Ridge does not carry a premium. It is a desirable neighborhood. This desirability is reflected in rental rates and amplified in house prices.

The two-bedroom market in Turtle Ridge will cost you $2,400 to $2,500:

$2405 / 2br – Turtle Ridge Town Home. End Unit!

$2450 / 2br – 2 Bedroom 2 bath – Irvine: Turtle Ridge

A three-bedroom house will cost you $2,900 to $3,000 for entry level:

$2850 / 3br – Beautiful Two-Story House in Irvine – Turtle Ridge

$2950 / 3br – Detach home in Turtle Ridge

Of course, Turtle Ridge wouldn’t be Turtle Ridge if someone didn’t think their rental was worth a fortune. Perhaps they are trying to cover half their mortgage payment…

$4500 / 3br – Stunning 3 Bedroom Furnished Home in Turtle Ridge

The fundamentals of property valuation are the same for the high end as they are for the low end. The breakeven cost of ownership for these units will be near 160 (perhaps a bit lower due to high Mello Roos fees.) This puts the value of two-bedroom units at $384,000 to $400,000. The value for the entry level three-bedroom units would be $464,000 to $480,000. So what would you guess these properties are priced in the market?

The degree of overvaluation is stunning…

Asking Price: $875,000

Income Requirement: $218,750

Downpayment Needed: $175,000

Monthly Equity Burn: $7,291

Purchase Price: $480,000

Purchase Date: 5/16/2003

Address: 43 Bower Tree, Irvine, CA 92603

Beds:	3
Baths:	2
Sq. Ft.:	1,500
$/Sq. Ft.:	$583
Lot Size:	1 Sq. Ft.
Type:	Condominium
Style:	Other
Year Built:	2003
Stories:	Two Levels
Area:	Turtle Ridge
County:	Orange
MLS#:	S508333
Status:	Active
On Redfin:	124 days
Unsold in 90+ days

Drastic 200K price reduction below market value!!!!!!Stunning turtle ridge home, completely remodeled throughout. Plank hardwood flooring, Travertine flooring in kitchen and all bathrooms. Master bathroom has custom travertine shower with designer sinks and hardware. Custom built-in closets and garage. Added recessed lighting, ceiling fans, crown molding and baseboards throughout home. Surround sound in family room and master bedroom. Garage also has granite flooring. Gorgeous and turnkey. Furniture optional, owners are very motivated!!!!!!! Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!

This is the most incompetent listing I have seen in quite some time. First, how do you like the sideways pictures? This isn’t a problem with Redfin. Look at the MLS logo in the corner. The pictures were put up sideways, and rather than correcting the error, the MLS logo was put on them, and they have been there over 90 days.

It really annoys me when a realtor tells me a property is priced below market value (and adds multiple exclamation points.) Market value is whatever someone is willing to pay. Unless someone comes in and pays $200,000 over asking price, the property is not priced below market. In fact, they will probably have to lower the price further to sell it, so it is still priced over market. What the realtor is really saying is “this property is priced $200,000 below the fantasy/wishing/WTF price the owners thought it was worth.”

Furniture optional? Can I have the shirt off the seller’s back?

Gorgeous Turkey…

Can you just feel the emotion (desperation) of the realtor holding down the exclamation point button on their keyboard. I don’t have the patience to count them, but this must be a new record: Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!

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One of the two 3 bedroom rentals featured above is identical to this unit, and it shares the same alley access. You can’t get a closer comparable. The breakeven cashflow value for an owner-occupant would be $464,000 to $480,000 — which is what they paid for the place in 2003. Unfortunately, it is about half of their asking price.

There are other comps in the neighborhood that are priced even higher:

39 Bower Tree, Irvine, CA 92603

49 Bower Tree, Irvine, CA 92603

48 Arborside, Irvine, CA 92603

Turtle Ridge has a long way to fall…

I’d gladly lose me to find you

I’d gladly give up all I got

To catch you I’m gonna run and never stop

I’d pay any price just to win you

Surrender my good life for bad

To find you I’m gonna drown an unsung man

I’d call that a bargain

The best I ever had

The best I ever had

Bargain — The Who

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There are always bargains in the rental market. Something has to define value, and as has been discussed in numerous posts on this blog, rents are where it is at. Today I want to look at the rental market for 3 bedroom units. I am excluding pseudo-apartments and looking at both attached and detached properties to see where the leading edge of rents (and thereby house values) can be found.

$2200 / 76 Sequoia Tree Lane

This property is the least expensive 3/2 with an attached two-car garage I could find. It does not appear to be updated or particularly well kept. It is located in University Park in a quiet, interior location with an easy walk to 2 community pools.

$2295 / 3br – CHARMING DETACHED SINGLE-FAMILY HOME

This looks like a particularly good deal. It is relatively inexpensive, fully detached, it doesn’t look to bad from the one interior picture shown, and it has a very spacious yard by Irvine standards. An address is not given, but the Walnut/Yale intersection would put it in El Camino Real.

$2300 / 31 Potomac

This unit is in Northwood just behind the small shopping center on Yale and Trabuco Canyon. It is a short walk to a tot lot and community swimming pool. I have seen units in this neighborhood, and I would guess there is a small, concrete-patio back yard. Very good price though.

$2300 / 3br – 2.5 Bath in Irvine

This property is also in Northwood near the Potomac property. These are attached condos that feel like an apartment complex. The unit itself is newly updated with granite tops in the kitchen.

$2350 / 3br – 3 bed/2 bath with 1244 sq ft in Woodbridge

This appears to be a single-story attached condo in Woodbridge. There are others in this area asking $2,500. This isn’t a bad price for the area.

$2500 / 3br – ..3 bed/2.5 ba/Garage/Upgrade/townhome…agent 2500

This Corta Bella unit seems reasonably priced, but no real bargain. It appears to be being offered by an agent. Do you think he is a floplord?

$3200 / 3br – Beautiful House in Turtle Ridge

I put this one in just for fun. I have seen lower priced rentals in Turtle Ridge. I guess you just need some kool aid…

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Based on the above comps, we can establish the leading edge of rental values for non-updated, small 3/2s with attached garages are going for $2,300 in the market. This puts their fundamental value at $368,000 assuming the rents remain stable. This time last year, I was looking for rentals, and I do not remember so many 3/2s being offered for under $2,500. One of the reasons I wanted to do this series of posts on rentals is to document the rise and fall of rental rates over time. We will check back again later.

If properties of this description are worth $368,000, how much are they currently asking in the for-sale market?

Price: $470,000

GRM = 204

19 Deodar, Irvine, CA 92604

Beds:	3
Baths:	2.5
Sq. Ft.:	1,517
$/Sq. Ft.:	$310
Lot Size:	2,112 sq. ft.
Type:	Condominium
Style:	Other
Year Built:	1976
Stories:	Two Levels
Area:	El Camino Real
County:	Orange
MLS#:	S504840
Status:	Active
On Redfin:	137 days
Unsold in 90+ days

BEAUTIFUL IMMACULATE HOME!!! REMODELED WITH HARDWOOD FLOORING, TILED BATHROOMS, AND CUSTOM TOUCHES THROUGHOUT. STAINLESS STEEL APPLIANCES. CATHEDRAL VAULTED CEILINGS. FIREPLACE IN LIVING ROOM AND MASTER BEDROOM, BRIGHT AND OPEN KITCHEN. LARGE PATIO.

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Price: $499,999

GRM = 217

9 Ericson Aisle, Irvine, CA 92620

Beds:	3
Baths:	2
Sq. Ft.:	1,679
$/Sq. Ft.:	$298
Lot Size:	–
Type:	Condominium
Style:	Townhouse
Year Built:	1989
Stories:	Two Levels
View(s):	Peek-A-Boo, Has View
Area:	Northwood
County:	Orange
MLS#:	S507288
Status:	Active
On Redfin:	119 days
Unsold in 90+ days

Gorgeous townhome in highly sought-after tract. Premium interior location + one of the largest models available! Inviting floorplan enhanced by soaring vaulted ceilings + custom upgrades. Expansive living room features recessed lighting, custom slate-wall fireplace & a myriad of well placed windows. Charming chef’s kitchen boasts raised ceilings + eating area & attached patio. Huge master suite w/ lavish bath & private balcony. Easy access to shopping, entertainment & freeways. WOW!

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Price: $465,000

GRM = 202

802 Terra Bella, Irvine, CA 92602

Beds:	3
Baths:	2.5
Sq. Ft.:	1,476
$/Sq. Ft.:	$315
Lot Size:	–
Property Type	Attached, Condominium
Year Built:	2000
Stories:	2 Level
View:	Pool
Area:	Out of Area
County:	Orange
MLS#:	C08008466
Status:	Active
On Redfin:	8 days

Northpark community. Great corner unit, very private. Balcony with view of the pool and green belt. Spacious living room with fireplace, bright kitchen with view of the green belt. ceramic tiles in all the bathrooms, kitchen, laundry room and berber carpert. Lowest price for a 3 bedroom unit. Submit all reasonable offers. Lender owned sold “as is” no warranty. All information believed to be correct please verify for your client.

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Price: $499,900

GRM = 217

59 Sapphire, Irvine, CA 92602

Beds:	3
Baths:	2.5
Sq. Ft.:	1,500
$/Sq. Ft.:	$333
Lot Size:	–
Type:	Condominium
Style:	Contemporary, Mediterranean
Year Built:	2001
Stories:	Two Levels
View(s):	Mountain, Park or Green Belt, Peek-A-Boo, Trees/Woods
Area:	West Irvine
County:	Orange
MLS#:	S514971
Status:	Active
On Redfin:	47 days

STUNNING SHOWCASE HOME! Very PRIVATE END UNIT w/ Larger PATIO than most. Lots of High Quality Upgrades featuring; Corian Kitchen Counters w/ full backsplash & Maple Cabinetry, High-end GE Profile Appliances, Designer Italian Porcelain Tiles, Custom-Designed Entertainment Center w/ Surround Sound, Security System, Ceiling Fans & Recessed Lighting throughout home. Elegant French Doors leading to Flagstone Patio. Functional Loft/Tech Area & Upstairs’ Laundry Room. VERY LOW ASSOCATION FEES.

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As you can see, GRMs for this product are hovering between 200 and 220. This is real progress from the 250-280 units like this were going for at the peak. These products are the least desirable of the 3/2s in the market, so there is the very real possibility they may drop below parity with rents because not everyone will want to be an owner-occupant. The bottom for these will probably be closer to 140 which translates to a bottom price of about $325,000. We still have a way to go.

This one goes out to a struggling realtors lurking on the blog. We feel for you…

Out of work, I'm out of my head

Out of self respect, I'm out of bread

I'm underloved, I'm underfed, I wanna go home

Will you tell the folks back home I nearly made it

Had offers but didn't know which one to take

Please don't tell 'em how you found me

Don't tell 'em how you found me

Gimme a break, give me a break

Seems it never rains in southern California

Seems I've often heard that kind of talk before

It never rains in California

But girl don't they warn ya

It pours, man it pours

It Never Rains in Southern California — Albert Hammond

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Today I want to look at the rental market and share with you some properties that caught my eye as good deals in the market. I have not been to any of these properties, so I don't know anything more than what is shown on the internet. A careful inspection of the property may reveal it to be less of a deal than it appears. Also, as a way to relate these properties to fundamental valuations in the for-sale market, I will provide links to comparable properties.

To start, I will share with you one of the craigslist scans I use to get a quick feel for changes in the rental market. I will search for 4 bedrooms in Irvine under $3,000. By limiting the search to 4 bedrooms, I avoid all the Irvine Company spam advertising their apartments, and by setting the limit under $3,000, I get a small enough list to tell at a glance if product availability is growing or shrinking. This scan turns up the following properties that appear to be a good deal:

$2500 / 4br – 4bed/2.5bath w/2088 sqft in Northwood

$2500 / 4br – 3 BR 1 Office Almost New Home in Irvine

$2550 / 4br – Spacious University Park Townhouse

The one at 4601 Kimberwick Circle (second one on the list) looks like a particularly good deal, IMO.

One interesting note is the decline in prices on these 4 bedroom properties. Last year, it was difficult to find a 4 bedroom under $2,800. As you can see above, the leading edge of the 4 bedroom market has dropped to $2,500. This would put the valuation of older, not-updated 4 bedroom properties at around $400K based on a 160 gross rent multiplier. So what are asking prices on properties meeting this description in Irvine?

Price: $650,000

4242 Rafael ST, Irvine, CA 92604

Beds:	4
Baths:	2.5
Sq. Ft.:	1,800
$/Sq. Ft.:	$361
Lot Size:	5,139 sq. ft.
Type:	Single Family Residence
Style:	Contemporary
Year Built:	1975
Stories:	Two Levels
Area:	El Camino Real
County:	Orange
MLS#:	S514960
Status:	Active
On Redfin:	42 days

Beautiful family home in great family neighborhood. Three lots from greenbelt leading to park, pool and elementary school. Centrally located in the well kept community of Greentree on a lightly travelled street and away from busy streets. A sunny back yard with jacuzzi invites gardening and relaxing. A downstairs master bedroom increases this home's appeal. A newer shake-like tile roof, remodeled kitchen and many other upgrades add to the quality of life for the new owners.

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Can you spot the misspelled word?

Price: $640,000

148 SAINT JAMES #56, IRVINE, CA 92606

Beds:	4
Baths:	3.5
Sq. Ft.:	–
Lot Size:	–
Property Type:	Single Family Residential
Area:	Out of Area
County:	Orange
MLS#:	07-235205
Status:	Active
On Redfin:	69 days

BEAUTIFUL GATED 4+ 3.5 TWO STORY IN PARK LANE IRVINE. BRING ALL OFFERS!!!! POSSIBLE SHORT SALE /LENDERS APPROVAL. PROPERTY AS IS, NEEDS A LITTLE PAINT. LOWEST 4 BED IN THE TRACT!!!HOA FEE LOW. GREAT COMMUNITY. A MUST SEE!!

ALL CAPS, multiple exclamation points. This is written by someone with an advanced degree in awful real estate writing. I wonder if they go away to seminars to learn to write this poorly, or if they just copy each other's bad habits.

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As you can see, the leading edge of pricing for these properties is around $650,000, and based on the comparative rents from the craigslist properties, the values for an owner-occupant are closer to $400,000. At the peak, prices were double (100% overvaluation) their fundamental worth based on rents. Now that properties have declined about 20% from the peak, the level of overvaluation is somewhat less. We are a bit less than half way to the point where prices in the market are at parity with rental valuations. Of course, if rents decline — and they appear to be showing some downward pressure — then valuations will drop.

When I did my initial Predictions for the Irvine Housing Market I did not factor in the potential impact of a severe recession causing a decline in rental rates.

In the post How Bad Could Bad Get?, I did.

BTW, I lifted the chart below from Pigginton.com. San Diego peaked 1 year before we did. Will Irvine's chart look like this in 2008?

While we are looking at rain, let me share another video with you…

"I'm Singing in the Rain", Gene Kelly

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Its rainin but there aint a cloud in the sky

Must of been a tear from your eye

Everythingll be okay

Funny, thought I felt a sweet summer breeze

Must of been you sighin so deep

Dont worry were gonna find a way

Im waitin, waitin on a sunny day

Gonna chase the clouds away

Waitin on a sunny day

Waitin’ on a Sunny Day — Bruce Springsteen

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Over the holidays, I had time to contemplate the content on the blog, and I realized we have not spent enough time and effort examining the rental market. Considering 40% or more of Irvine households are renters, it seems appropriate for the Irvine Housing Blog to pay more attention to what is going on in the rental market. Plus, much of our discussion on valuations and projections for the market bottom depend on rental rates, so it is important to know where rental rates are to gain a feel for where prices are in the marketplace.

Examining prices for rentals is fraught with the same problems as examining prices of for-sale properties with one exception: there are good deals in the rental market. I will generally profile those I consider good deals or those that are simultaneously offered for sale. Occasionally, I do find WTF rental asking prices from floplords trying to cover their payments. I will profile these too. I will not examine any rentals owned by the Irvine Company. If you want to see their offerings, I suggest you go to Rental-Living.com. Instead, I will focus on private rentals offered on the MLS and Craigslist. I do not know any of the landlords, and we are not going to accept money from landlords to feature their properties. My opinion of the quality of the rental and the deal it represents is based solely on the information from the internet, and it could be entirely incorrect.

With all our explanations and disclaimers in place, let’s examine a property offered for rent and for sale to see what it tells us about the market. Today’s seller can’t decide if they should rent or sell. They are waitin’ on a sunny day…

Asking Price: $568,000

Asking Rent: $2,350

Gross Rent Multiplier: 241

Rent Finance Value: $371,795

Income Requirement: $142,000

Downpayment Needed: $113,600

Purchase Price: $165,000

Purchase Date: 1988

Address: 11 Springflower, Irvine, CA 92614

Beds: 3

Baths: 2

Sq. Ft.: 1,144

$/Sq. Ft.: $497

Lot Size: –

Type: Condominium

Style: Contemporary

Year Built: 1986

Stories: One Level

Area: Woodbridge

County: Orange

MLS#: P585566

Status: Active

On Redfin: 188 days

Unsold in 90+ days

From Redfin, “single story detached condo house, 3BR, 2BA (3rd BR could be used as den or office), corner lot location, walking distance to sch, park, pool, lakes, shopping, newer carpet, baseboard, paint, scrapped ceiling, woodblind window coverings, show very clean and bright, move-in condition. No Mello-Roos, low tax rate”

Do you sense a lack of enthusiasm in the description? I don’t need three exclamation points, but that description reads like a medicine bottle.

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First, I would like to introduce a new concept: the rent finance value. Since the payment is the most important determinant of value, the rent finance value looks at the maximum value that could be financed with a 30-year fixed mortgage at todays interest rates (I used 6.5% above.) In today’s example, a payment of $2,350 would finance a payment on a loan of $371,795 at 6.5%. It is not as handy as the gross rent multiplier because you need either a financial calculator or a spreadsheet, but IMO it provides a good method for estimating value because it comes closest to simulating a buyer’s mentality without crunching too many numbers. As you may have noticed, it comes out pretty close to the 160 GRM value of $376,000.

So what can we observe with this property. IMO, this asking rent is near market for this unit. Further, this unit is what I would consider a “median” house product in Irvine: small 3/2s or large 2/2s. Obviously, the asking sales price is too high or it wouldn’t be languishing on the market for over 180 days. Gross rent multipliers were near 300 at the peak, and with our 20% drop, they are under 240 now. This unit confirms that GRMs are falling below 240. A knife catcher may pick this up for $525,000 and watch it drop another $150,000 in value over the next few years. If the property data I have is correct, there is no urgency for this seller to sell, but also no need to be stubborn about the asking price. They really have two options: rent this out and be the bagholder, or lower their price and let someone else be the bagholder. What do you think they will do?