REO pricing is starting to really pummel the bottom of the market. Today’s featured property is being offered for 50% less than its peak purchase price.
Now you’re running ’round talking looking like a fool I’d like to know what you goin’ do and now who’s laughing Jokes been played on you
I have my own emotional measure of progress toward affordability. I openly ridicule WTF prices whenever I see them because, quite frankly, they make me angry, and the ridicule is deserved. For a very long time, most of the listings were in the OMG price range, and much of the high end is still there. However, lately I have been seeing prices on properties that do not completely offend my sensibilities; these prices merely make me LOL. When I first saw today’s featured property, I did not think OMG; That is progress.
When I first predicted house prices would fall, this is exactly the kind of deal I believed we would see–just not this quickly. It is very unlikely that we are at the bottom, but we are making huge strides toward genuine affordability. Someone will buy this one and weather the drawdown that follows. Many of us who buy when affordability returns may experience the same outcome. I am not going to try to time the bottom tick of the market; although, I will wait to get closer than today’s pricing. Unless you are going to wait until a new uptrend is firmly established, there is a very good chance the property you purchase may be worth less than you paid for quite some time. I will be OK with that as long as I am saving money over renting. Unfortunately, we are not there yet.
BANK OWNED – REO SALE – PROPERTY SOLD AS-IS WITHOUT REPAIRS OR WARRANTY.
This property was purchased on 1/30/2006 for $488,000. The owner used a $390,400 first mortgage, a $97,600 second mortgage, and a $0 downpayment. The property went back to the bank on 1/23/2009 for $372,000. It has taken 3 months to get it on the market. If it sells for its current asking price, and if a 6% commission is paid, the total loss will be $257,794.
This is the first property I have seen in Irvine priced 50% off.
{book4}
You can’t blame me for hatin’ But it’s funny how you thought you can Let your little secrets pass by me And try to get them not to like me I was being good to you Now you’re running ’round talking looking like a fool I’d like to know what you goin’ do and now who’s laughing Jokes been played on you
Got me thinking about You make me laugh All the things you’re doing, trying so hard Just to ruin me but you can’t see You make me laugh, cuz you’re running around You make me laugh You try so hard to be down Talking ’bout me when I’m not around But you don’t get that you make me laugh
‘Cause I’m trying and trying to walk away But I know this crush ain’t goin’ away-ay-ay-ay-ayy Goin’ away-ay-ay-ay-ayy
The low end in Irvine is starting to catch up to the low-end declines in other markets. There is no end in sight to this carnage. In many other markets, the low-end condos have already fallen to cashflow investor levels, and there is even overshoot in some bad areas (which some may argue isn’t overshoot). In Irvine’s market, many of these condos are just starting to reach rental parity. They will fall much further.
Our real estate market is currently being supported by knife catchers with cash; the downpayments are large by historic standards. There is a finite number of people with large cash downpayments, and this number is dwindling with each purchase and continued asset price deflation.
A healthy real estate market cannot be supported by cash buyers; there simply is not enough to them to buoy a market. Eventually, the low end of the market must stabilize and these properties must appreciate. It is only once there is appreciation at the low end will buyers have a source of additional cash to ignite the chain of move-ups necessary for a self-supporting housing market. Unless there are move-up buyers with significant equity, there can be no sustained market rally.
The low end of the market has not stabilized, and pricing would suggest it is not near stabilizing levels. First, prices must stabilize, then there must be appreciation over time, only then will there be move-up appreciation equity available to sustain the market. It is one of the many reasons that real estate markets do not form “V” bottoms but instead slowly change directions in an elongated “U” shape.
One of the lowest priced 1 bedroom 1 bath condos in Irvine. Single
level condo No Stairs, Safe, Secure and Great Private Quiet Corner
Unit. Beautiful Mantle on Fireplace in Spacious Living Room, Formal
Dining Room. Crown Moulding Throughout. Sliders to Large Balcony from
Master Bedroom and from Living Room. Kitchen Breakfast Bar overlooks
Living Room and Fireplace. Master Suite with Two(2) Sink Vanity. View
of Tree Tops and City Lights at Night. Inside Laundry Room off Kitchen.
Security Bldg with Intercom, Elevator and Underground Garage Parking.
Handicap Access. HOA Provides Water(heating),Gas, Trash, Maintenance,
Pool, Spa, Lighted Tennis, Basketball Courts, Work Out Room and Tot
Lot. There are 3 High Rise Bldg-This Is The Third One-Closest to IVC.
If It Were Not For The Title Case, I Would Say It Was A Good Description.
{Adsense-ir}
This property was purchased on 7/13/2005 for $340,000. The owner used a $271,920 first mortgage, a $67,980 second mortgage, and a $100 downpayment. Well, she does have some skin in the game. It is much less than my security deposit, but she is invested…
On 2/1/2007 she refinanced with a $320,000 Option ARM with a 1% teaser rate and a $40,000 stand-alone second. Thankfully, she pulled out an extra $20,000. She might have lost her $100 downpayment otherwise.
Total property debt is $360,000.
Total mortgage equity withdrawal is $20,000.
If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $172,940. That is a substantial loss on a 900 SF 1/1.
BTW, I would like to call your attention to the newest blog in town: Irvine Homes. Erika Chavez of the OC Register is now writing a daily blog on Irvine real estate. We welcome the additional attention to Irvine this blog will bring, and I would like to wish Erika the best of luck with the new venture. I found it interesting that despite the talk of increasing sales rates, Irvine is still showing less sales this year than last. I look forward to more posts from Erika.
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.
🙂
{book2}
I hung up the phone tonight Something happened for the first time deep inside It was a rush, what a rush
‘Cause the possibility That you would ever feel the same way about me It’s just too much, just too much
Why do I keep running from the truth? All I ever think about is you You got me hypnotized, so mesmerized And I’ve just got to know
Do you ever think when you’re all alone All that we can be, where this thing can go? Am I crazy or falling in love? Is it real or just another crush?
Do you catch a breath when I look at you? Are you holding back like the way I do? ‘Cause I’m trying and trying to walk away But I know this crush ain’t goin’ away-ay-ay-ay-ayy Goin’ away-ay-ay-ay-ayy
Many prognosticators are already calling the bottom. Most are market cheerleaders who will again be wrong. The deep price reductions we are seeing today suggests the bottom may be even lower than I originally predicted.
Y’know I fell on hard times Bad luck fell on me Pay day fell on Friday And that’s a distant memory
When I predicted where the bottom will occur in Predictions for the Irvine Housing Market, I was not factoring in the impact of a severe economic recession, rampant job losses and astronomical foreclosure numbers. I did mention these factors in the post How Bad Could Bad Get? but I have been reluctant to embrace an even more bearish outlook on prices largely due to the extreme kool aid intoxication present in the market. The technical factors certainly point to a much deeper trough, but the psychological factors are still working to buoy prices. It is difficult to predict where the equilibrium between these competing forces will occur. Right now, I am hedging to the downside.
When I first suggested prices might drop 40% back in early 2007, people
thought I was crazy. Here we are a little over 2 years later, and we
are already seeing prices reflecting the percentage declines I foresaw. That tells me one thing; we should overshoot my predictions to the downside. We should not be seeing prices this low at this stage in the decline. The fact that we are does not bode well for future pricing.
As a refresher, I predicted median prices would fall from a price point near $700,000 to near $400,000 over a 5 year period.
Today’s featured property was $700,000 in 2005, and it is asking $429,900 today. That is a 38% price reduction. This property made the entire journey I outlined above, but it dropped that far in 2 years rather than 5.
The predictions I made were for the median rather than for individual properties. It is possible for the prices of individual properties to drop more than 40% while the median does not. One of the weaknesses of using the median is that it only reflects what is being spent in the market; it does not tell what was obtained for the money spent.
It is difficult to say what this property is worth due to the downward pressure on rents, but I would estimate this is quickly approaching rental parity. Assuming $2,500 a month rent, rental parity would be around $400,000. We have seen many low-end apartments condos at or below rental parity, but this is one of the first near-median properties (3/2 with 1,700 SF) we have seen to date.
It isn’t very likely that the market will bottom sooner than anticipated. There are too many homeowners with too much debt that have to be purged from the system. It is far more likely that we will reach a lower bottom than I originally estimated because if REOs are going this low now, how low will prices need to get to clear out the tsunami that is coming? We have already seen REOs from $45/SF to $100/SF all over Riverside County; that is what subprime did. Wait until the Alt-As and Option ARMs do their damage here. How low will it go here in Irvine? You tell me.
Two Story – 3 Bedrooms, 2.5 Bathrooms. Beautiful home in Universty
park. Home has spacious yard with a green belt on the other side of the
fence. Hardwood floors throughout the First Floor. Balcony of the
Master Bedroom..
This was a simple transaction. In 8/10/2005, the owner paid $700,000 using a $560,000 first mortgage, a $140,000 second, and a $0 downpayment. Just when you thought we had seen all the 100% financing deals purged from the system, you realize, there are still more out there. The lender only bid $461,588 at the auction, and they got the property anyway. They have listed it for $429,900, probably in hopes of a bidding war.
If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $295,894. This property is listed for 38% off its peak purchase price.
{book3}
Y’know I fell on hard times Bad luck fell on me Pay day fell on Friday And that’s a distant memory But don’t do me no favours Just you let me live and learn Don’t you do me no favours That I can’t do in return
So don’t do me no favours Just you let me live and learn Don’t you do me no favours That I can’t do in return
Many of you have told me you are waiting for me to call the bottom. I am not going to do that. The bottom will not need to be called because when it is time to buy, the numbers will tell you so.
You are young and life is long and there is time to kill today And then one day you find ten years have got behind you No one told you when to run, you missed the starting gun
I will never call a bottom. For any of you waiting for the big announcement on the IHB that the bottom is here, that announcement will never come.
I have written about the market bottom on a number of occasions including: The Market Bottom and Fundamentals at a Market Bottom, and I have predicted where the bottom will occur in Predictions for the Irvine Housing Market, and I followed up with I Was Wrong, It’s Worse… But today, I want to talk about what will happen when we get near the bottom of the market and why I will not need to call it–and no, it isn’t because I am afraid to. It is because it is unnecessary.
I will profile properties, and I will
discuss what I believe the value of these homes are based on rental and
income numbers. At some point, probably 2 years from now, asking prices and comparable sales prices should be at or below reasonable valuation
levels based on rent and income. It will not be a call to buy, it will
merely be a comparison of value to current pricing. When current
pricing is below values based on cashflow, it is an implied buy signal. It
doesn’t mean property values might not decline further, but it does
mean that even if that occurs, you are still saving money owning versus
renting and declining values are not going to hurt (as much).
For instance, right now in several markets, there are properties
trading at a discount to rental parity or even cashflow investor
levels. Go to Redfin and look at some of the properties in Riverside
County. They are everywhere. If I were to do a cashflow analysis of
these properties and show price levels of rental parity and cashflow
positive investment value, you would see that the current comparable
sales are trading below these levels in many instances. That is a buy
signal. At some point in the future, not now, the same analysis will
point to buying in Irvine’s market.
I have been experimenting to find a simple way to communicate these ideas in a report people can easily understand. The chart to the left is my attempt. Let me explain what everything means:
Each property is subjectively evaluated to determine its desirability as a long-term residence. This is a subjective evaluation. For instance, today’s featured property would be an excellent long-term home. It is a large home in a good neighborhood with few negatives. If the best properties in the entire market would rank a 1, and if the very worst would rank as a 5, this one, IMO, is a bit better than a 2. The little green dot represents my subjective evaluation of this property.
The black dots represent different important price points every buyer should be aware of. The first is the “value,” if you want to call it that, of comparable sales in the market. This has nothing to do with cashflow, and it is based totally on what people are currently paying for similar properties in the market. As we all know, we are still deflating from a massive housing bubble, so this comparable sales value in Irvine is currently well above any reasonable cashflow metric. The Comparable Sales Value floats up and down this chart based on whatever people are currently paying.
The next black dot on the list is the asking price. This can also be just about anywhere. The frequent WTF listing prices I profile here would be off the top of the chart. Hopefully, if anyone is actually considering buying in this market, they would at least try to pay less than current comparable sales.
The next black dot on the list is the Maximum Cashflow value of the property. Do you remember the post, Investment Value of Residential Real Estate? As I begrudgingly described in that post, there is a legitimate financial reason to pay more than rental parity for blue-chip properties a buyer plans to own for 10 years or more. This is not a large premium over rental parity. The calculations in that post demonstrate you can pay up to 10% more than rental parity on a long-term hold because you obtain the benefit of the inflation hedge. This is not a price point for homes you know you will want to move up and out of in a few years.
The next black dot on the list is the oft-described rental parity. One of the better discussions of this concept is contained in Rent Versus Own. This is the price level most properties in Irvine should reach at the bottom of the market. At this price point, the cost of ownership is equal to the cost of a rental. In theory, a buyer considering only financial concerns would be indifferent between renting and owning at this price point.
The zone between rental parity and cashflow investor levels is the gray area where all the less desirable properties fall. This would include most condos, any two-bedroom properties and what are commonly known as “starter homes.”
The final black dot is the cashflow investor level. This is the price point where an investor can acquire a property, rent it out, and turn a monthly profit from owning the property. This is the bottom of the line for Irvine properties, and it is usually about 25% below rental parity. Many of the crappy condos that have been leading the charge to the bottom will find support at this price point.
The final number on the chart would be those properties nobody wants to live in. Does everyone remember Dr. Housing Bubble’s series Real Homes of Genius? Those are the properties I am talking about. What they really need is a bulldozer.
So with that lengthy preamble, let’s examine what a good deal would look like. Take a look at this listing in Corona, California. I have not pulled comps for sales and rentals, but just by looking at the property and the price, I can make a barely educated guess about the dynamics of the property. To me, this looks like a nice median Corona property. The pricing should be at rental parity; however, looking at this asking price and the comps, it certainly appears as if both comparable sales and the asking price are below rental parity. This would be a property to buy, assuming you want to live in Corona (I am not endorsing buying this specific property as I have not researched it in detail). A person looking at a property like this one in Corona would see a chart like the one at the left.
You see, there is no need to “call a bottom.” I only have to identify good deals. Over time there will be an
emergent trend where each day here at the IHB we see more and more
properties trading at or below rental parity. When that occurs, the
bottom, although not called by anyone, will be under our feet.
Rare find. Light, Bright and Spacious Home in Woodbridge. 4 Bedrooms
plus a den with 3 Baths. Vaulted ceilings, Sunken Living Room,
Breakfast Area, Fireplace in Family Room and Master Suite. Private Pool
in the Backyard. Woodbridge features 2 Lakes and Private Beaches, lots
of Parks, Pools, and Tennis Courts. Walk to schools and close to
Freeways and Shopping.
This property was purchased for $639,000 on 6/24/1996. The owner used a $500,000 first mortgage and a $139,000 downpayment. Just for giggles, I calculated the compound rate of return this property witnessed between 1996 and 2009. It works out to 2.16%.
2.16%
1996
$639,000
1997
$652,818
1998
$666,936
1999
$681,358
2000
$696,093
2001
$711,146
2002
$726,524
2003
$742,235
2004
$758,286
2005
$774,684
2006
$791,437
2007
$808,552
2008
$826,037
2009
$843,900
So much for the rampant appreciation of the bubble. At least this owner cashed out. She got a $750,000 first mortgage and a $300,000 second from Lehman Brothers back in 2006.
If this property sells for its asking price, if a 6% commission is paid–and this one probably will as it is priced below neighborhood comps–the trusties for the Lehman Brothers bankruptcy will lose $256,734.
This price isn’t at rental parity, and it isn’t at maximum cashflow value either, but it is making significant progress toward affordability. Wait, prices will get better.
{book5}
Ticking away the moments that make up a dull day You fritter and waste the hours in an off hand way Kicking around on a piece of ground in your home town Waiting for someone or something to show you the way Tired of lying in the sunshine staying home to watch the rain You are young and life is long and there is time to kill today And then one day you find ten years have got behind you No one told you when to run, you missed the starting gun
And you run and you run to catch up with the sun, but its sinking And racing around to come up behind you again The sun is the same in the relative way, but youre older Shorter of breath and one day closer to death
What are we living for? Two-roomed apartment on the second floor. No money coming in, The rent collectors knocking, trying to get in.
What level of affordability are we waiting for? Well, something better than a 2 bedroom apartment for those making over the median income. This is the definition of a property thats value should never exceed rental parity. Why would anyone pay more than the cost of ownership for an apartment?
We all know people did this due to fantasies of appreciation. I doubt anyone would pay a premium for a property like this one for any other reason. Would you? The REO trustee is hoping someone will. Based on the nearby comps, I doubt it will happen.
Beautiful Condo in Oak Park Gated Community. Very clean 2 bedroom, 2.5
bath. Beautifully upgraded master bath with granite counters. Nice
floorplan with kitchen open to dining room and living room. 2 car
tandem garage attahed. Good location within tract, near pool, shopping
and schools. Come and see this beauty in Irvine.
attahed?
Short and sweet.
This property was purchased on 8/10/2005 for $549,000. The owner used a $439,200 first mortgage, a $54,900 second mortgage, and a $54,900 downpayment. You can see more of these properties where the owner had a significant downpayment walking away now the prices have moved down so far. There is a point where people are so far underwater that they just give up. Statistics show this amount is not typically very large as the default rates increase dramatically once people go under.
If this property sells for its asking price, and if a 6% commission is paid, then the total loss on the property will be $168,394. Both loans were from Countrywide, and they ended up in BSALTA 2005-09. If you want to see why Bear Sterns went under it is here. They were loaning people half a million dollars to buy 2 bedroom apartments. Great business plan.
{book4}
Theres a crack up in the ceiling, And the kitchen sink is leaking. Out of work and got no money, A sunday joint of bread and honey.
What are we living for? Two-roomed apartment on the second floor. No money coming in, The rent collectors knocking, trying to get in.
We are strictly second class, We dont understand, (dead end!) Why we should be on dead end street. (dead end!) People are living on dead end street. (dead end!) Gonna die on dead end street.
New Listing (24 hours)
I have been experimenting to find a simple way to communicate these ideas in a report people can easily understand. The chart to the left is my attempt. Let me explain what everything means:
So with that lengthy preamble, let’s examine what a good deal would look like. Take a look at 
