The collapse of the low end has arrived in one of Irvine’s most desirable neighborhoods. Entry level affordability is coming soon.

Today’s featured property is REO–not a short sale–being offered at 30% off peak pricing. The price is still too high.

Asking Price: $298,000

Address: 33 Costa Brava, Irvine, CA 92620

My Rifle, My Pony and Me – Dean Martin and Ricky Nelson

The sun is sinking in the west
The cattle go down to the stream
The redwing settles in the nest
It’s time for a cowboy to dream

Does affordable housing seem like an impossible dream? Are we fools at the IHB because we believe affordability will return to the market? Sellers and owners sure hope we are, but as prices crash all around us, and now even within the Irvine Sacred Land Trust, the reality of affordable housing is soon to be upon us.

This neighborhood is a bloodbath in the making. There are three foreclosures-in-waiting nearby:

21 Arboretum, Irvine, CA 92620 — asking $450,000, paid $535,000.

15 Costa Brava, Irvine, CA 92620 — asking $379,000, paid $498,000.

216 Guinevere, Irvine, CA 92620 — asking $400,000, paid $519,500.

Woodbury, like Quail Hill and Northwood II, is going to be wiped out by the next wave of foreclosures. Everyone who bought in these neighborhoods overpaid, and most used some form of toxic financing that is going to blow up. If is not a matter of “if,” it is only a matter of “when.”

Asking Price: $298,000

Income Requirement: $74,500

Downpayment Needed: $59,600

Monthly Equity Burn: $2,483

Purchase Price: $449,500

Purchase Date: 5/1/2006

Address: 33 Costa Brava, Irvine, CA 92620

Beds:	1
Baths:	2
Sq. Ft.:	975
$/Sq. Ft.:	$326
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	2006
Stories:	2
Floor:	1
Area:	Woodbury
County:	Orange
MLS#:	S563973
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

The original buyer of this property paid $449,500 on 5/1/2006. He used a $359,657 first mortgage, a $67,435 second mortgage, and a $22,408 downpayment. Not to worry, on 10/16/2006, he opened a HELOC for $146,266 and got back his downpayment plus $56,383. I hope he sent his appraiser a Christmas card. The lender took back the property in foreclosure on 11/3/2008 for $392,062. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $225,803: quite a loss for a 1 bedroom property.

{book1}

The sun is sinking in the west
The cattle go down to the stream
The redwing settles in the nest
It’s time for a cowboy to dream
Purple light in the canyons
That’s where I long to be
With my three good companions
Just my rifle, pony and me
Gonna hang (gonna hang) my sombrero (my sombrero)
On the limb (on the limb) of a tree (of a tree)
Comin’ home (comin’ home) sweetheart darlin’ (sweetheart darlin’)
Just my rifle, pony and me
Just my rifle, my pony and me
(Whippoorwill in the willow
Sings a sweet melody
Riding to Amarillo)
Just my rifle, pony and me
No more cows (no more cows) to be ropened (to be ropened)
No more strays will I see
Round the bend (round the bend) she’ll be waitin’ (she’ll be waitin’)
For my rifle, pony and me
For my rifle, my pony and me

My Rifle, My Pony and Me – Dean Martin and Ricky Nelson

Who’ll Stop The Rain — Creedence Clearwater Revival

Long as I remember
the rain been comin’ down.
Clouds of myst’ry pouring
confusion on the ground.

The difference in asking prices between those who must sell their properties and those who do not is pretty remarkable. When I wrote about the ARM Problem, I laid out the case for destruction of pricing at the high end. Basically, the low end has been wiped out because this is where subprime was concentrated, and the high end is in a low-volume holding pattern waiting for the Alt-A and Option ARM resets to wipe them out. There have been some feeble attempts to make light of this problem, but I have not seen any compelling reason to believe these resets will not flatten the market. In fact, the mainstream media is starting to pick up on the fact that there is a Growing Foreclosure Crisis. I wrote the post, When Not If, to more clearly illustrate the ARM problem and show how it will impact one particular property. It will be one of many.

What I want to show today is just how devastating must-sell inventory is to a housing market. We have already seen the low end get blasted, but how significant are the discounts on high end properties when they become distressed? To illustrate I have two properties to view today. One is a distressed sale asking $1,073,100 and the other is a non-distressed homeowner asking $1,599,900. I don’t see many differences between these properties, but I will let you decide if one of them deserves a 50% premium over the other.

First our non-distressed property:

Asking Price: $1,599,900

Income Requirement: $400,000

Downpayment Needed: $320,000

Monthly Equity Burn: $13,333

Purchase Price: $589,000

Purchase Date: 12/23/1997

Address: 15 Spring Grove, Irvine, CA 92620

WOW! the CAPS LOCK goes ON AND off.

Super clean? So what?

shuttres?

One sign of the lack of distress (or perhaps greed) is the extra $900 in the price tag. This guy was only willing to leave $100 on the table when dropping the price below $1,600,000. I suppose he could have priced it like gas and asked for $999.99 and 9/10.

Eleven years of ownership, and this guy thinks his property has tripled in value, and he deserves to make $1,000,000. Why not hang on for 33 years and make $3,000,000?

And now our distressed property:

Asking Price: $1,073,100

Income Requirement: $268,275

Downpayment Needed: $214,620

Monthly Equity Burn: $8,942

Purchase Price: $1,150,000

Purchase Date: 7/15/2003

Address: 2 Clear Creek, Irvine, CA 92620

BTW, this is a 2003 Rollback at the high end.

These properties are very similar. The more expensive one has a bigger yard, a pool and one additional bedroom, but it is closer to Culver. The sizes are identical. The less expensive one is on the end of a cul de sac.

Each of these properties has plusses and minuses, and people can construct rational arguments why each one commands a premium over the other. I can’t come up with a good argument why one of them is 50% more expensive than the other… except that one is a distressed sale and one is not.

These distressed sales are going to greatly reduce prices. They already are.

{book}

Who`ll Stop The Rain

Heard the singers playin’
how we cheered for more.
The crowd had rushed together,
trying’ to keep warm.
Still the rain kept pourin’,
fallin’ in my ears,
and I wonder, still I wonder
who’ll stop the rain.

Who’ll Stop The Rain — Creedence Clearwater Revival

Remove Yourself — Candiria

Touch what you can’t have
While i have what you can’t touch for now
My friend, all of this will turn to ash

Cash-strapped homedebtors going through a foreclosure often look for ways to get a few dollars out of the property before they give it back to the lender. One common way is to strip down the property and sell everything of value.

When I was in school, I had the privilege of helping a man named Frank Little as he retooled his architecture practice. He did a great deal of research on the tax code and the distinctions between what is personal property and what is a fixture of real estate. In architectural design, it is possible to create construction drawings to have what would ordinarily be classified as a fixture (part of the real estate) be classified as personal property. There are major tax advantages to this classification as you can greatly accelerate the depreciation. In working with Frank, I gained some knowledge of the grey areas between real estate and personal property.

The distinction between fixtures and personal property becomes very important when one is facing foreclosure. The personal property is yours, and you can do what you want with it. However the fixtures are real estate, and as such, they are part of the lender’s collateral. If you remove and sell fixtures, you are potentially stealing from the lender and reducing the value of the collateral.

Most people going through foreclosure could care less about the lender’s collateral. In fact, some people intentionally trash the place simply out of spite. In the weekend open thread, I mentioned a property in Beaumont (35756 Trevino Beaumont,
CA 92223: $492,000 new in 2006, asking $122,850 today. That is a property just over 2 years old (December 2006 to January 2009) selling at a 75% discount.) This property is selling for such a steep discount because the previous owners stripped the house before they left.

I mention all this because a reader sent me a Craigslist ad where a guy facing foreclosure is offering to sell everything in the house, including the fixtures. Here is the ad:

“My $1.5 Million dollar house was built last year and I just lost my job
after 10 years of service and can’t pay $10,000 a month. I pray to GOD
to the other families who are in the same position.

I will list the New prices so make your BEST OFFER.

LIST OF NEW PRICES, MAKE YOUR BEST OFFER. ############

40 White flush 6 inch Can lights $145 each obo

3 white Stairway lights $620 total obo

10 J-Boxes $185 each obo

Greyfox Intercom System Package, Master station, 3 interior sub stations, 1 exterior $2,640 obo

Central Vacuum System with accessory kit Dirt Devil pro series 690 12w x 39tall $2,840 obo

15 universal outlets $275 each obo

KITCHEN CABINETS total $12,650 obo some sizes 23.75w x 52.75single,
30w x30 tall double, 30w x25 double, 2) 36w x12.5 drawers, 33w x 10
drawer, 30w x5 drawer and more in Island etc.

20 about Kitchen Knobs polished nickel $950 total obo

Kitchen Island cabinets $1,435 obo

Undertone Undermount stainless steel Sink Kohler k3356, 29.5w x 34.5 with garbage disposal $980 obo

(SOLD) Wolf Stainless Steel 30” x 50 tall double over with professional handles $3,045 obo

(SOLD) Thermador Stainless Dishwasher with professional handles 23w x 34.5 tall $1,020 obo

(SOLD) Thermador Stainless built-in Microwave with trim kit $490 obo

(SOLD) Wolf stainless 36” Gas cooktop 5 burners $1,790 obo

KitchenAid wine cooler stainless 24” separate climate for red and white holds 48 bottles $1,570 obo

Sub Zero FRIGERATOR with ice and water 42w x 84tall $10,845 obo

Bathroom tub enclosure clear glass doors 58wx 62tall $540 obo

Bathroom stand up shower enclosure clear glass door $540 obo

Framed Mirror master bath 74w x 45 $1,235 obo

Framed Mirror guest bath 30w x 42 $620 obo

WHITE SHUTTERS 20 WINDOWS 4 1/2 inch blades double and single

49w x60tall double, 19 w x36.5 tall single, (3) 37w x 42tall, (3) 25w x 60tall, 24 3/4w x48 3/4tall

(6) 36.5 x 60 3/4 double, $400 each obo

5 Mirrored medicine cabinets 16w x 26 tall $400 obo

2 Mansfield toilets $400 each obo

2 Bathroom towel racks polished nickel $60 obo

4 Bathroom lights with 3 hanging glass bells $100 obo

13 DOORS with fancy double molding (3) 29 3/4w x 79, (5) 31 3/4 x 79, 29.5w x 79, 27 3/4 x 79,

32w x 79 mirrored on each side $250 obo

Bradford White hydrojet energy saver 50 gallon defender safety system WATER HEATER $400 obo

15 Journeyman security double halogen lights motion sensored $30 obo
“

Looking over his list, I don’t see much there that would qualify as personal property. Nearly everything there is part of the lender’s collateral. If you don’t believe me, read the definition of “fixture” and tell me what you think. I have left off the name and phone number, but I have left the link to the Craigslist ad so that you know it is for real.

Is this stealing? Technically, the guy still owns the house and all the fixtures therein. There are probably provisions in the mortgage that prevents the sale of fixtures after a default, but who would enforce it? If you purchased this stuff, are you stealing? Does the technical definition matter? Is this right or wrong?

Let’s assume that technically this is not stealing because the guy owns the house. Is it OK for you to buy the stuff and screw the lender?

Let’s assume that this man is stealing from the lender. Are you participating in a crime by buying his stolen goods?

Would your ignorance to the crime make it OK? Most people who respond to a Craigslist ad like this are not going to know or understand the nuances of personal property law as it pertains to imminent foreclosures. Most would not care.

Would you buy from this guy?

So digest your consequences
The Serpent’s venom runs inside of you
Your lust, desire will blind your senses
Whirlwinds of disaster for you

{book}

Today’s featured property is NOT the one mentioned in the Craigslist ad. The only reason it is not is because the owner has not decided to strip it down… yet.

Asking Price: $1,599,000

Income Requirement: $399,750

Downpayment Needed: $319,800

Monthly Equity Burn: $13,325

Purchase Price: $1,891,000

Purchase Date: 6/28/2006

Address: 25 Fresco, Irvine, CA 92618

Beds:	3
Baths:	3
Sq. Ft.:	3,100
$/Sq. Ft.:	$516
Lot Size:	8,500 Sq. Ft.
Property Type:	Single Family Residence
Style:	Tuscan
Year Built:	2006
Stories:	1
Floor:	1
View:	City Lights, City, Greenbelt, Hills, Mountain, Panoramic, Valley
Area:	Quail Hill
County:	Orange
MLS#:	S537000
Source:	SoCalMLS
Status:	Active
On Redfin:	214 days
Unsold in 90+ days

Intermittent CAPS LOCK.

flring? rm? drs? incl? Outdr? thruout? Can’t find room for a few more letters (throughout)?

VICARA in QUAIL HILL. Am I the only one who reads “Viagra” every time “Vicara” is mentioned? Viva Vicara…

This property was purchased near the peak on 6/28/2006 for $1,891,000. The owner used a $1,511,200 first mortgage, and a $379,800 downpayment. Wow, that must suck. This guy is losing all of his money.

If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $387,940. Since this almost exactly matches the owners downpayment, you have to suspect the price will get pretty sticky right where it is. This listing price history is agony in motion:

Each price drop comes right out of this guys downpayment. For his sake, I hope he sells it before it becomes a short sale. It doesn’t look very promising.

{book}

Men of the Earth
You have soiled you’re so foul
With lips of infected sullen
You will indulge yourself

Touch what you can’t have
While i have what you can’t touch for now
My friend, all of this will turn to ash

Remove Yourself — Candiria

Tonight is the night…

Lemon — U2

And I feel
Like I’m slowly, slowly, slowly slipping under
And I feel
Like I’m holding onto nothing

Over the last two days, we have discussed debt-to-income ratios and how people are financing current purchases. One of the topics mentioned in the comments and in a recent thread in our forums is the large downpayments people are using. (see this excel file)

There were a significant number of all-cash transactions, particularly at the high end where you would expect to see them. When you take out the all-cash deals and look at the 85% of transactions where there was some form of financing, you see that the median downpayment was $150,000. This is 25% down. This is very high. This level of downpayment is unusual in a normal real estate market. Needless to say, it was much, much lower during the bubble rally. The reason is simple: how many people have that kind of cash saved up? Not very many.

We have another forum thread going on the phenomenon of cash buyers. No discussion of this topic would be complete without theories of how rich foreign buyers will save the housing market.

In yesterday’s comments, a new poster named samuroo had recently sold his property. He made this observation:

“We priced aggressively and sold our property in 3 days with 10
written offers on the table. The offers were from a mix of people. We
had one investor (the only one to offer below asking) and the rest were
first timers, move-uppers, or someone buying for someone else (for
children or grandparents). Only one offer was 20% down, the rest
ranged from 40% to all cash. All offers were from asians (except one
Brazilian). The offer we accepted was a first time buyer with
substantial down.

The one thing that seemed consistent among all the offers as well as
those that came looking was that they believed the market was near
bottom and that Irvine is still the place to be.”

I have no doubt that his observation is correct and accurate. So the question is will foreign money or the extremely kool aid intoxicated support the housing market?

{book}

Rich Toscano, from Piggington and Voice of San Diego, has made this observation:

“Investors from other countries are well known to be the very last
participants to arrive at the scene of a financial bubble. They are the
last to hear about all the riches to be made, the last to buy in, and
the last to realize that the party is over…

Far from being a positive fundamental, a sudden excess of foreign
participation in an asset market is indicative of ill-informed
speculative money at work. When the foreigners really start piling on,
it’s always a good sign that the end of the bubble is nigh.”

Foreign money can support prices for a while, but if market forces are working to drive prices lower, this buying support will be overwhelmed by the supply for sale.

So what about kool aid intoxicated zealots? Most people believe house prices will rebound quickly and that there are certain neighborhoods that are immune to the price decline. I have made fun of Turtle Ridge on many occasions for this attitude. If people believe prices cannot fall in a certain neighborhood, they are far more likely to buy there. If the neighborhood is small enough, and the number of buyers is large enough, it can become a self-fulfilling prophecy. In my opinion, the neighborhood most likely to see this phenomenon is Turtle Rock because there will be fewer toxic mortgages there. Turtle Ridge is toast. Is it possible for zealots to buy up all of Irvine?

In the short term, zealots and foreign money can support a housing market. As long as there are enough buyers willing to pay current prices to absorb the market inventory, prices will find an equilibrium. As some point the number of buyers with significant cash downpayments is depleted, and the inventory of houses for sale exceeds the number of available buyers at a particular price level. When this occurrs, prices fall.

Historically, high downpayment requirements has lead to lower prices because there are so few with downpayments, and there are so many houses that need to be sold. Is it possible that there will be enough buyers to support prices at valuations permanently detached from fundamentals? Well, anything is possible, but if history is any guide, then the answer is no. Cash buyers will continue to provide the liquidity for the low transaction volumes witnessed during price declines. They are the designated bagholders. When prices reach levels of affordability, transaction volumes will increase, prices will stabilize, and the market will be healthy again.

And these are the days
When our work has come assunder
And these are the days
When we look for something other

Asking Price: $240,000

Income Requirement: $48,000

Downpayment Needed: $60,000

Monthly Equity Burn: $2,000

Purchase Price: $367,000

Purchase Date: 12/22/2006

Address: 105 Lemon Grove #264, Irvine, CA 92618

plust?

View of trees from
living room balcony. Wow! that is a big plus. Next they will be advertising a view of sky from your window…

Today’s property needs someone to rescue it. The price drop in these low-end condos is pretty extreme. This property was purchased on 12/22/2006 for $367,000. The owner used a $293,600 first mortgage, a $55,050 seller-financed second mortgage, and an $18,350 downpayment. The lender took back this property on 10/3/2008 for $206,932.

That is 44% off the peak.

If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $141,400. That is a hefty loss on an 819 SF one-bedroom apartment condo.

I would be interested in finding out what happened to the seller financed second mortgage. This was a private agreement between two individuals. Do you think the buyer who lost the place in foreclosure is paying it off? Do you think the seller who financed this deal at the peak and made a huge windfall feels ripped off because he didn’t get the last $50,000 out of the deal?

Where are the zealots? Where are the cash-rich buyers? Do you think the market can selectively crash? Will condos drop 60% while SFDs only drop 20%?

{book}

Lemon
See through in the sunlight
She wore lemon
But never in the daylight
She’s gonna make you cry
She’s gonna make you whisper and moan
And when you’re dry
She draws her water from the stone
And I feel
Like I’m slowly, slowly, slowly slipping under
And I feel
Like I’m holding onto nothing

Midnight is where the day begins

Lemon — U2

Remember, tonight is the night. I hope to see all of you there.

Give It Away Now — Red Hot Chili Peppers

Give it away give it away give it away now
I cant tell iff Im a king pin or a pauper

In yesterday’s rather lengthy post, I discussed Debt-To-Income Ratios: The Forgotten Variable. Today, I want to bring together parts of that post with other issues in the marketplace to paint an accurate picture of where we are. In the discussion on DTIs, I had the following table that shows how the median income household is financing median income properties.

The chart would suggest that people who are still borrowing 6 times their income are doing so by utilizing DTIs near 50% (which represents almost 80% of take home pay). The reality is slightly different. Lenders are telling me that most people buying today are using 5-year and 10-year interest-only mortgages to get the DTIs down to somewhat manageable levels. So how does that math work out?

A median income household earning $91,101 can put $2,885 toward housing payments and expenses if they utilize a 38% DTI. (I think this is insanely high, but the government seems to think this is manageable.) If 20% of the $2,885 needs to be set aside for taxes and insurance ($577 per month), then $2,308 can be put toward an interest-only mortgage payment at 5%. This will finance $553,920 which is a little over 6 times income. Add a downpayment to this, and median income households can “afford” a house price between $550,000 and $650,000. The numbers are a bit smaller with the higher jumbo interest rates, but the downpayment requirements are higher too. Plus, some lenders will still allow DTIs higher than 38%.

People using 38% DTIs, 10-year interest only mortgages and downpayments of 5% to 20% are sustaining the housing market.

Are you willing to do this? I’m not.

For this method of finance to sustain home ownership, mortgage interest rates will need to be at 5% in 10 years time and prices will have to be equal to or greater than they are today. If those two things do not happen, today’s buyers will not be able to refinance, and they will be in the same circumstances as those facing foreclosure today. The only other thing they can hope for is that they will have a much higher income to afford the payments.

In the 10 years while these homedebtors are waiting to see if they can refinance, they will endure crushing housing costs that crowd out all other forms of consumption or savings. People buying today do not believe the harsh economic realities of making crushing mortgage payments is going to go on very long. Most believe that appreciation is right around the corner and with it, they will be able to get a HELOC and begin supplementing their missing income through mortgage equity withdrawal.

Do you think that is going to happen. I don’t.

So there you have it: people buying today are doing the following:

• Using 38% DTIs and interest only financing,
• Betting the interest rates will still be at 5% when they need to refinance in 5 or 10 years,
• Betting their house will appreciate between now and when they need to refinance,
• Counting on rapid appreciation soon to provide free money they can tap with a HELOC,
• Counting on banks giving them a HELOC after the banks just lost a trillion dollars doing the same.
• Putting their faith in the Real Estate Gods to make it all happen.

It this does not work out as planned for today’s buyers, they will be renting from their lender for 5 or 10 years, then they may be evicted when they fail to make the increased rental payments on the banks money that will come due after their loan resets. During their rental period, they will be paying 30% to 40% more than traditional renters will be paying for the same property.

Greedy little people in a sea of distress
Keep your more to receive your less

So why are people doing this? Fear and greed. They are afraid that if they do not buy now, they will never get the chance again, and more importantly they want that free HELOC money they think is coming back soon. Fear might compel someone to buy, but only greed will compel them to pay that much.

In my opinion, if you took away the enticement of free money, prices would collapse almost immediately. We have documented on this blog the hundreds of thousands of dollars of free money borrowers got from their lenders. For those who sold at the peak, the money was totally free, and for those who didn’t, they have to pay with damaged credit. Big deal. They all got to spend or keep the free money.

Californian’s have learned this free money is there, and all they have to do is buy real estate to get it. The collective insanity of everyone believing and acting on this idea makes prices rise and makes the fantasy a reality. Right now, the only thing preventing this from happening is reluctance on the part of lenders to give away another trillion dollars in free money to people who will not pay them back. Personally, I don’t think this reluctance from the lenders is going to change. Funny how losing a trillion dollars will make you a bit more cautious…

{book}

It seems like there are some properties people just don’t want. I can
understand all the crappy little condos in The Lakes (Lakepines,
Pinewood, Streamview, etc.) but when you see newer, larger, more
desirable properties still in the system and still with declining
prices, you have to wonder what is going on. Today’s featured property was first on the IHB as a 2003 rollback in August of 2007, right as the credit crunch hit. It has been almost a year and a half since this property was first featured, and it is still making its way through the system.

Do you see why the hangover from the Great Housing Bubble is going to last longer than most people realize? We will be dealing with properties like this one for the better part of a decade. We still have a number of resets in 2011. It isn’t hard to imagine some of those still polluting the market in 2014. Plus we have all the knife catchers from 2007 and 2008 who used 5 year interest-only ARMs to clean up after.

Asking Price: $499,900

Income Requirement: $124,750

Downpayment Needed: $99,800

Monthly Equity Burn: $4,158

Purchase Price: $735,000

Purchase Date: 5/4/2006

Address: 144 Saint James #54, Irvine, CA 92606

Beds:	4
Baths:	3
Sq. Ft.:	1,931
$/Sq. Ft.:	$259
Lot Size:	–
Property Type:	Condominium
Style:	Contemporary
Year Built:	2002
Stories:	2
Floor:	1
Area:	Walnut
County:	Orange
MLS#:	S538589
Source:	SoCalMLS
Status:	Active
On Redfin:	188 days
Unsold in 90+ days

planation?

If you look back at the original post, you see that the sellers were asking $651,900 in August of 2007. Now the asking price is $499,900.

This property was purchased on 5/4/2006 for $735,000 by a Married Woman as her sole and separate property. She used a $588,000 first mortgage, a $147,000 second mortgage, and a $0 downpayment.

The property was taken back by the lender on 3/13/2008 for $564,750. The second mortgage was wiped out.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to whoever holds New Century’s toxic waste will be $265,094.

Yes, I can see where lenders and investors will be ready to start handing out HELOCs and second mortgages again soon…

{book}

Greedy little people in a sea of distress
Keep your more to receive your less
Unimpressed by material excess
Love is free love me say hell yes

Give it away now
Give it away now

Give It Away Now — Red Hot Chili Pepper