For What It’s Worth — Buffalo Springfield
It’s time we stop, hey, what’s that sound
Everybody look what’s going down
House prices: house prices are going down. That sound is the weeping and gnashing of teeth of speculators and homedebtors everywhere.
A thousand people in the street
Singing songs and carrying signs
“Bail me out” printed on every sign. Banks, automakers, insurance companies, and of course, overextended homeowners.
Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid
Is market psychology starting to change? The next stage after denial is fear. Has the severity of the recession changed people’s opinions?
The Psychology of the Bubble
Actually, from what I have observed, the market psychology is different at different stratas of the market. The low end is already approaching capitulation. There is no more hope for people holding on at the low end. The middle of the market is starting to feel fear. Prices are starting to significantly weaken, and those priced near the median are starting to show larger discounts. The high end of the market is still in denial.
The high end has the least reason to hope. Their denial is rooted in the continuing activity of knife catchers, but jumbo rates are rising, and the knife catchers are nearing exhaustion. The collapse in both pricing and market psychology is working its way up the food chain.
{book}
Today’s featured property is a low-end condo approaching its 2003 purchase price. I featured a similar property over a year ago. 93 Tarocco was asking $389,000, and it was being touted as an “investment property”. The investor must not be very happy right now…
Income Requirement: $68,725
Downpayment Needed: $54,980
Monthly Equity Burn: $2,290
Purchase Price: $235,000
Purchase Date: 2/13/2003
Address: 33 Tarocco, Irvine, CA 92618
Beds: | 2 |
Baths: | 2 |
Sq. Ft.: | 995 |
$/Sq. Ft.: | $276 |
Lot Size: | – |
Property Type: | Condominium |
Style: | Cape Cod |
Year Built: | 1983 |
Stories: | 1 |
Floor: | 2 |
Area: | Orangetree |
County: | Orange |
MLS#: | S556458 |
Source: | SoCalMLS |
Status: | Active |
On Redfin: | 1 day |
New Listing (24 hours)
|
Beautiful End Unit; very Private, Light & Bright; Great Location
Walking Distance to Irvine Valley College; nearby UCI, Irvine Spectrum,
Shopping Mall, Business area and major freeways. Custom Paint, New
flooring, Inside Laundry.
- This property was purchased on 2/13/2003 for $235,000. The owner used a $188,000 first mortgage, a $47,000 second mortgage, and a $0 downpayment.
- On 11/4/2003 he refinanced for $245,000.
- On 9/27/2004 he refinanced for $275,000 using an Option ARM with a 3.66% teaser rate.
- On 4/25/2006 he opened a HELOC for $72,500.
- Total property debt is $347,500
- Total mortgage equity withdrawal is $112,500 — a hard working little condo…
Washington Mutual took back the property on 11/13/2008 for $289,800 which is likely the outstanding balance on the Option ARM. If this is accurate, Washington Mutual actually has loans totalling $362,300 on this property. If it sells for its asking price, and if a 6% commission is paid, the total loss to Washington Mutual will be $104,270. I thought Washington Mutual was supposed to be a conservative lender…
What do you think this would rent for? $1,750? How much rent would be required for an owner-occupant to break even?
This is still 10% or more above owner-occupant breakeven. It is 10% above based on the calculations presented here, but since an owner-occupant who is at this income level isn’t going to see as large a tax break as I am showing here, it probably needs to drop another 20% to reach rental parity. Of course, the whole discussion of owner-occupant breakeven assumes there is someone willing to live in this place long term. In all likelihood, this will be bought by an investor looking for positive cashflow. When I wrote the post on 93 Tarocco, I quipped that the price would need to fall to $180,000 to find a rational cashflow investor. I think that price is about right for this one as well.
Sponsored Posts
This brings me to another subject I want to discuss with the IHB community. To date we have been a completely non-commercial website. We make a few bucks with ads, and I have made a few bucks selling books, but we have never been focused on monetizing the IHB.
We have been approached by a realtor that would like us to profile properties outside of Irvine and provide our unbiased opinion of the investment potential. If we decide to do this, the posts would only appear on the weekend, and they would only be properties that are at rental parity or below using the same analysis pictured above. Our motivation for doing this is twofold: one, it would be nice to make a few extra dollars, particularly in this economy, and two, I would like to show that we are not permabears. There is a price point where real estate investment makes sense, and when we find properties selling at these price levels, I will point out that they might be good deals. In fact, the only announcement we will make about the bottom of the market will be a slow transition from mocking overpriced properties to featuring what appear to be good deals. Hopefully, we will start to do this for Irvine properties in the coming years. Until then, sponsored posts on properties outside of Irvine are as bullish as we will get. We will probably profile a couple of these properties early next year, and if the response is not negative, we will continue to do so.
P.S. Check out my interview on South OC Real Estate Tracker.
{book}
There’s something happening here
What it is ain’t exactly clear
There’s a man with a gun over there
Telling me I got to beware
I think it’s time we stop, children, what’s that sound
Everybody look what’s going down
There’s battle lines being drawn
Nobody’s right if everybody’s wrong
Young people speaking their minds
Getting so much resistance from behind
I think it’s time we stop, hey, what’s that sound
Everybody look what’s going down
What a field-day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side
It’s time we stop, hey, what’s that sound
Everybody look what’s going down
Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid
You step out of line, the man come and take you away
We better stop, hey, what’s that sound
Everybody look what’s going down
Stop, hey, what’s that sound
Everybody look what’s going down
Stop, now, what’s that sound
Everybody look what’s going down
Stop, children, what’s that sound
Everybody look what’s going down
For What It’s Worth — Buffalo Springfield