Don’t Panic — Coldplay

Prices are sinking like stones, and we are all done for. It it time to panic?

People will not panic this year. This will be the last year of denial. Only the weakest of speculators have been flooded from the market at this point, and there are many, many more who will be hopelessly underwater and drowning in debt as time goes on. Most of the buying this year has been by foolish knife-catchers who still believe in the fallacies of kool aid intoxication and bought now that they are no longer “priced out.” (Of course, now they are “priced in” forever…) There is still the widespread belief among the general public that house prices will return to the peak in a couple of years and everything will be like it was during the bubble rally. That is not going to happen. This fall and winter, prices will make another big drop just as they did last fall and winter. That drop will put fear in the hearts of everyone who owns speculative real estate (which means almost everyone who bought since 2002.) By next year, we will see real fear and possibly some capitulatory selling. Remember, the speculators we have profiled to date have only been the trickle of water that breaks the dam. This problem is much larger than what we have seen to date.

There is a funny mathematical truth few understand: drawdowns are asymmetrical. If prices fall 50%, it takes more than a 50% increase to get them back up to the peak. In fact, after a 50% drop, prices must go up 100% to get back to where they started. Even now, with prices down 20%, prices have to go up 25% to get back to the peak. The deeper the price drop gets, the harder it will be for prices to recover. This is also why timing the market is important. (I will post on this concept in more detail at a future date.)

Today’s featured property was purchased in 2004, and now it is selling for significantly less than its purchase price as REO.

Asking Price: $649,900

Income Requirement: $162,475

Downpayment Needed: $129,980

Monthly Equity Burn: $5,415

FB Purchase Price: $730,000

FB Purchase Date: 12/22/2004

WAMU Purchase Price: $610,000

WAMU Purchase Date: 4/2/2008

Address: 14921 Yucca Ave, Irvine, 92606

Beds:	4
Baths:	3
Sq. Ft.:	2,650
$/Sq. Ft.:	$245
Lot Size:	5,000 Sq. Ft.
Property Type:	Single Family Residence
Style:	Other
Year Built:	1972
Stories:	2 Levels
Area:	Walnut
County:	Orange
MLS#:	U8002616
Source:	SoCalMLS
Status:	Active
On Redfin:	2 days
Fixer-upper

nice wood cabinets in the
kitchen? I have had better in apartments. Did you notice how they were cropped out of the picture?

When this house was purchased, the buyers put 10% down. I don’t know if they abused their HELOCs after that. The data service we have been using has been scrubbing their records after a property goes REO. We are looking for a new one. In any case, if this property sells for its asking price, the total loss on the property after a 6% commission will be $119,094. It is interesting to see how WAMU prices their REO. They have marked up their auction price by 6% to cover the cost of the commission. If this sells for asking, and assuming they bought it for the outstanding balance on the first mortgage, they will recover their cost. Of course, the second mortgage is a total loss, and if they were any HELOCs or other debt, that is gone too. It may be that our 2004 buyer is losing $73,000, but I doubt it…

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Oh, we’re sinking like stones,
All that we fought for,
All those places we’ve gone,
All of us are done for.

Oh, all that I know,
There’s nothing here to run from,
And there, everybody here’s got somebody to lean on.

Don’t Panic — Coldplay

Walnut Tree — Keane

Do you remember our recent discussion on Financing in a Declining Market? This REO is going to obliterate the neighborhood comps. Any property the lender considers comparable to this one will not get good financing (it doesn’t matter what we might think is comparable, it only matters what the lender thinks.) Remember our optimistic seller one block over on Sweetan Street? Any lender is almost certainly going to consider today’s featured property to be a comparable, and with a $400,000 lower asking price, anyone looking to buy the property on Sweetan Street is going to have to come up with almost $500,000 cash to close the deal (Those sellers are pwned.) This is the first real jaw-dropping price buster we have seen here in Irvine. It is happening everywhere else, and now it is happening here as well.

Asking Price: $351,500

Income Requirement: $87,875

Downpayment Needed: $70,300

Monthly Equity Burn: $2,929

Purchase Price: $475,000

Purchase Date: 7/30/2004

Address: 5228 Walnut Ave #10, Irvine, CA 92604

Wow!** The realtor had fun with punctuation. and Random capital Letters.

Bank Owned REO? Bank owned real estate owned?

Plenty of room for Gardening? Looks like they need to weed the bricks they are growing.

Did you notice that this is also the first 3/2 listed for sale under the median income in Irvine?

So what is this property worth? It is selling near breakeven for an owner-occupant. An astute observer from yesterday, C. Cammack, rents nearby for $2,065. There are also nearby properties going for $1950. Let’s say this place rents for $2,000. With a 160 GRM, the value is $320,000. Some knife catcher will probably bid near $400,000 for this place today, but the asking price is getting very close to the owner-occupant breakeven. Of course, many would not want to own and occupy this dwelling, but prices in Irvine are nearing the range where they are affordable again.

Those of you who have been wondering why I have been showing so many low-end properties lately can find your answers in the graph below I borrowed from Calculated Risk:

The low end of the market is where the action is with properties like todays. It is leading the race to the bottom. The lender who foreclosed actually had $520,200 in debt on the property due to a refinance in late 2005. The people who lost the property in foreclosure walked away with their downpayment plus an additional $45,000. If this property sells for its asking price, the lender is going to lose $189,790. If there are 4,365 distressed properties in OC under $500K, and if the lenders are losing an average of $100,000 per unit, there is $4,365,000,000 in losses just at the low end in Orange County, California. Do you think the lenders have already written this off? I doubt it…

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Once there was a great storm,
Pushed my head beneath the waves,
I was gone.
Underneath the walnut tree,
Where you said you’d wait for me,
And I waited a long, long time
I waited a long, long time,
I waited a long, long time,
I waited a long, long time,
I waited a long, long time.
Why, why do I come here?
Seeking out the memories I hold dear,
‘Cause you put your spell on me,
Made me live in memory,
And im frozen in just the wrong time.
I waited a long, long time,
I waited a long, long time,
I waited a long, long time,
I waited a long, long time.

Walnut Tree — Keane

The Ultimate Sin — Ozzy Osbourne

What would be the ultimate post we could do at the Irvine Housing Blog? We have been getting a great deal of attention lately for our posts on HELOC abuse, and our post on Monday showing the $500,000 loss was also very well received. This is only one way you can top what we have done to date: combine the two. Today’s featured property is the new pinnacle. We are raising the bar. Today, we have a property where the owner took out over $1,000,000 in a series of small refinances and general HELOC abuse, and now the lender who has taken back the property is looking at a $650,000 loss.

It does make me wonder… How can I get a lender to give me $1,000,000 that I don’t have to pay back?

Asking Price: $895,000

Income Requirement: $223,750

Downpayment Needed: $179,000

Total Property Debt: $1,490,000

Lender Purchase Price: $909,195

Lender Purchase Date: 3/19/2008

FB Purchase Price: $520,000

FB Purchase Date: 4/6/2000

Address: 3 Green Hollow, Irvine, CA 92620

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At first glance, this property’s purchases and sales look ordinary. It was bought for $520,000 in 200, and it sold for $909,515 in 2008. It isn’t until you go through the property records that the extraordinary nature of this property is revealed (Thank you, Brittney.) This is a long and complicated story, so bear with me.

• This property was purchased for $520,000 on April 6, 2000. The buyer put $120,000 down and financed $400,000. It didn’t take long for the kool aid to begin flowing.
• In July of 2001, he refinanced for $500,000 taking out $100,000 of his initial equity.
• In January of 2002, he took out a $544,000 loan taking out all $120,000 of his initial equity plus an additional $22,000.
• In February of 2002, he took out a $30,000 stand-alone second.
• In March of 2002, he took out a $50,000 stand-alone second.
• In August of 2002, he took out a $67,800 stand-alone second.
• In October of 2002, he opened a $20,000 HELOC.
• In November of 2002, he refinanced with a $596,000 first and a $149,000 stand-alone second and presumably paid off all the other loans. At this point, his mortgage equity withdrawal stands at $345,000.
• In January of 2003, he opened a $20,000 HELOC.
• In January of 2004, he refinanced with a $793,600 first and a $148,800 stand-alone second.
• In April of 2004, he refinanced again with a $940,000 first and a $176,250 stand-alone second.
• In October of 2004, he refinanced the stand-alone second for $400,000
• In March of 2005, he refinanced the stand-alone second for $550,000

Total indebtedness: $940,000 + $550,000 = $1,490,000.

Total Mortgage Equity Withdrawal: $1,490,000 – $400,000 = $1,090,000.

What can you say about that? Does anyone care to opine on how this was an investment or a medical issue? I think we can rule those circumstances out. Let’s be real here: this guy’s house was making $200,000 a year, and he took it out and spent it. It is what it is.

Lenders are stupid. What else can you say about that? How can you loan this guy so much money only to find your collateral is worth $600,000 less than the loans you made? There are bad loans, there are really bad loans, and then there are loans like this one. It boggles the mind. If this property sells for its asking price, the total loss to the lender will be $648,700 assuming a 6% commission.

I wonder how this guy is adjusting to the loss of that $200,000 a year extra income? I will bet it is not as much fun as spending it was.

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Overkill enough is enough
There’s nothing left of me to devour
You’ve had your fill I’m all I have left
What can stop your hunger for power
‘Cos you took advantage of things that I said
Now the feeling is dead

When it’s the ultimate sin
When it’s the ultimate sin
When it’s the ultimate sin
When it’s the ultimate sin

The Ultimate Sin — Ozzy Osbourne

Comfortably Numb — Pink Floyd

Have you become numb to the losses we see here at the Irvine Housing Blog? The dollar amounts we are talking about are almost too large to comprehend. Monday’s property is going to be an over $500,000 loss. Today’s is $140,000, and it is a tiny condo. It can be hard to relate to the size of these numbers, and even harder to relate when it is a big corporation losing most of the money. These losses will continue to mount. If the lenders had to do a mark-to-market on all their loans based on the value of the underlying collateral, our entire financial system might collapse. It might anyway. I guess it is a good thing that we have runaway consumer price inflation, or the monetary deflation of all these bank losses would be a real problem. 😉

Asking Price: $232,000

Income Requirement: $58,000

Downpayment Needed: $46,400

Monthly Equity Burn: $1,933

Purchase Price: $359,000

Purchase Date: 10/31/2006

Address: 47 Lakepines, Irvine, CA 92620

ALL CAPS.

THIS IS THE BEST REASON TO BUY
IN-LIEU OF RENTING. Yes, but it is still not good enough. Can you see the sales pitch to come 2 or 3 years from now?

COME HOME TO IRVINE AND START LIVING THE ORANGE COUNTY
LIFESTYLE TODAY. Where have we seen this before?

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The distress at the low-end of the market is striking. I find it amazing that some genius paid $359,000 for this property. What is even more surprising is that he put $17,950 of his own money into the deal. I am not very surprised that Countrywide put in the other $341,050. Countrywide sold the loan to Barclays Capital Real Estate Inc. They bought the property back at auction for $259,626 on 12/17/2007. It doesn’t look like the original flipper made too many payments. If this property sells for asking price, and if there is a 6% commission paid, the total loss on the property will be $140,920. The original buyer is out $17,950, and Barclays is out $122,970. That is a substantial loss on an 835 SF, 1/1, apartment condo.

These losses we document daily are staggering, but since I am waiting for prices to drop to buy myself, I am comfortably numb.

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Hello.
Is there anybody in there?
Just nod if you can hear me.
Is there anyone home?

There is no pain, you are receding.
A distant ships smoke on the horizon.
You are only coming through in waves.
Your lips move but I cant hear what youre sayin.
When I was a child I had a fever.
My hands felt just like two balloons.
Now I got that feeling once again.
I cant explain, you would not understand.
This is not how I am.
I have become comfortably numb.

Comfortably Numb — Pink Floyd

Cheap is relative. Compared to pricing at the peak, the prices of houses in Irvine right now are cheap. Of course, they will get cheaper, but today’s property caught my attention because I did not get an overwhelming feeling of revulsion at the high price. That is real progress. I am not sure what attracted me to this property. Perhaps it is like ZZ Top’s Cheap Sunglasses.

We are the Irvine Housing Blog, and I rarely profile properties outside of Irvine, but today’s property is in the Irvine school district, and although it is in Tustin, it is certainly Irvine adjacent.

Asking Price: $507,900

Income Requirement: $126,975

Downpayment Needed: $101,580

Lender Purchase Price: $503,477

Lender Purchase Date: 1/28/2008

FB Purchase Price: $598,000

FB Purchase Date: 9/2/2005

Address: 362 Flyers Lane, Tustin, CA 92782

Beds:	3
Baths:	4
Sq. Ft.:	1,938
$/Sq. Ft.:	$262
Lot Size:	–
Type:	Condominium
Style:	Contemporary
Year Built:	2005
Stories:	Three or More Levels
View(s):	City, Courtyard, Park or Green Belt, Tree Top, Trees/Woods
Area:	Tustin Field
County:	Orange
MLS#:	P634383
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Do you get the Monty Hall reference? If any of you have ever watched the show, you might remember that contestants didn’t always like what they found behind the door.

This Home Surpasses Everything in this Price Range… Yes, it does. It is a real comp killer. Check out 247 Kitty Hawk and 237 Kitty Hawk. They must be hating life.

LIGHT &
BRIGHT

ONLY
ONE at this Price. No kidding. Was this written by a used car salesman?

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The property is a typical foreclosure. The buyers bought in 2005 for
$580,000 putting 20% down and taking out a conventional mortgage for
$478,057. They stopped making payments and the lender bought the
property at auction for $503,477. The lender is going to lose some money, but fortunately for them, the people who lost this house also lost $119,943. That can’t be fun. Quite a high price for buying in to the fallacies of the housing bubble.

I would estimate this property would rent for $2,500 to $2,700 leaving
a value of between $400,000 and $432,000. This one will only fall
another 15% – 20% in price, IMO. That is still complete evaporation of
someone’s downpayment, but at least they won’t go underwater.

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When you get up in the morning and the light is hurt your head
The first thing you do when you get up out of bed
Is hit that streets a-runnin and try to beat the masses
And go get yourself some cheap sunglasses
Oh yeah, oh yeah, oh yeah

Spied a little thing and I followed her all night
In a funky fine levis and her sweaters kind of tight
She had a west coast strut that was as sweet as molases
But what really knocked me out was her cheap sunglasses
Oh yeah, oh yeah, oh yeah

Cheap Sunglasses — ZZ Top