The long awaited implosion of the North Korean towers at the Marquee is happening as envisioned. There is a race to the ground, and no floor in prices is in sight.

Today’s featured property is being offered for 53% off its purchase price.

Asking Price: $349,900

Address: 3131 Michelson #307, Irvine, CA 92612

One more community profile at the Irvine Homes Blog: Quail Hill.

I first wrote about these towers in Equity Inferno and most recently in $16,805 Monthly Equity Burn. In the Equity Inferno post, I ran a rent versus own calculation and estimated rental parity at about $325,000 with a $2,800 rent. With changes in interest rates and rental rates, this number is now about $350,000 which is today’s asking price.

Does that mean I recommend this place? No. Values will likely decline further because the fate of these units is not to be owner occupied–these will mostly be rentals. Cashflow investment levels, even at these very low interest rates are about 25% further down. If you buy these units at rental parity, you need to be prepared to be trapped there for many years as prices drop to cashflow investor levels and stay there indefinitely.

Today’s featured property is being offered for 53% off its purchase price. So what makes me think values will decline even further? Perhaps it is an inventory issue. There are 7 properties for sale under $500,000:

3131 Michelson #306 Irvine, CA 92612, Price: $399,000

3131 Michelson #606 Irvine, CA 92612, Price: $399,000

3131 Michelson Dr #802 Irvine, CA 92612, Price: $430,000

3131 Michelson Dr #1102 Irvine, CA 92612, Price: $449,000

3141 Michelson #804 Irvine, CA 92612, Price: $475,000

3131 MICHELSON #1302 Irvine, CA 92612, Price: $499,000

3141 MICHELSON Dr #404 Irvine, CA 92612, Price: $499,999

I was going to link to the entire inventory in these two buildings, but there are too many. I would not be surprised to see an 80% turnover of these units in foreclosure with a bottoming price near $250,000, perhaps lower if there is overshoot.

Asking Price: $349,900

Income Requirement: $87,500

Downpayment Needed: $70,000

Monthly Equity Burn: $2,916

Purchase Price: $740,000

Purchase Date: 5/15/2006

Address: 3131 Michelson #307, Irvine, CA 92612

Wonderfull?

The mortgage records on these properties are difficult to sort through (they unit numbers are not given), so I was unable to locate the mortgage records. With an asking price 53% off, someone is eating a big $hit sandwich. If this property sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $411,000.

With all of the defaulting owners and crashing prices, I cannot help but wonder what the fate of this place will be. Will the services be cut back and the $1,150 HOA fees reduced? Will this be converted to low-income housing? Will lenders loan on units in places like this? I don’t see the end game here, but I am pretty confident this place will never be what it was advertised to be.

Some people should never have been given the loans they had; they can’t afford the properties they occupy. Today’s featured property is beyond the means of its owners, so it is going into foreclosure. Is this foreclosure a crisis? or is is the cure to their debt problems?

Asking Price: $1,399,000

Address: 25 Arcade, Irvine, CA 92603

{book1}

I contributed another post at Irvine Homes: Turtle Rock.

Escape — Metallica

I’ll fight until the end,
To escape from the true false world,
Undamaged destiny,
Can’t get caught in the endless circle,
Ring of stupidity

The stupidity of lenders is amazing. It is obvious that some people can only afford their home with Ponzi Scheme borrowing, but during the bubble the lenders did not care. The few that noticed or cared believed they had no risk so it didn’t matter. The collateral would go up in value forever, so they had no foreclosure risk, they could sell the loan to investors and remove the risk from their books, or they could protect themselves with a credit default swap from AIG. In short, they could write whatever loan they wanted to any borrower with a pulse, and they could not lose money–or so they thought.

Today’s featured property was partially financed with a $998,400 Option ARM with a 1% teaser rate. These are the loans that inflated values at the high end, and they are the same loans that will cause its destruction. None of these loans are stable, and the borrowers using these loans are defaulting in large numbers and building the next foreclosure wave. None of these loanowners are going to keep their homes because they cannot afford the payments on a conventional mortgage.

At the conclusion of Mr. Mortgage’s most recent post, he stated, “Bottom Line — after seeing these latest figures I am
more convinced than ever that the next step is wide-spread principal
balance reductions that will reduce the massive negative equity burden
in America and be a first-step to solving the mortgage and housing
crisis once and for all.” Widespread principal balance reductions are occurring in a process known as foreclosure. Once a property goes through foreclosure and is resold, the new buyer has a much lower principal balance than the old one. That is what needs to happen.

Does Mr. Mortgage believe this is going to happen through voluntary “gifts” of principal reductions to existing borrowers from the lenders? That is what his statement implies. I rather doubt it. There is no way to make this “gift” equitable, and the moral hazard would be extreme, and the lenders will resist this to the bitter end. Look at their opposition to allowing bankruptcy judges to reduce principal balances; they would rather take the home back in foreclosure than allow principal reductions even in the case of borrower insolvency and bankruptcy. Further, they have managed to kill that measure in the Senate–a Senate completely controlled by an antagonistic Democratic majority. Don’t expect to see either a voluntary or a politically mandated effort at principal reduction any time soon.

The only rational method of principal reduction is through foreclosure. As a society, we need to stop viewing this as a “foreclosure crisis.” There is no foreclosure crisis; there is a debt disease, and foreclosure is the cure.

Asking Price: $1,399,000

Income Requirement: $349,750

Downpayment Needed: $279,800

Monthly Equity Burn: $11,658

Purchase Price: $1,248,000

Purchase Date: 1/26/2005

Address: 25 Arcade, Irvine, CA 92603

architectual?

Notice the I-don’t-give-a-crap description on a $1.4 million property

So how did this become a short sale? The property was purchased on 1/26/2005 for $1,248,000. The owners used a $998,400 Option ARM with a 1% teaser rate first mortgage, a $62,400 second mortgage, and a $187,200 downpayment. On 2/10/2006 they opened a HELOC for $310,000, and apparently used it. The total property debt is $1,370,800 plus negative amortization.

If this property sells for its current asking price, and if a 6% commission is paid, the lender will not lose much, perhaps $100,000. It is interesting the “rich” people who live here wouldn’t pay off the short sale amount. Perhaps they are not so rich after all.

{book3}

Feel no pain, but my life ain’t easy,
I know I’m my best friend,
No one cares, but I’m so much stronger,
I’ll fight until the end,
To escape from the true false world,
Undamaged destiny,
Can’t get caught in the endless circle,
Ring of stupidity

Escape — Metallica

Some lenders are now accepting bids on short sales to spare them the hassles and expense of a foreclosure. Some of these firesale prices–at least by today’s standards–are resulting in sales. Will this one?

Asking Price: $529,000

Address: 4142 Fireside Circle, Irvine, CA 92604

{book7}

BTW, in case you missed it yesterday, the IHB is mentioned in Huntington Homes: Surf City home-equity ‘abuse’: ‘So many you can’t believe it’.

Light My Fire — The Doors

The time to hesitate is through
No time to wallow in the mire
Try now we can only lose

Wise sellers are pricing their properties to move while there is still bubble equity left in them–assuming there is any. Even the lenders would be wise to sell today, but alas, many of them are holding their REO either because they are overwhelmed or because government regulators are not forcing them to dispose of their non-performing assets. Perhaps the lenders are behaving like a cartel or oligopoly trying to artificially limit supply and keep prices up. If so, it is a strategy that will ultimately fail. Cartel arrangements are inherently unstable due to the incentive each member has to cheat, and with the huge increase in defaults across all borrower classes, the supply of REO is growing faster than the banks are disposing of it.

Most sellers want to hold out and get every last penny of of a transaction they believe they deserve. It is a strategy that works in a rising market; if you ask too much, it just takes a little longer to sell, but you can still get your price. In a declining market it is a disastrous strategy resulting in being overpriced for very long periods of time or chasing the market down and selling for much less. Better to quickly lower the price and sell the property than continually chase the market down to the bottom.

As some point, lenders are going to have to foreclose on the defaulting borrowers and dispose of the REOs. As the inventory of REO builds, so does the pressure to liquidate them in a fire sale. Perhaps it will happen, or perhaps the lenders will try to meter out their REO slowly. If they pursue the firesale strategy, prices will drop quickly, but appreciation will return sooner. If they pursue the slow sale strategy, the inventory will take years to work off, and prices will linger at the bottom for many years. Make no mistake, there will be no market appreciation until the defaults and foreclosures have stopped. Right now, both are at very high levels and increasing rapidly.

Asking Price: $529,000

Income Requirement: $132,250

Downpayment Needed: $105,800

Monthly Equity Burn: $4,408

Purchase Price: $705,000

Purchase Date: 4/28/2006

Address: 4142 Fireside Circle, Irvine, CA 92604

That is not a bad description by Irvine standards.

This property was purchased on 4/28/2006 for $705,000. The owners used a $564,000 first mortgage, a $35,250 second mortgage, and a $105,750 downpayment (ouch). If it sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $207,740.

This property is being offered for 25% off its peak purchase price.

{book6}

You know that it would be untrue
You know that I would be a liar
If I was to say to you
Girl, we couldn’t get much higher
Come on baby, light my fire
Come on baby, light my fire
Try to set the night on fire

The time to hesitate is through
No time to wallow in the mire
Try now we can only lose
And our love become a funeral pyre
Come on baby, light my fire
Come on baby, light my fire
Try to set the night on fire, yeah

Light My Fire — The Doors

Some people claim they are merely victims of bad market timing. But how bad can timing really be? How about purchasing a tiny condo a few days before subprime imploded; that would do it.

Asking Price: $299,900

Address: 113 Rockwood #30, Irvine, CA 92614

{book}

Everybody Must Get Stoned — Bob Dylan

They’ll stone you when you’re trying to be so good
They’ll stone you just like they said they would
They’ll stone you when you’re trying to go home

Did you see that our governor thinks we should debate pot? Schwarzenegger: Time To Debate Legalizing Pot. Even MSN is getting in on the story. A budget cure: Marijuana taxes? With the Conservatives being thrown out of power in Washington, I suppose anything is possible…

The owner of today’s featured property was either stoned, or drunk with kool aid when this deal went through. New Century Financial had not fully imploded when this deal happened, but problems with subprime were front page news in the first quarter of 2007. It wasn’t a good omen for making this a successful flip.

Ignorant investing is common. Most people know very little about the markets they invest their money in. This is not necessarily a bad thing, if this money is trusted to competent professionals, but when people go it alone, the results are often a disaster.

To make money in real estate (or any speculation for that matter), you must have a sense of current value, and what buyers will be willing and able to pay in the future in order to make a profit. The extent of valuation and due diligence during the bubble was minimal; most people just knew real estate was going to go up because it had been for a long time. There was no attempt at valuation or any consideration for how or how much future buyers were going to pay. People bought because it was a sure thing.

Anyone with a moment of forethought would have questioned whether it was a good idea to buy a low-end condo while subprime was imploding. Since subprime was the primary funding mechanism of this market strata, a problem with the subprime industry was going to be a problem with the entire bottom tier of the market. This isn’t rocket science or complex discounted cashflow analysis, this is just common sense.

When people invest without a plan, they stand to lose money. If you are talking about a stock purchase of a few thousand dollars, the results may be painful, but not catastrophic. When you are talking about a piece of real estate priced at $479,000, the results can be disastrous. it certainly was in this case.

Asking Price: $299,900

Income Requirement: $74,975

Downpayment Needed: $59,980

Monthly Equity Burn: $2,500

Purchase Price: $479,000

Purchase Date: 2/23/2007

Address: 113 Rockwood #30, Irvine, CA 92614

ALL CAPS

What is the deal with “W/”? This abbreviation–which isn’t proper–saves exactly two characters. What is the point?

Despite the words, there are only two useful pieces of information contained in that description: (1) the unit has a view of the park, and (2) it has new cabinets and countertops. Everything else is garbage.

As with most properties purchased during this era, this was a 100% financing deal, so I suppose this flipper wasn’t that foolish; he only risked his credit score. This property was purchased on 2/23/2007 for $479,000. The owner used a $383,200 first mortgage, a $95,800 second mortgage, and a $0 downpayment. If this property sells for its current asking price, the bank will have lost $197,094 in just over 2 years. From the lender’s standpoint, that is serious equity burn…

I hope you have enjoyed this week at the Irvine Housing Blog. Be sure
to come back tomorrow as I explore HELOC Abuse Newport Coast Style, and
come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

{book3}

They’ll stone you when you’re trying to be so good
They’ll stone you just like they said they would
They’ll stone you when you’re trying to go home
They’ll stone you when you’re there all alone
But I would not feel so all alone
Everybody must get stoned

Everybody Must Get Stoned — Bob Dylan