Hard Candy Christmas — Dolly Parton

Everyone seems to be worries that prices will never fall to affordable levels, despite the fact we are witnessing unprecedented price declines everywhere. Those of you desirous of a high-end Irvine property have not seen the price drops you would like to see, so you conclude they will never get there. If you widen your view a bit, you see properties declining in value all around us and even within Irvine at the low end.

If you are watching the high-end market, these will be the last to fall because this is where knife catchers are most active. The high-end watchers of the IHB are a microcosm of the market. Even among this group, there are people willing to jump in at different price points. Each person capable of buying has a different degree of kool aid intoxication. Each potential buyer has a different tolerance for fear of being priced out — which is still the primary motivator of knife catchers. If you only make lowball offers, you may never get filled, and you will never own. This reality gets amplified into the fear of being priced out, and through this fear, people raise their bids.

Pause for a moment… Reflect on the emotions you felt when you read, “If you only make lowball offers, you may never get filled, and you will never own.” Did you feel the fear? How strong is it? Will you act on this fear? If you are introspective enough to have these emotional awarenesses, you can gauge your own level of kool aid intoxication. We are all different, and the most fearful are the most likely to become knife catchers.

Personally, I rely on my analytical skills to keep my emotional responses under control. I have faith that market pricing will fall to levels consistent with rental parity. It is a faith backed up by market data pertaining to previous market bubbles. I also recognize that even if prices do not reach rental parity, and if I never own, I will be better off financially by renting. It is a win-win. Intellectually, I recognize this truth. Emotionally, I have to let go and trust my intellect. It isn’t always easy.

{book}

For those who have been waiting for prices to reach rental parity, there are still signs the market is heading that direction. Before we get “there,” we need to identify what “there” is. In a stable real estate market, rental parity is a general guide, but not all market segments stabilize at rental parity. The low end, composed of undesirable condos and other properties where owner-occupants are rare often trade at prices below rental parity. The less desirable it is, the closer it trades to investor cashflow levels (GRMs from 100-120). The median type property that owner occupants desire trade near rental parity. This is particularly true for “starter homes,” those nicer condos and small 3/2s. The above median properties often stabilize just above rental parity (+10%.) This happens for a number of reasons: 1. The longer ownership period of these homes justifies a higher investment premium. 2. The limited supply makes them scarce. 3. Rents are more variable at the high end as most people who can afford the higher rents generally own instead.

In the market bubble of the late 80s, the low end of the market got bid up to rental parity, and the high end was pushed well above. When prices crashed in the early 90s, the high end crashed first, then the low end got hammered. With the low end already at rental parity and within levels of affordability, it made sense for the high end to crash first. Once the more desirable properties were at rental parity, there was an exodus from the low end that caused prices there to plummet. I mention this because I believe this is how the next stages of the drop will play out.

Since the Great Housing Bubble saw an unprecedented degree of price inflation, both the low end and the high end prices became elevated far above rental parity. As the low end comes down to rental parity, it is starting to find some support. At this point, we are looking much like the market in 1991 — the low end is nearing rental parity, and the high end is still grossly overpriced. If history repeats itself, the low end may stabilize temporarily near rental parity while the high end declines. Once the high end drops to rental parity, the low end will take another drop down to investor cashflow levels. Is it going to happen that way? Who knows, but that is my best guess.

Today’s featured property is a 3/2 that appears to be at rental parity here in Irvine.

Asking Price: $360,000

Income Requirement: $90,000

Downpayment Needed: $72,000

Monthly Equity Burn: $3,000

Purchase Price: $550,000

Purchase Date: 8/2/2005

Address: 416 Monroe #166, Irvine, CA 92620

It doesn’t look like the realtor is expecting a big payday here…

This property was purchased on 8/2/2005 for $550,000. The owner used a $440,000 first mortgage, a $55,000 HELOC, and a $55,000 downpayment. Not to worry, he opened a new HELOC for $110,000 on 9/20/2005 and removed his downpayment. The owner isn’t losing anything here…

If this property sells for its asking price, the various lenders stand to lose $211,600 after a 6% commission.

This property is being offered for 35% off its 2005 purchase price.

What is it worth?

I have looked at this property from a conventional financing perspective and from the more realistic perspective of an FHA buyer. In either case, I believe this property is near rental parity.

• With the lower interest rates, I used an assumption of 6% rather than 6.5% I have been using previously. Perhaps some can find a better rate, and for some it will be worse.
• I do not believe there are Mello Roos for this property.
• Since this is a condo, I put only a 1/2% maintenance and replacement reserves. If the condo association is well managed, there should be no special assessments, and with the entire exterior being the responsibility of the association, maintenance should be minimal.
• A buyer making $90,000 is not going to see a huge tax benefit. The marginal tax rate is only 25%, and with the loss of the personal exemption, the effective tax savings rate is closer to 15%.
• The lost income from the downpayment should be an after-tax amount, so I have reduced this from 5% to 3%. There are still 5% CDs available (in those banks nearing collapse…)

• The picture is very similar for an FHA borrower. They have to pay a higher interest rate because they have to cover the FHA insurance, and since the mortgage is more than 80% of the property value, private mortgage insurance is required. These costs, plus the larger mortgage balance, increase the monthly cost of ownership.

In both scenarios, the total cost of ownership is under $2,400 per month. What do you think this would rent for? I think $2,400 is about right for a 3/2 in Irvine. Of course, that doesn’t mean rents cannot go lower, and during this recession, they probably will. However, this property seems a reasonable price given current rents and the cost of ownership. What do you think?

{book}

Hey, maybe Ill dye my hair
Maybe Ill move somewhere
Maybe Ill get a car
Maybe Ill drive so far
Theyll all lose track
Me, Ill bounce right back
Maybe Ill sleep real late
Maybe Ill lose some weight
Maybe Ill clear my junk
Maybe Ill just get drunk on apple wine
Me, Ill be just

Ill be fine and dandy
Lord its like a hard candy christmas
Im barely getting through tomorrow
But still I wont let
Sorrow get me way down

Hard Candy Christmas — Dolly Parton

Seasons in the Sun — Terry Jacks

But the hills that we climbed
were just seasons out of time.

House prices in our local real estate market, like prices in many others, climbed a mountain of debt to heights they should have never seen. There will be a time when those prices are justified — perhaps 20 years from now — but seeing those prices in 2006 was a season out of time.

Friends, Irvinites, countrymen, lend me your ears; I come to decry the housing bubble, not to inflate it. The evil that men do lingers on through a devastated economy; the good is oft interred with their foreclosure. So let it be with the housing bubble. The noble Irvine Renter hath told you that homedebtors were greedy. If it is so, it is a grievous fault, and grievously have homedebtors answered for it.

To everything there is a season. A time to gain, a time to lose. A time to time to laugh, a time to weep. A time to build up, a time to break down. A time to dance, a time to mourn.

The Great Housing Bubble is over. It is time to move on. The Ponzi Scheme has collapsed. The lifestyle of mortgage equity withdrawal has come and gone. The dream of endless appreciation is a fantasy gone awry. Winter is upon us.

We had joy, we had fun, we had seasons in the sun.
But the wine and the song,
like the seasons, all have gone.

So where do we go from here? It is pretty frightening when you consider all the analogies of our current situation are to the Great Depression. It is clear that what is to come is going to be very bad, and we have not seen the worst of this yet. Our elected officials and the bureaucrats at the Federal Reserve are doing all they can to straighten out this mess. Hopefully, their meddling in the financial markets will not do more harm than good. I have my doubts. What happens is largely out of our hands. Even the people who are supposed to be in control are not. They more they try to reassure us, the more anxious I become. If events were under control, no assurance would be necessary.

It is natural to become reflective in a time like this. It is a good opportunity to reassess what is important and what is not. Most people are being forced to sacrifice possessions and pretenses of wealth. For some people, their attachments to these objects and illusions will cause them a great deal of suffering. For others, being released from these attachments will be a spiritual blessing. Difficult economic conditions create circumstances of loss and mourning. How we deal with these circumstances speaks to our character, and if we learn its lessons, it will reveal the path to true happiness, contentment and feelings of abundance.

{book}

Today’s featured property is a new condo sporting a significant discount. We have profiled another property in this neighborhood. Whoever owns it now cannot be happy with this new comp.

Asking Price: $399,000

Income Requirement: $99,750

Downpayment Needed: $79,800

Monthly Equity Burn: $3,325

Purchase Price: $535,000

Purchase Date: 3/15/2006

Address: 24 New Season, Irvine, CA 92602

How does one get “close to everythings”?

Another realtor who obviously does not give a crap.

This property was purchased on 3/15/2006 for $535,000. The owner used a $500,000 first mortgage, and a $35,000 downpayment. That is all gone.

If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $159,940.

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

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.

🙂

{book}

Goodbye to you, my trusted friend.
We’ve known each other since we’re nine or ten.
Together we climbed hills or trees.
Learned of love and ABC’s,
skinned our hearts and skinned our knees.
Goodbye my friend, it’s hard to die,
when all the birds are singing in the sky,
Now that the spring is in the air.
Pretty girls are everywhere.
When you see them I’ll be there.
We had joy, we had fun, we had seasons in the sun.
But the hills that we climbed
were just seasons out of time.
Goodbye, Papa, please pray for me,
I was the black sheep of the family.
You tried to teach me right from wrong.
Too much wine and too much song,
wonder how I get along.
Goodbye, Papa, it’s hard to die
when all the birds are singing in the sky,
Now that the spring is in the air.
Little children everywhere.
When you see them I’ll be there.
We had joy, we had fun, we had seasons in the sun.
But the wine and the song,
like the seasons, all have gone.

Seasons in the Sun — Terry Jack

Corrosion of Conformity — Albatross

How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on

The conforming loan limit through the GSE’s is currently limited to $625,000 in our area. This is down from the $729,750 temporarily allowed under the Economic Stimulus Act of 2008. Any loan larger than this amount is considered a jumbo, and jumbo loans carry a higher interest rate. The current spread on a 5/1 ARM (a method of financing I do not recommend) is only 9 basis points; however, the spread on 30-year fixed rate loans is 130 basis points. Also, jumbo loans generally have higher downpayment requirements than conforming loans. All this means that the jumbo loan market is thinner because fewer buyers have the cash for the downpayment or the income to qualify.

Since our real estate market is collapsing from the bottom up, the slice of the market starting to show stress now is the bottom of the jumbo market — $685,000 to $900,000. Homes priced to sell in this range are having a hard time finding buyers, and prices are starting to drop. Today’s featured property is a short sale priced at $775,000. It recently dropped its price $80,000 in an effort to chase the market.

My home is kind, man it pays to be blind

I want to share with you a couple of recent experiences I had that demonstrate to me the power of conformity and denial.

I have been arranging to speak at various groups active in my industry. There are a great many even in my industry that do not fully understand what is happening and why. One of these groups told me they would like to have me as a speaker, but only if I am planning to give a Pollyanna message of hope. Well, there is always hope, but the reality is not particularly positive, so I will not be speaking there any time soon. The reason is simple. They are in denial, and they want to maintain that even at the expense of seeing reality. I can not and do not live my life this way, so it is difficult for me to relate to this mentality, but I do understand their desire for denial and the reason for their enforced conformity.

I subscribe to a reporter lead service to try to generate free publicity. Yesterday, I had a phone interview with a reporter doing a story on people who cannot sell who are renting out their houses. I explained to her that those homeowners with a positive cashflow do not have a problem, but many bubble buyers cannot cover their cost of ownership with rents, and they do not have any good options. They can either sell the property today for a loss, or lose money each month until prices come back (which is going to take years). Many, if not most, of the people who try to rent it out will end up in foreclosure anyway. This reporter got upset with me because my message was not positive, and she had to spin this story in a positive light. I didn’t know what to say. All I can do it report reality. What she needed was someone from the NAR to tell her that prices will be back at the peak in two years and those who rent out their losing venture will be made whole soon. I couldn’t say that because it is not reality. Even the media is under pressure to conform to the culture of denial.

I have often wondered why our government sets up its method of reporting recessions so that it isn’t announced until it is almost over. Now that I see the powerful need for denial among the populace, I think I understand.

Asking Price: $775,000

Income Requirement: $193,750

Downpayment Needed: $155,000

Monthly Equity Burn: $6,458

Purchase Price: $985,000

Purchase Date: 7/20/2005

Address: 75 Rockport, Irvine, CA 92602

This property was purchased on 7/20/2005 for $985,000. The owner used a $784,000 first mortgage, a $196,000 second mortgage, and a $0 downpayment.

If this sells for its asking price, and if a 6% commission is paid, First Franklin stands to lose $256,500.

This property is being offered for 21% off its 2005 purchase price.

{book}

Well I’m feelin’ left behind, Lord what a waste of time
They’re coming to get you, run on
How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on

I should have seen the signs
Now the memories far behind
It was no big loss,
Fly on, Albatross yeah

Corrosion of Conformity — Albatro

Liar — Queen

Liar I have drunk the wine (or kool aid)
Liar time after time

Not long ago, we had a realtor trolling the forums. He tried all the standard hooks, but he found those fish were not biting. One of the more ridiculous ideas he put out there was the notion, “You can’t predict which way the market will go, so you should buy.” WTF? Anyone with half a brain or any amount of investment experience would know the old truism, “When in doubt, stay out.” Beyond that the remark is stupid for another reason: it is pretty obvious that the market is going to go down. The decline has momentum, we are entering a recession, and prices are still greatly inflated.

Realtors thrive by creating fear in buyers. They will use lines like:

• It is a good time to buy!
• Hurry. This one won’t last.
• Don’t throw away your money on rent.
• If you are serious, you had better buy now or you might be priced out of the market.
• They are not making land anymore.
• If you see a property you love, you really need to make an offer.
• The more earnest money you put down, the more seriously your offer is taken.
• Things have been a bit slower than last year, but the last two weeks we have seen a lot more traffic.
• Rates are at all time lows and buyers have more choice than ever!
• Rates are creeping up, so you better get in now.
• If you wait until the bottom, you will miss out on getting a property that you really like.
• This property is priced at below market value.
• Incentives this good won’t be available after…
• Don’t worry about the asking price – just offer what you’re willing to pay.
• Don’t worry. You can afford this house.
• I will show my client the offer, but I just want to let you know that we have another offer for more coming in this afternoon.
• Trust me.
• It’s not just the commission. I really care about you.

In a buyer’s market these ploys are all lies (the truthfulness of these statements is questionable in all market conditions). Don’t believe them.

Liar liar liar liar
Liar that’s what they keep calling me

Do not forget that when you are buying a house, the realtor is the agent of the seller. The primary responsibility of the realtor is to serve his client by obtaining the greatest possible purchase price. The realtor may be nice and disarming, and you might honestly believe they have your best interests at heart. They don’t. In a perfect world (for them) they would lead you to believe they are looking out for you while they are extracting as much money out of you as possible. That way, you will be inclined to use them again when it is your turn as a seller to get as much as possible from your buyer.

Realtors are paid to say the things that would make you cringe with a straight face and a smile. That is how they get that extra few percent out of buyers that justifies their existence. Sellers pay them to say all of the things in the list above for one simple reason: it works. Buyers fall for it, almost every time. Financial manias are not enabled by realtors presenting rational arguments and objective advice. Housing bubble psychology is exploited by realtors to sell homes. That is their job.

When I sold my home before moving to California, I used a realtor. When it is my turn to sell a home here in California, I may do the same. If I find someone who I believe will get me at least 4% more in a sales price than I could on my own, I will hire them. I just won’t be there when they go into their sales pitch. My facial expression would give me away…

Today’s featured property is in the Northwood II neighborhood. The stress of the low end is working its way up to this next tier of the housing market. This one is going for less than $300/SF.

Asking Price: $750,000

Income Requirement: $187,500

Downpayment Needed: $150,000

Monthly Equity Burn: $6,250

Purchase Price: $898,500

Purchase Date: 3/28/2005

Address: 53 Bombay, Irvine, CA 92620

Beds:	4
Baths:	3
Sq. Ft.:	2,630
$/Sq. Ft.:	$285
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	2005
Stories:	2
Floor:	1
Area:	Northwood
County:	Orange
MLS#:	S555878
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Assciatio? That description is 55 words, and they can’t spell them all correctly.

This property was purchased on 3/28/2005 for $898,500. The owners used a $718,562 first mortgage, a $137,500 HELOC, and a $42,438 downpayment (It is possible the HELOC wasn’t used to purchase and the downpayment was $179,938). On 6/7/2006, they refinanced with a $749,000 first mortgage, and opened a $111,000 HELOC. On 7/28/2006 they opened a $200,000 HELOC. If the final HELOC was used, the total debt on the property is $949,000. That would also be its peak appraised value.

If this property sells for its asking price, the total loss on the property will be $193,500 after a 6% commission. The actual loss to the lender would be $244,000 if the HELOC is maxed out.

This property is being offered for 16% off its 2005 purchase price, and 22% off its peak appraised value.

So can you think of any realtor ploys I have missed?

{book}

I have sinned dear Father Father I have sinned
Try and help me Father
Won’t you let me in? Liar
Nobody believes me Liar
Why don’t they leave me alone?
Sire I have stolen stolen many times
Raised my voice in anger
When I know I never should
Liar oh ev’rybody deceives me
Liar why don’t you leave me alone

Liar I have sailed the seas
Liar from Mars to Mercury
Liar I have drunk the wine
Liar time after time
Liar you’re lying to me
Liar you’re lying to me
Father please forgive me
You know you’ll never leave me
Please will you direct me in the right way
Liar liar liar liar
Liar that’s what they keep calling me
Liar liar liar

Liar — Queen

Thanksgiving — George Winston

I hope you all are having a wonderful Thanksgiving. Despite all the bad news, we all have much to be thankful for. No matter how bad things look for us, Americans still have life far better than most people on this planet. We here in California have a great climate, plenty of activities to enjoy, and a peaceful existence. I am thankful for a loving family, a roof over my head, continued employment, and of course, Thanksgiving turkey.

Since we have been looking at Turtle Ridge properties this week, I wanted to show you the crumbling base of the property pyramid. Apparently Turtle Ridge is not immune, and the stress at the low end is taking its toll there too.

Asking Price: $320,000

Income Requirement: $64,000

Downpayment Needed: $80,000

Monthly Equity Burn: $2,666

Purchase Price: $445,000

Purchase Date: 3/25/2005

Address: 133 Danbrook, Irvine, CA 92603

Beds:	1
Baths:	1
Sq. Ft.:	822
$/Sq. Ft.:	$389
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	2004
Stories:	1
Floor:	1
View:	Park or Green Belt, Has View
Area:	Turtle Ridge
County:	Orange
MLS#:	S521349
Source:	SoCalMLS
Status:	Active
On Redfin:	288 days
Unsold in 90+ days

Better than a model? Bull$hit.

every built?

This property was purchased from the builder on 9/15/2004 for $358,000. It was flipped to our current owner on 3/25/2005 for $445,000. The owner used a $400,500 Option ARM with a 2.62% teaser rate and a $44,500 downpayment. He opened a HELOC on 4/5/2006 for $60,000. Hopefully, he took out 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 $144,200. That seems like a lot to lose on a property measuring only 822 square feet.

This property is being offered at 28% off its 2005 purchase price in Turtle Ridge.

I hope you are having a happy holiday. 🙂

{book}