Big Wedge — Fish

Are we selling out tomorrow for today? The takeover of Freddie Mac and Fannie Mae has opened the door for a massive government bailout. Since we are already running a large budget deficit, any bailout would be debt financed. As such, we are borrowing from future tax receipts to pay today for the sins of lenders, speculators and others who foolishly bought more house than they could afford.

The whole mortgage market bailout is yet another false hope for troubled homeowners. The bulls are somehow convinced that the problem of insolvency can be rectified through even more borrowing. People have too much debt already. That is the problem. Giving them more is not the answer. I believe you are going to see two things happen with the government in control: 1. There will be more workouts and refinancing of existing debt. 2. Credit standards will continue to tighten and interest rates and fees will continue to rise for new mortgages. There is not much the government can do with the existing toxic loans it must now make good on. It will do what workouts it can, and it will foreclose on the rest. It has a great deal of control over the new mortgages it writes going forward. It seems unlikely to me that the government would suddenly embrace all the practices that proved so disastrous during the bubble in order to prop up prices. It is one thing to minimize the losses you have, it is quite another to create new losses through foolish lending practices.

The cynics (and the bulls) believe the government will lower credit standards and write a plethora of new bad loans simply to support current price levels. This would amount to a huge, direct government subsidy to homeowners. The Government is stupid, and they do have political pressures to deal with, but they are not that stupid. Right now the focus is on limiting the damage and letting the bubble unwind without losing the secondary mortgage market causing a complete seizure of our credit markets. The government is not concerned with resale house values in Irvine, California. Everyone knows prices must come down, the only issue is how can this occur with the least amount of disruption to our financial system. Prices will stabilize, they will just do so at a much lower price level — A price level supportable by incomes where the borrowers are solvent and not prone to default on their loans.

Today’s featured property is a short sale that has been garnering a lot of attention in Northwood. Apparently there are multiple offers. After 47 days on the market, I guess everyone just discovered it… Or perhaps the realtors are lying…

Asking Price: $525,000

Income Requirement: $131,250

Downpayment Needed: $105,000

Monthly Equity Burn: $4,375

Purchase Price: $720,000

Purchase Date: 6/17/2004

Address: 10 Wedgewood, Irvine, CA 92620

This is a deep rollback of a 2004 price: 27%. We have been seeing many properties almost 30% off the peak, but nearly 30% off a 2004 price is more rare. Is it a bargain? Would it rent for $3,281? It may not be far from breakeven for an owner-occupant. I can remember seeing nearby comparable property for rent in early 2007 for $2,800 (on Bristlecone), so I don’t think we are quite down to rental parity, but this one is certainly closer to the bottom than to the top.

This was a conservative speculation by recent blog standards. The woman who bought this as her sole and separate property paid $720,000 on 6/27/2004. She used a $576,000 first mortgage, a $72,000 second and a $72,000 downpayment. There were no refinances. If this property sells for its asking price, the total loss will be $226,500. The seller will lose her $72,000 downpayment, and the lender will lose the remaining $154,500.

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.

🙂

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I found a new religion yesterday, I’d just cleared immigration jfk
A priest got in a cadillac, the shoe shine boy sang gospel
As God and his accountants drove away.
You’ll see him coast to coast on live tv, in a stadium
Rocked by satan just the night before
The collection from the faithful is tax free
It’ll pay for his presidential campaign and his yacht

You’re looking good, looking good with big wedge
Are you holding back tomorrow for today?
They’re driving in, driving in with big wedge
Are we selling out tomorrow for today?

Big Wedge — Fish

Mandrake Root — Deep Purple

You have the power. It is A Buyer’s Market. Did you ever think you would see properties under $200/SF again? How about $162/SF? Today’s featured property caused one commenter yesterday to opine, “This must be bottom.” Is it? The price drops have been so dramatic and come so fast on many properties that people can’t get their mind around the valuations. A property selling for 26% off its peak purchase price of just two years ago seems cheap. When viewed through the lens of 2006 prices, it is. However, when viewed through from the perspective of fundamental valuations, a property like today’s featured property is still overpriced. People did not put much effort into understanding prices when they were rising, after all, prices always go up — not. People assume that market prices are fair value and any discount from that price a bargain. When viewed from a broader perspective of valuations based on rents and incomes, the degree of price inflation becomes clear, and the amount prices have yet to fall also becomes apparent. Today’s featured property is probably closer to the bottom than to the top, but at $559,900, it still requires a rental rate of $3,500 a month to reach a breakeven threshold for an owner-occupant. Does this look like a $3,500 a month property to you?

Asking Price: $559,900

Income Requirement: $139,975

Downpayment Needed: $111,980

Monthly Equity Burn: $4,665

Purchase Price: $760,000

Purchase Date: 2/9/2006

Address: 3 Mandrake, Irvine, CA 92612

Beds:	4
Baths:	3
Sq. Ft.:	3,448
$/Sq. Ft.:	$162
Lot Size:	3,200 Sq. Ft.
Property Type:	Single Family Residence
Style:	Traditional
Year Built:	1967
Stories:	Split-Level
View:	Park or Green Belt
Area:	University Park
County:	Orange
MLS#:	S546847
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Fancy spiral staircase? It looks like it was recycled off a naval ship.

Apparently, they really like their pool table… and their dog…

Why is there a giant flat screen in the corner of the dining room?

I think they bought out the local Persian Rug store.

The stool prominently displayed in the kitchen is a nice touch as well. Why would you put a stool there?

They definitely have some serious computing power. I can’t criticize it too much as I have a similar setup…

With the way they raved about the view, you would think the Pacific Ocean was out back…

This property was purchased on 2/9/2206 for $760,000. The owner used a $608,000 first mortgage, a $76,000 HELOC and a $76,000 downpayment. On 10/22/2006 he refinanced with a $675,000 Option ARM and opened a HELOC for $135,000 raising his total debt to $810,000. $50,000 for 8 months ownership: not bad. Of course, now that values have dropped, he is leaving the lender holding the bag. If this sells for its asking price, and if a 6% commission is paid, Paul Financial LLC stands to lose $283,694. The owner will walk away with his $50,000. Perhaps the new buyer can go borrow from Peter to pay off Paul…

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I’ve got a Mandrake Root
It’s some thunder in my brain
I feed it to my babe
She thunders just the same
Food of love sets her flame
Ah, stick it up

I’ve got the Mandrake Root
Baby’s just the same
She still feels a quiver
She’s still got the flame
She slows down, slows right down
I’ve got the power

Mandrake Root — Deep Purple

Sky Starts Falling — Doves

Is the sky really falling? I guess it depends on whether or not you associate falling real estate prices with the end of the world. Real estate prices are falling, and they will continue to do so until prices are affordable again. With all of the talk about stabilizing the housing market, people overlook the benefits of affordable housing. If people can live in a property and only spend 28% of their income on it, they have money left over for other uses. The economy will benefit from lower prices as discretionary consumer spending will increase. Of course, if you believe in perpetual Ponzi Scheme financing, we can always fuel our economy on ever-increasing debt loads justified by inflated real estate values. However, we just tried that, and so far the results haven’t been too encouraging. We grossly misappropriated resources to non-productive uses, we overbuilt home improvement shopping centers, and we employed too many people in real estate related professions. The inevitable collapse of the Ponzi Scheme has left us deeply in debt, with an insolvent banking system, and with an economic recession. It will take many years for the California economy to readjust from the housing bubble just as it did in the early and mid 90s. The allocation of resources must change, and it will not be a pleasant process. I hope the California economy that emerges is rooted in something productive rather than another unsustainable Ponzi Scheme.

Today’s featured property is another loser in our real estate game of musical chairs. When the music stopped, today’s owner had taken out all the equity and left the lender is without a chair.

Asking Price: $499,900

Income Requirement: $124,975

Downpayment Needed: $99,980

Monthly Equity Burn: $4,165

Purchase Price: $699,000

Purchase Date: 4/13/2006

Address: 10 Orangetip, Irvine, CA 92604

Do you like the $499,900? Why not $499,999.99 and 9/10. If you are going to price like a used car dealership or a gas station, why not go all the way?

Highly upgraded? As opposed to lightly upgraded? Or just upgraded? Or perhaps downgraded? Maybe flippers will start tearing out the good stuff and putting in the junk you see in mobile homes…

How do you like the patio “perfect for entertaining?” I thought I was looking at the grounds of Versailles.

This property was purchased on 4/13/2006 fir $699,000. The owner used a $534,171 first mortgage, a $142,445 second, and a $22,304 downpayment. He refinanced on 5/1/2007 with a $588,000 first mortgage and a $110,100 HELOC effectively pulling out all but $900 of his downpayment. He is now offering it for sale at 29% less than his purchase price. Assuming this short sale is approved, a buyer is found at this price, and a 6% commission is paid, the total loss on the property will be $229,094. Taylor Bean & Witaker Mortgage Corporation will lose on the first mortgage, and Citibank will lose their HELOC money.

.

Who am I supposed to be?
I can’t be sure that the next one will see me

And if the sky starts falling on the street outside
The only thing that satisfies
If the sky starts falling on the heads outside
The only thing that keeps me alive

Sky Starts Falling — Dove

Money Talks — AC/DC

There have been some rumblings about the declining inventory numbers and the slight uptick in sales in Irvine. Perhaps it is signaling a bottom in pricing? This doesn’t seem likely, particularly with the Alt-A and Prime ARMs due to reset over the coming few years. The fact remains that REOs continue to enter the market, and they continue to drive prices lower to find buyers. Until that stops occurring, prices will not stabilize much less appreciate. Today’s featured property is 35% off its 2005 purchase price, and the lender recently reduced the price drastically to find a buyer.

Asking Price: $339,900

Income Requirement: $67,980

Downpayment Needed: $84,975

Monthly Equity Burn: $2,832

Purchase Price: $520,000

Purchase Date: 12/23/2005

Address: 34 New Season, Irvine, CA 92602

This property is even more of a loss for the various lenders than it appears. The property was purchased for $520,000, but the owner managed to refinance into a $456,000 first and a $114,000 second pulling out $50,000 before he quit making payments and walked away. Wells Fargo held the first mortgage debt, and they only bid $360,000 for the property securing their $456,000 mortgage. Obviously, the loss mitigation procedures have changed at these banks. Surprisingly, there were no buyers even at $360,000, so they ended up with the property. After a month in fantasy land trying to get back most of the $456,000 mortgage, they have lowered the price to move the property. At $339,000, this is approaching rental parity at $2,124 per month. If this property sells for its asking price, the total loss after a 6% commission will be $250,494 based on the refinance amount of $570,000.

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Yeow! Tailored suits, chauffered cars
Fine hotels and big cigars
Up for grabs, up for a price
Where the red hot girls keep on dancing through the night
The claim is in you
The sights are on me
So what do you do
That’s guaranteed
Hey little girl, you want it all
The furs, the diamonds, the painting on the wall

Money talks, B.S. walks
Money talks, come on, come on

Money Talks — AC/DC

Vintage Wine — Moody Blues

Isn't real estate supposed to be like vintage wines that get better with age? Rare vintage wines can get very expensive, and unless they turn to vinegar, their prices do always go up. Well it appears the 2006 vintage homes are all turning to vinegar now because they certainly are not appreciating in value.

Today I want to relay a story to you that was told to me by a real estate developer currently buying property in one of our most blighted California bubble markets. His company is purchasing this particular property from the bank for far less than the original loan amount. Do you remember the residual land value calculations from Land Value 101? This particular property was ready for the construction and sale of houses in 2003. The original prices were $400,000 in this particular market. By 2006, houses were selling for $700,000. When sales volumes plummeted, the builder gave up and let the property go back to the bank. The developer ran a proforma using a $275,000 house price. As you can imagine, this did not leave a large residual land value. The bank took the offer. This developer knows he can build and sell houses profitably for $275,000 in this particular market. If prices increase, he stands to reap a windfall. His only real concern is the competition from the REOs, particularly all the previously built homes in this subdivision he is undercutting by over 50%. He knows he is probably going to cause more walkaways, but prices are what they are, and as long as he can build and sell $275,000 houses, it isn't his problem.

Fortunately, for those living in Irvine, the developer is financially stable, and it is concerned about long-term house prices and probably will not cut prices over 50% to move homes. As we noted with the problems in Columbus Grove, those who are off the Ranch are not so lucky. Today's featured property is another of the bad 2006 vintage properties in Woodbury. This seller is really being hosed by his competition as he owes $184,000 more on his property than his comparable neighbor is asking for sale.

Asking Price: $489,000

Income Requirement: $122,250

Downpayment Needed: $97,800

Monthly Equity Burn: $4,075

Purchase Price: $554,500

Purchase Date: 10/12/2005

Address: 142 Vintage, Irvine, CA 92620

Beds:	3
Baths:	3
Sq. Ft.:	1,526
$/Sq. Ft.:	$321
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2005
Stories:	3+ Levels
Floor:	1
View:	Hills, Mountain
Area:	Woodbury
County:	Orange
MLS#:	S529072
Source:	SoCalMLS
Status:	Active
On Redfin:	133 days
Unsold in 90+ days

That is a well written description. It is so rare, I thought it necessary to comment on it.

This property was purchased on 10/12/2005 for $554,000. The owners used a $443,000 first mortgage, a $110,700 second mortgage and put $300 down. On 3/21/2007 they refinanced their second for $141,000 pulling out a quick $30,000. Now that prices are dropping and they got all they could out of the property, they see no need to keep paying the big debt, so they are walking away. Does anyone blame them? Does anyone think we won't be seeing a lot more of this?

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I remember the taste of the vintage wine

It sounds so good to me

Vintage Wine — Moody Blue