Thank You — Dido

Declining markets are very difficult on builders, and it is not for the reasons you might think. Production homebuilders make their money on sales volume and not on margin. They would rather see stable prices and high volumes than periods of booms and busts. As I described in detail in the post Land Value 101, production builders can adjust to different price points as long as there is demand above their cost of production. The vast majority of the gain or loss in house prices falls to land value. In a price bust like we are seeing now, price of houses may drop 40%, but the price of land may drop 85%. The mistake many of the builders made, which is the same mistake they make in every cycle, is that they become land speculators buying land early in the production process. As they are doing their improvements, land values increase, so they make some extra on the land deal — as long as prices go up. When a bust occurs, builders get caught with inventory of both land and houses. It is the land inventory that really wipes them out (think Lennar.) The bottom line is that builders are flexible, and they can adjust to any price level where prices exceed their production costs. The real challenge for builders is during the adjustment when prices are falling.

House prices in speculative markets (California and some others) do not respond to price changes like one would expect. When prices decline, sales volume also declines because people expect further price declines, and they do not want to lose their equity. Anyone who is not kool aid intoxicated becomes hesitant to buy in a falling market — as they should. This is the real problem for homebuilders because theirs is a volume business. The more they lower price to attract buyers, the more buyers are frightened and expect further price declines. It is a downward spiral. Every time a prospective buyers goes into a sales office, they will be told there are no further price reductions and they need to buy now. Of course, further price reductions happen, and the builders lose credibility and buyers become even more hesitant. As we have discussed before, prices will continue to decline until affordability returns to the market, and it makes sense to buy again.

Today’s featured property is a classic example of what happens to people who buy from a builder in a declining market. These people bought at the peak, and now they are looking at a $200,000 loss for their troubles.

There are no property pictures today, but this is the street of models.

Asking Price: $699,900

Income Requirement: $174,975

Downpayment Needed: $139,980

Monthly Equity Burn: $5,832

Purchase Price: $939,000

Purchase Date: 12/19/2006

Address: 21 Conservancy, Irvine, CA 92618

ENJOY THE GENTLE BREEZES AND CITY LIGHTS FROM THIS BEAUTIFUL TURN-KEY
HOME IN LOVELY PORTOLA SPRINGS. MANY UPGRADED AMENITIES, GRANITE
COUNTERTOPS, CUSTOM PAINTS THROUGHOUT. VERY PRIVATE BACK AND SIDE
YARDS. DESIRABLE CORNER LOT LOCATION. SHOW YOUR FUSSIEST BUYERS. FORMAL
DINING ROOM, LIVING ROOM W/FIREPLACE. PRIVATE BALCONY OFF MASTER SUITE.
WALK TO ASSOC. POOL/SPA. CLOSE TO SHOPPING,RESTAURANTS.

GENTLE BREEZES? This is Portola Springs. You are more likely to feel the Santa Ana’s rolling out of the hills than the cool ocean air.

UPGRADED AMENITIES? Upgraded from what? This is a new home.

VERY PRIVATE BACK AND SIDE
YARDS. Does this mean your neighbor cannot look into your back yard from their second story windows like the rest of Irvine?

When these people bought the property, they probably did not think prices would ever fall. They were probably assured by the builder it would never happen, and until recently it was the policy of the landowner not to lower prices, so these people probably felt protected. Unfortunately, the market is not controlled by builders or The Irvine Company, so prices did fall after sales volumes fell to near zero. As prices fall, those who bought at the peak are watching whatever equity they had evaporate, and it serves as a lesson to current buyers to beware. Of course, this is exactly what the builders do not want. They want people to rush in and buy now that prices are lower. The casualties in the neighborhood like today’s sellers show why this is such a daunting problem.

Sold property: 15 Arrowhead, Irvine, CA 92618, $768,000

Builder offering: 46 Conservancy, Irvine, CA 92618, $799,000

Builder offering: 48 Conservancy, Irvine, CA 92618, $768,000

If this property sells for its asking price and a 6% commission is paid, the total loss on the property would be $281,094. That is a lot of money to lose in a year and a half. The buyer put 20% down ($187,800) which is all gone, and American Home Mortgage Corporation is going to lose the rest.

Prices are still too high. Expect further price reductions.

I want to share a story with you today. I recently spoke with a couple who knows who I am and that I write for this blog (There are people who know. Hi Vicstah.) This couple told me there were on the verge of buying a property like this one in Portola Springs in late 2006, and they were going to utilize a sizeable downpayment. Once they started reading the IHB, they decided against the purchase. They thanked me for saving them their downpayment, their credit and their sanity. That is why I write for this blog. So far I have been lucky, but some day there may be repercussions for this hobby. Whatever happens, knowing that I have saved many people from financial and emotional hardship makes it all worthwhile. I will never regret it.

Thank you, thank you all for reading this blog and spreading the word.

Thus concludes another 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.

🙂

.

My tea’s gone cold, I’m wondering why
I got out of bed at all
The morning rain clouds up my window
and I can’t see at all
And even if I could it’d all be grey,
but your picture on my wall
It reminds me that it’s not so bad,
it’s not so bad

I want to thank you
for giving me the best day of my life
Oh just to be with you
is having the best day of my life

Thank You — Dido

Sittin’ on a Fence — The Rolling Stones

We have profiled informal neighborhood cartels where a group of neighbors get together and set WTF asking prices. As with all cartels, they are unstable arrangements because each participant has an incentive to cheat at the expense of the others. Today’s featured property was one of two neighboring properties asking WTF prices. One of the two decided it was time to sell and lowered his price accordingly. The neighbor has got to be really angry as not just will the neighbor sell first, it will also set a comparable price that will make it nearly impossible for the other property to get its asking price. We are not talking about $5,000 or even $50,000, we are talking about $500,000!

Asking Price: $1,299,900

Income Requirement: $324,975

Downpayment Needed: $259,980

Monthly Equity Burn: $10,832

Purchase Price: $1,668,000

Purchase Date: 4/5/2006

Address: 9 Paso Robles, Irvine, CA 92602

Beds:	4
Baths:	5
Sq. Ft.:	4,335
$/Sq. Ft.:	$300
Lot Size:	7,020 Sq. Ft.
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	2001
Stories:	2 Levels
Area:	Northpark
County:	Orange
MLS#:	S521077
Source:	SoCalMLS
Status:	Active
On Redfin:	123 days
Unsold in 90+ days

Guard gared community? enterance? Gourment? seperate? tanden?

3 car tanden, Gym room or office. That could be read “tan den, gym room, or office.” It would be cool to have your own tanning bed den.

I am starting to wonder if realtors believe poor spelling and schizophrenic use of punctuation is a positive. It does make their listings stand out. If realtors believe all publicity is good publicity, they should continue writing like that so we will bring attention to their listings. Perhaps they do not mind that we ridicule them.

Wow! It comes with a Butler’s Pantry. I hope I get to use that graphic again 😉

This is a seller who knows how to lower his price to reach the market:

At the rate he is lowering the price, the property will sell in about 10 years. Based on the equity burn the market is dropping $11,000 to $18,000 a month. The $60,000 price drops will get there eventually, but since the market is at least $500,000 below his asking price today, it will take a very long time to catch up. Plus, if you remember the post Financing in a Declining Market, the new comparable sale will limit the financing. In short, for someone to buy 15 Paso Robles for asking price, they will need about $800,000 cash.

For the record, if the featured property sells for its asking price, and if they pay a 6% commission, the total loss on the property will be $446,094. It looks as if the owner is going to take a significant equity loss. There is a refinance for $1,334,000, but I see no other HELOCs or second mortgages. Of the $446,094 total loss, $334,000 came out of the owner’s pocket. I guess the WAMU can breathe easy, they will only lose $112,094 on this one.

When you see losses like that, does it inspire you to keep sitting on the fence? The knife catcher that buys this place will probably lose a similar amount. With those dollar figures, they really are a chainsaw catcher…

.

Since i was young i’ve been very hard to please
And i don’t know wrong from right
But there is one thing i could never understand
Some of the sick things that a girl does to a man, so
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
All of my friends at school grew up and settled down
And they mortgaged up their lives
One things not said too much, but I think it’s true
They just get married cause there’s nothing else to do, so
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
I’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence
The day can come when you get old and sick and tired of life
You just never realize
Maybe the choice you made wasn’t really right
But you go out and you don’t come back at night, so
i’m just sittin’ on a fence
You can say i got no sense
Trying to make up my mind
Really is too horrifying
So i’m sittin on a fence

Sittin’ on a Fence — The Rolling Stone

Sugar Shack — Jimmy Gilmer and The Fireballs

There were people attempting flips in 2007. There were looking for their own Sugar Shack to sweeten their lives. Prices in our area were still at or near the peak, but all the signs were pointing to a downturn which was already underway in many markets. Residential real estate markets are dominated by amateurs because professionals do not bother with the headaches of what is generally a poor investment. Non-professionals by and large have no idea what they are doing, and they only make money when they get lucky because the emotions of speculators always lead them astray (remember Speculation or Investment?) Today’s featured property was purchased after the collapse of subprime was front page news in March of 2007. Our would-be Donald Trump either wasn’t watching the news, or he truly believed the subprime containment BS put out by the media. This guy actually put some of his own money into the deal, so it wasn’t just gambling with the lenders money. You would think if someone was going to put their own money in the deal they might have a clue about what he was doing: apparently not.

Asking Price: $699,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Monthly Equity Burn: $5,825

Purchase Price: $850,000

Purchase Date: 4/4/2007

Address: 36 Gillman Street, Irvine, CA 92612

Is this another example of a house being sold or foreclosed with an unwitting renter inside? Anyone think this landlord is skimming the rent?

The property was purchased for $850,000 with a $637,500 first mortgage, a $170,000 second mortgage, and a $42,500 downpayment. The 5% downpayment evaporated even before he closed as he overpaid for the house. When the credit crunch hit in August, the property values really plummeted, and now he is asking $699,000. If this house sells for its asking price, the total loss on the property after a 6% commission will be $192,940. The seller will lose his $42,500, and the second mortgage holder will lose $150,440. The lesson for our speculator will not be as tough as it is for the lender, but losing $42,500 along with trashing your credit cannot be a good time.

.

Theres a crazy little shack beyond the tracks
And evrybody calls it the sugar shack
Well, its just a coffeehouse and its made out of wood
Expresso coffee tastes mighty good
Thats not the reason why Ive got to get back
To that sugar shack, whoa baby
To that sugar shack.

Now that sugar shack queen is amarried to me, yeah yeah
We just sit around and dream of those old memories
Ah, but one of these days Im gonna lay down tracks
In the direction of that sugar shack
Just me and her yes were gonna go back
To that sugar shack,
Whoa uh ohT
o that sugar shack, yeah honey
To our sugar shack

Sugar Shack — Jimmy Gilmer and The Fireball

She Works Hard for the Money — Donna Summer

HELOC abuse is just as prevalent among women as it is among men. With all the free money floating around, it is to be expected that a woman who wanted to have the finer things in life would become accustomed to a lifestyle well beyond her means. Today’s featured property is owned by a woman (as the decor makes obvious,) and she managed to borrow and spend herself out of her home. There is a certain Shakespearian Tragedy element to stories like these. Today’s seller made a series of bad decisions which lead to her downfall. How are we supposed to feel when we see these situations? Part of me is sad that this woman is losing her home, and part of me is not sad because she brought this fate onto herself (and I suppose a little schadenfreude is mixed in as well.) The emotions we all feel when confronted with these stories serve to teach us all not to do what she did.

Asking Price: $357,642

Income Requirement: $89,410

Downpayment Needed: $71,528

Monthly Equity Burn: $2,980

Purchase Price: $174,000

Purchase Date: 6/26/1998

Address: 434 Monroe, Irvine, CA 92620

Beds:	2
Baths:	3
Sq. Ft.:	1,142
$/Sq. Ft.:	$313
Lot Size:	–
Property Type:	Condominium
Style:	Townhouse
Year Built:	1985
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	S534175
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

The exclamation points are back. Hurray!!!!!!

Fireplaced family area? WTF?

gourmets dream? (needs an apostrophe) Does that mean I can use the gourmet kitchen graphic?

So how often did this woman go to the housing ATM? Let’s look at the bullet point recap:

• The property was purchased for $174,000 on 6/26/1998 with an FHA loan of $165,900 and a $8,100 downpayment.
• On 10/31/2001 the first sip of kool aid was a refinance for $180,000 pulling out her downpayment and an additional $6,000.
• On 6/4/2002 she opened a stand-alone second for $28,000.
• On 8/20/2003 she refinance for $189,000.
• On 12/30/2003 she opened a HELOC for $101,000.
• On 6/8/2004 she opened a stand-alone second for $8,000.
• On 9/22/2004 she opened a stand-alone second for $40,000.
• On 12/30/2004 she refinanced for $350,000.
• On 2/1/2005 she opened a HELOC for $64,000.
• On 12/9/2005 she opened a HELOC for $10,500.
• On 9/26/2006 she refinanced with an Option ARM for $422,400.
• On 9/26/2006 she opened a stand-alone second for $52,272.
• On 7/12/2007 she opened a stand-alone second for $5,300.
• Total debt on the property is $422,400 + $52,272 + $5,300 = $479,972.

That is quite a finance history. Her return-on-investment is excellent. She put in $8,100, got it back in 3 years, plus she took out and additional $305,972.

If this property sells for its asking price, her lenders, Washington Mutual and Apex Mortgage Services stand to lose $99,501 after a 6% commission on a property which would be selling at a profit of $183,642.

The lenders were pretty stupid, weren’t they?

Thus concludes another 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.

🙂

.

She works hard for the money
so hard for it honey
she works hard for the money
so you better treat her right

She’ll never sell out
she never will
not for a dollar bill
she works hard

She Works Hard for the Money — Donna Summer

Little House — The Fray

The distress at the low end of the market doesn’t bode well for the high end. In a normal, healthy real estate market, small condos generally sell for the highest prices on a per-square-foot basis. When single-family detached homes where going for upwards of $400/SF, small condos were selling for $450/SF and up. Small properties cost more on a per-square-foot basis because the inexpensive square footage in bedrooms and living areas are much smaller, but the expensive square footage in kitchens and bathrooms are still present. Right now, in our market, the smaller condos are selling for much less on a per-square-foot basis than the larger, single-family detached homes. This situation will not persist. Either small condo prices will increase, or larger home prices will fall. I think it will be the latter.

Asking Price: $349,876

Income Requirement: $87,469

Downpayment Needed: $69,975

Monthly Equity Burn: $2,915

Purchase Price: $424,000

Purchase Date: 8/4/2005

Address: 189 Pineview, Irvine, CA 92620

Beds:	2
Baths:	1
Sq. Ft.:	1,202
$/Sq. Ft.:	$291
Lot Size:	760 Sq. Ft.
Property Type:	Condominium
Style:	Cape Cod
Year Built:	1977
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	S533137
Source:	SoCalMLS
Status:	Active
On Redfin:	9 days
Fixer-upper

One Carport and one assigned parking. That’s desirable…

Guess what? This property was purchased with 100% financing by a flipper. The music stopped playing, and he couldn’t find a chair. First Franklin is the big loser today. If this property sells for its asking price, First Franklin stands to lose $95,116. This sales price would leave the first mortgage unharmed, but it will wipe out the second. Some knife catcher might buy it for that, but it is still grossly overpriced even for an owner-occupant.

It is interesting to watch this first wave of knife catchers. These people have no concept of what a property is really worth. They are just as kool-aid intoxicated as the fools who bought during the bubble. As this group also gets their heads handed to them, the market will be open to a another significant leg down. I would look for this in the fall after the “spring slide” (there was no rally just a brief flattening.) When this group of buyers is exhausted, there will be very little support below the market, and there will be a huge number of foreclosures to absorb. This fall and winter should be very interesting.

.

She doesn’t look, she doesn’t see
Opens up for nobody
Figures out, she figures out
Narrow line, she can’t decide
Everything short of suicide
Never hurts, nearly works

No one expects
You to get up
All on your own with
No one around

Little House — The Fray