Standing in line marking time– Waiting for the welfare dime cause they cant buy a job The man in the silk suit hurries by As he catches the poor old ladies eyes Just for fun he says get a job
Thats just the way it is Some things will never change Thats just the way it is But dont you believe them
California is proud state with a long history. Now it is a mess. We have been living for the day for too long. Will we make another 100 years?
I was recently emailed a report (090906_labor_day.pdf) about the California economy. Here are the highlights:
The Recession Has Battered California’s Job Market
Two years of job losses erased four years of job gains.
California has approximately the same number of jobs as it did nine years ago.
A smaller share of Californians is working today than at any point since the late 1970s.
Recent job losses have been deeper than those of prior recessions.
Nearly all major sectors of California’s economy have lost jobs during the downturn.
California’s Unemployment and Underemployment Rates Reached All-Time Highs
California’s unemployment rate hit a record high of 11.9 percent in July 2009.
More than one out of four unemployed Californians (28.2 percent) had been jobless for more than six months in July 2009 – the highest level ever recorded.
Nationally, there were nearly six job seekers for every job available in June 2009.
The monthly number of jobless Californians filing initial claims for unemployment insurance (UI) benefits increased by approximately 152,000 (81.9 percent) between June 2007 and June 2009.
Many Californians are likely to run out of UI benefits before they can fi nd work.
The number of underemployed Californians more than doubled in two years.
Nearly one out of five working-age adults (18.5 percent) was “underutilized” in July 2009.
Unemployment rates for California’s men and Latinos have risen steeply.
The Recession Has Diminished Workers’ Earnings
Workers’ hourly wages lost purchasing power across the earnings distribution as the recession deepened.
Reduced hours of work diminished many workers’ weekly earnings.
The gap between low-wage and high-wage California workers widened during the past generation.
Recent Income Gains Were Not Broadly Shared
The bulk of recent income gains went to the wealthiest Californians.
Recent uneven income gains continue a longer-term trend.
The top 1 percent of taxpayers has nearly doubled its share of AGI since the early 1990s.
The share of income going to the top 1 percent of US taxpayers is at a 79-year high.
I am sure the rich fat-cats on Wall Street are suffering too…
Don’t worry, I am sure our inflated house prices will continue to rise.
Perhaps not…
Salinas, California, 1939.
Asking Price: $675,000
Income Requirement: $127,796 Downpayment Needed: $135,000
Purchase Price: $975,000 Purchase Date: 9/27/2006
Net Gain (Loss): -$340,500 Percent Change: -30.8% Annual Appreciation: -10.3%
Beds: 4 Baths: 3.75 Sq. Ft.: 2,630 $/Sq. Ft.: $257 Lot Size: – Property Type: Detached, Condominium Stories: 2 Community: Northwood County: Orange MLS#: T09088634 Source: MRMLS Status: Active On Redfin: 35 day
Beautifully upgraded home in Irvine gated community. Granite counter tops, ceramic tile floors, down stairs master. Large back yard as well as front yard. Upstairs additional bedrooms along with very private suite and loft. Perfect for guests! End of Cul de sac!! NO SHOWING TILL AFTER Thursday 8 20
I wonder if the owner had to sell their SUV and buy the Mini…
This house was purchased at the peak with 100% financing. The owners gave up paying ages ago, but they took the free ride.
Foreclosure Record Recording Date: 02/23/2009 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2009000080972
Foreclosure Record Recording Date: 06/04/2008 Document Type: Notice of Default Document #: 2008000268212
What will be left of California after the recession is over?
Do very low short sale prices still have shock value? If too many sellers go this route, the shock wears off, and expectation of lower future prices becomes the norm.
When I was a child I caught a fleeting glimpse Out of the corner of my eye. I turned to look but it was gone I cannot put my finger on it now The child is grown, The dream is gone. I have become comfortably numb.
Recently, an astute observer noted that my being less angry about the Great Housing Bubble may be a sign of Stockholm Syndrome. Have I become comfortably numb to my subjugation to the will of my Wall Street masters that I no longer feel the rage over the injustice? Have I become numb through exposure to this issue every day?
Psychologists know that repeated exposure to any anxiety-producing stimulus will lead to a reduced response over time through gradual desensitization. Perhaps me and many readers have become desensitized to the outrageous behavior of our Government and their Wall Street Overlords.
Kool aid intoxication will wear off through gradual desensitization, and the short sale gambit is at the heart of this phenomenon.
Short Sale Gambit
The short sale gambit is the ploy used by sellers and realtors where a property is listed for sale significantly below recent comps to generate buyer interest and hopefully ignite a bidding war. In our market this year with its limited inventory, this gambit has worked quite well. This ploy relies on kool aid intoxication for its effectiveness. People think the good deal is real, and there will not be other deals like it in the future — they still fear being priced out forever.
To give you an idea of how widespread this phenomenon is, consider the following listings:
What do all these listings have in common? They are all priced well below comps to solicit bids in the short sale process. So what do you think happens when sellers do this too much?
Over time, buyers come to realize that sellers are playing a game. The property is listed to attract offers, then the bank takes months to process the offer price, and by the time the bank approves a short sale price, the bidders have long since moved on to other properties. When this practice becomes common — which it is now — buyers become cynical and they stop putting in offers.
What would be the natural reaction of sellers when buyers stop putting in offers? They make the discounts even more extreme. If 5% below comps fails to generate interest, perhaps 20% below comps will (see 22_Rockwren_Woodbridge_Irvine.pdf for an example). Do you see where this is going?
As short sellers increase their discounts to attract offers, it actually serves to make buyers more skittish. Why would you bid on a property with a 5% discount when waiting will prompt a 20% discount? Ultimately, the short sale gambit is self defeating, and it becomes the primary mechanism for lowing prices in the market. Low inventory is the only thing keeping prices high right now. What happens when more inventory hits the market and the properties start competing with each other to attract buyer attention? Lower prices happen.
The Private Mortgage Insurance Problem
The short sale gambit does create a unique opportunity for property flippers. There are many properties where the listing agent has obtained a dozen or more bids on a short sale, but the bank refuses to take one of these offers and instead opts to foreclose, even when the short sale bid brings in more money. Many property flippers are buying properties at auction for 20% less than existing short sale offers on the property — it is practically a no-risk transaction for the flipper. Why are lenders doing this?
If the mortgage is covered by private mortgage insurance (PMI), the lender actually makes more money by foreclosing than by accepting the short sale. If they foreclose, the shortfall at the auction is covered by the PMI company. If they accept a short sale, PMI does not pay out. Basically, the flippers at the auction are making a profit at the expense of the PMI company.
I wonder how many PMI policies AIG has issued? and how many of these losses we are going to pay through our taxpayer bailout?
A Bella Rosa Home in the exclusive gated community of Northwood II. It
contains many upgraded features, hardwood floors, plantation shutters,
french doors, custom paint, epoxy floor in garage, stainless steel
appliances with double oven, granite countertops, central air, cozy
fireplace, 4 large room plus loft. Association has Jr Olympic Pool, Spa
and Clubhouse. Conveniently located near Irvine Spectrum, shopping and
Dining. Within Irvine Unified School District.
The short sale gambit does make for interesting loss calculations — despite the realistic inaccuracy of the results. If this property sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $426,080. It is being offered for 41% off its peak purchase price.
THIS IS A SMOKING DEAL!!! The LOWEST PRICED home in the very desirable
community of West Irvine. ***BEAT THE BANK*** This is an investors
dream. Dual Master Suites, Dual Vanities, & HUGE walk-in closets
plus additional powder room for guests. Loads of storage throughout.
Durable laminate flooring & newer carpet, high ceilings and many
windows that bring in a lot of natural light. Recessed lighting in
every room. Custom Built DUAL Computer Niche, with more storage and
shelving, offers the perfect work space. Separate laundry room. 2 car
garage with direct access and more storage. Custom stamped concrete
throughout the private and enclosed courtyard. Situated in a quiet and
desirable location within the community, which offers a tot lot, pool,
spa, kiddie pool, and tennis courts. Easy access to both 5 & 55
fwys. Near the Tustin Market Place, Farmers Market, Tustin Sports Park,
Award Winning schools, hiking & biking trails and many more
ammenities + LOW Mello Roos roughly $44/mo.
ammenities? At least the words “throughout” and “Separate” were spelled correctly.
This is an investors
dream. Really, why?
{Adsense-ir}
This second property is borderline on being priced to market. It is a bit below, but perhaps not far enough to generate bidding-war interest. If it sells for its current asking price, and if a 6% commission is paid, the total loss will be $154,080. It is being offered for 26% below its 2005 purchase price.
And the world don’t stop There is no time for cracking up Believe me friend Cause when freedom comes I’ll be long gone You know it has to end
There’ll be no better time There’ll be no better way There’ll be no better day to save me Save me Yeah, save me Yeah, save me I hope you see what I see
The people who bought here must be weeping. The values of their high-end properties has fallen 40%, and despite our bear rally, sales prices are not going up here. These properties are much closer to the bottom than to the top, but even at $750,000, the property is still overpriced when you consider the HOAs and Mello Roos.
I have profiled a number of properties on this street: in May of 2009 I featured 14 Desert Willow in Desert Willow Did Not Fall, on April 30 of 2009 I featured 30 Desert Willow in Nine Months as REO, in July of 2007 I featured 28 Desert Willow in Weeping Desert Willow, on May of 2009 I featured 26 Desert Willow in Nine Months as REO. Today we are moving down the street and featuring 40 Desert Willow. It is another huge price reduction — 43% off.
Most of these properties have been REO, and since the prices have fallen so much, and since the financing of these properties is so toxic, we are likely to see capitulation and a complete turnover of this housing stock. Would you keep paying on $1,306,500 in mortgages when the resale value is $750,000? That is theTipping Point I wrote about last October.
This is a beautiful home,spacious,lots of storage, two car garage big
bedrooms and bathrooms, nice kitchen with ample space for cooking and
entertaining family and friends.Beautiful land scape front and
back.****Short Sale****Short Sale
The realtor used four exclamation points to go with the four photographs, but she forgot to repeat short sale four times.
This property was purchased on 2/9/2006 for $1,306,500. The owner used a $979,517 first mortgage, a $195,903 HELOC, and a $131,080 downpayment. Obviously, the downpayment equity is gone — bummer. It may be some small consolation to the owner that she has been living “rent free” for more than a year:
Foreclosure Record Recording Date: 08/25/2008 Document Type: Notice of Default Document #: 2008000402265
To get a NOD in August, the owner was in default at least 90 days prior, so this owner has not made any payments for the last 15 months. If you divide her downpayment by 15, her lost downpayment comes to about $8,738 in what functions as prepaid rent.
There just isn’t any good way to spin a $601,500 loss….
And so concludes another week at the Irvine Housing Blog, chronicling the Irvine home market since September of 2006.
Have a great weekend.
😉
{book4}
Growing up in Wisconsin, I used to see the Curling results on the local news. Searching for quadruple, I found this on Youtube:
Snow, cement and ivory young towers Someone called us Babylon Those hungry hunters Tracking down the hours But where were all your shoulders when we cried Were the darlings on the sideline Dreaming up such cherished lies To whisper in your ear before you die
And the whole earth was of one language, and of one speech. And it came to pass, as they journeyed from the east, that they found a plain in the land of Shinar; and they dwelt there…. Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth: and from thence did the Lord scatter them abroad upon the face of all the earth.
During the bubble, everyone was of one language and one speech — kool aid; the collapse has counfounded the “real estate always goes up” crowd and scattered them upon the face of the pavement.
As I documented in Equity Inferno, these towers have a special significance to me; “(the) dark tower is
going to stand as the symbol for the height of hubris of the housing
bubble.” To me this property has always been the worst of the worst as far as valuations being detached from fundamentals. The readers of this blog should not be surprised to see properties like the ones I am featuring today are going for 60% off their peak purchase prices. As I will demonstrate, even at these prices, the properties are still greatly overvalued. I will go on record today making a bold prediction:
A condo at the Marquee at Park Place will sell for under $200,000.
That’s right, one of these condos will go for under $200,000, perhaps well under.
To demonstrate why I believe this will happen, we need to look at a different IHB report — one tailored to cashflow investors.
Cover Sheet
Similar to the report we prepare for owner-occupants, the report cover sheet contains summary information including
pictures, the address, and a few identifying characteristics. The first piece of summary data is the asking price, and
this is followed by the Comparable Value, and the Likely Transaction Price. There is no IHB Fundamental Value. Cashflow investors are not interested in how we may value the property, they want to know what rates of return are available, and they can decide their own price based on the cashflow. We provide the necessary data to make this determination.
Capitalization Rate and Cash-On-Cash Return
One key concept for Investment Value of Residential Real Estate is capitalization rate. The Capitalization (cap) Rate is the (yearly) Net Operating Income divided by Asking Price (assumed purchase price). It is the simplest measure of an investment’s financial performance, and it provides a convenient comparison to competing investment alternatives. A cap rate is like an interest rate on a checking account, a mutual fund return, or a bond yield. Cap rates change over time to reflect the perception of risk in real estate as compared to other investments.
The cap rate is inversely related to price; in other words, high cap rates are synonymous with low prices and visa versa. The cap rate an investor will accept varies from person to person. There is no single appropriate rate to apply to value. Instead, we show a range of values at different cap rates to show the current investment return someone can expect from this property.
The Cash-On-Cash Return is similar to a capitalization rate in that it shows a return on investment, but it is measured by comparing the Total Profit and Loss after Expenses, Debt and Taxes to the Total Cash Costs. This is the important rate of return for investors who are not purchasing with all cash. As long as debt is less expensive than the cap rate, the cash-on-cash returns can be magnified by increasing debt. This is an appropriate use of leverage to increase investment returns — to a point.
This property, even with a $360,000 asking price, only reflects a 3.67% cap rate. You would be better off in 10 year Treasuries. Since the cap rate is less than the interest rate (cost of debt), applying a mortgage to the property actually hurts the returns. This very unusual circumstance reflects how low cap rates became and how much the market was depending on appreciation.
Rental Income, Operating Expenses and Net Operating Income
An accurate estimate of income and expenses is required to value a property based on cashflow. The Gross Rent is the monthly rental rate pulled from comparable properties. Assuming this rent can be obtained, an allowance for Vacancy and Collection Loss is subtracted to arrive at a realistic Monthly Rental Income. The Operating Expenses are those fees and costs typical of rental properties. This does not include any financing or tax implications.
Many properties are purchased by wealthy individuals looking to diversify their holdings among asset classes. These investors want to deploy capital with safety and obtain a periodic, measurable return on their investment. Under those circumstances, the properties are purchased without debt. The preponderance of all-cash investments creates the need to view the investment on an all-cash basis.
Net Income is Rental Income minus Operating Expenses. The capitalization rate is based on Net Income. It is the rate of return on the investment when no debt is utilized. Once you introduce debt, returns get magnified, but so do the risks. This spreadsheet allows viewing different financing alternatives.
There are a few different line items to consider when the property is a rental investment. The Maintenance and Replacement Reserves are often double the cost of an owner occupied property. Unless you are managing the property yourself, there will be a Property Management Fee for someone to handle tenant issues. There will also be expenses related to your owning the property through tax filings and other Miscellaneous Expenses.
Financing and Taxes
The financing and taxes are considered separately because some owners do not finance the purchase. There are two items of note in this section as it differs from the owner occupant version. (1) The Tax Savings % will be your highest marginal tax rate. The assumption is that an owner of investment property has already given up the personal exemption, so any interest write off would be at the highest marginal rates — there is one caveat — the property must positive cashflow for the write-off to be allowed.
(2) The opportunity cost is ignored. The whole point of calculating the cap rate or the cash-on-cash return is to establish a value to compare to your opportunity cost. To try to adjust for it here would make the results inaccurate. It would be like comparing twice or double counting.
Cash Acquisition Demands
The Cash Acquisition Demands is similar to the owner occupant version except that the emergency cash reserves are removed. Emergency cash reserves is an important financial planning consideration for an owner-occupant, but an investor has other concerns.
Comparative Sales Value and Negotiating Range
This table is similar to the owner-occupant version as it shows the recent comps and projects negotiating ranges. When we estimate the Likely Transaction Price, we look at comparables and adjust it for the market trend. In order to see the reasoning behind our determination, I have added the Short Term Direction of Prices.
Capitalization Rates and Property Values
The Capitalization Rates and Property Values section replaces the Cashflow Value and IHB Fundamental Value section. As I said, each investor has their own required rate of return, so rather than present what we believe to be the right value, we show investors a range of values based on the cashflow. An investor who demands higher cap rates will bid more conservatively, and a more aggressive investor will bid higher.
Asking Price and Value Ranges
As with the owner-occupant version, the information is presented in a graphic form. The property values at different cap rates makes for an interesting view of pricing.
I base my prediction of a unit in this complex selling for under $200,000 from the chart above. The cap rate values are so low they fall off the bottom of my chart. Cap rates have to stay under 6.5% for this property not to fall below $200,000.
Comparable Sales, Comparable Rentals and Notes
This is the new and improved section based on the feedback from readers asking for the dates of the comparables. The notes are different including a section on the Capitalization Rate and Cash-On-Cash Return.
What were they thinking?
It is obvious that I do not believe these condos are a good investment. Any cashflow analysis at all would have revealed this fact to even the most kool aid intoxicated. The only reason people bought in these towers was to flip the property to an even bigger fool. There is no better example of Ponzi Scheme thinking and behavior than the buyers in the North Korea Towers.
This desirable round plan ‘A’unit has 2beds,2baths with 200 degrees of
glass walls,lots of closet,top of the line fixtures. This luxious tower
offers 24 hr concierge,gated parking,pool,spa,fitness,guest
parking,meeting room,theater room & billiard room.It is also close
to HWY 405,55,Airport,world class shops.This unit has one of the
preimer terrace locations so fountain, city view, lush green lawns,
arbours are added bonuns.
200 degrees? Does this seem like an odd measurement to you?
Beautifully upgraded, light and bright 2 bedroom condo plus separate
Den for guests or office in fabulous Marquee Park Place. Built in 2006,
this lovely condo has a spacious living room and separate formal dining
room. Kitchen with granite counters, Stainless Steel Appliances,
beautiful maple hardwood flooring throughout living area, carpet in
bedrooms, Master Suite with separate shower and spa tub, marble
flooring. Lots of community amenities, close to airport and shopping,
24 hour Concierge, Elegant Lobby, fitness center, community pool, spa,
guard gated entry, guest parking. 2 parking spaces and much more.
How do you upgrade one of these? Gold fixtures?
The Marquee Park Place North Korea Towers are imploding. This was foreseeable. Cashflow analysis is not overly complicated, and it is a powerful to for avoiding catastrophes like today’s featured properties. There are no guarantees in investing, and we can only provide analysis and recommendations. Cashflow analysis has its limitations (you wouldn’t have bought anything after 2002), but these limitations are also its strength; unless you want to speculate in a housing bubble.
Nobody wants to face the consequences of their decisions. Most would rather fly away than face the music. Today’s owners are no exception; they already spent their house, so it is time to walk away and let someone else clean up the mess.
This property was purchased on 10/31/2001 (Halloween?) for 317,000. The owners used a $253,600 first mortgage, a $31,700 second mortgage, and a $31,700 downpayment.
On 2/26/2003 they refinanced with a $290,000 first mortgage.
On 10/23/2003 they opened a HELOC for $100,000.
On 4/7/2004 they opened a HELOC for $150,000.
On 5/7/2004 they opened a HELOC for $136,000.
On 3/17/2006 they opened a HELOC for $250,000.
On 8/3/2006 they refinanced their first mortgage with a $560,000 Option ARM.
Total property debt is $560,000 plus negative amortization.
Total mortgage equity withdrawal is $274,700.
This house provided these owners with $55,000 per year in tax-free spending money. It would take a $75,000 salary to take home that kind of money.
Next time around, are you going to be picking up your bags of cash from the lenders?
Spacious Home with Vaulted Ceilings, Open Floor Plan. HUGE Long Family
Room with Lovely Bricked Fireplace and Wet Bar. Living Room with
Fireplace, Formal Dining Room, Kitchen with Newer Appliances and
CounteTops. Extra Room with air conditioner off of the Large Master
Bedroom that can be used as an office, den, playroom or storage.
Central air through rest of the house. Large Private backyard that
backs to Greenbelt 2 Car Garage with newer roll up door. Walk to
shopping, Restaurants, Award winning Irvine Schools
Why do realtors alternate between sentence case and Title Case?
If this property sells for its current asking price, and if a 6% commission is paid, the total gain on the sale will be $154,000, a 58% gain. However, since they have already spent the money, this will be a short sale, and the lender stands to lose $90,000 plus negative amortization.
When I was a child
THIS IS A SMOKING DEAL!!! The LOWEST PRICED home in the very desirable
Spacious Home with Vaulted Ceilings, Open Floor Plan. HUGE Long Family