Irvine Housing Blog

Frightened Sellers Who Missed the Market Lower Prices in a Panic

Posted: 23 Aug 2010 03:30 AM PDT

The spring rally is officially over as sales in Southern California have dropped dramatically. Sellers are getting frightened and greatly reducing their asking prices.

Irvine Home Address ... 14911 DOHENY Cir Irvine, CA 92604
Resale Home Price ...... $499,000

You’re such a catastrophe
Hold on, you’ve been running for oh so long
And soon I’ll be gone
You’ve got to build it up and then break down

Four Year Strong -- Catastrophe

The Federal Reserve and the government spent the last 18 months engineering a market bottom through a variety of market props. The powers-that-be hoped the market would support itself as the artificial props were removed. Well, it isn't working out that way.

Home sales slump in July

Southern California sees a 21.4% drop in home sales from 2009 but tax credits skew the figures.

[Before the article even starts, the writer has to put in some reassuring bullshit for nervous bulls. It goes downhill from here.]

August 18, 2010 -- By Roger Vincent, Los Angeles Times

Southland home sales fell dramatically in July as federal tax credits for buyers expired, yet the median home price declined only slightly from June.

Volume always precedes price. In 2007 volume dropped off, inventory ballooned, and prices began to roll over. It was the beginning of a slide that went unabated until early 2009 when supply was constricted enough to prevent further declines. Since the bubble was not allowed to naturally deflate, we are awaiting another leg down to return us to reasonable valuations.

Observers say buyers' rush to take advantage of the tax benefits pushed forward sales that would otherwise have taken place later in the summer, creating a statistical drop that didn't signify sudden underlying market weakness.

Observers say? Well, I am an observer, and I say that the volume drop has far exceeded any "statistical drop" and falls into the category of complete disaster showing underlying market weakness. This guy is trying to make a huge drop in sales volume sound like no big deal. Typically, a sudden 20% drop in sales is a signal that the market has topped. The last time a similar event occurred was June of 2006.

When averaged, home sales have been fairly flat in recent months, said Gerd-Ulf Krueger, principal economist at HousingEcon.com.

"The lack of progress on the economic front is just having a very problematic impact on the psychological situation of a lot of American consumers," Krueger said. "They are very cranky."

So now we are all cranky? That explains a lot. Perhaps we will change our mood with a few more feel-good nonsense stories in the newspaper.

Notice how this is being portrayed as a completely psychological problem. This implies that the condition will change as quickly as people can change their mind. Such an idea is comforting to bulls, but it ignores the structural problems of foreclosure-induced bad credit, increasing unemployment, and tightening credit standards that are preventing people from buying. There is a legitimate reason for people's "crankiness" that will not disappear if people suddenly change their state-of-mind.

The median price for all new and resale single-family homes, condominiums and town homes in July in Southern California was $295,000, according to MDA DataQuick of San Diego. Although that was a 1.6% drop from June, it represented a 10% increase from a year earlier, the real estate research firm said Tuesday.

Prices have rolled over at the peak of the spring selling season. That is not a good sign. What is going to happen in the historically weak fall and winter? Notice the writer had to spin it with some good news about a higher media to lessen the impact. Of course he ignores that a higher median only reflects a change in product mix and not a real increase in prices.

Year-over-year price increases have occurred throughout 2010, with the exception of a 1% dip in April. But such advances will be harder to come by in future months, DataQuick analyst Andrew LePage said. Median prices — the point at which half the homes sold for more and half for less — were depressed early last year by a glut of distressed sales in cheaper inland markets, then moved up in later months as sales activity spread to wealthier neighborhoods.

"The high end came alive in the middle of last year," LePage said. "Sellers got real and buyers started buying."

"came alive" and "started buying" Let's put on our cheerleader uniforms and shout "Go team!" The real point lost in the rah rah is that sellers finally started lowering their prices in order to sell their properties.

A total of 18,946 homes were sold in the six-county region, a 20.6% drop from the previous month and a decline of 21.4% from July 2009, DataQuick said.

Those numbers are a catastrophe. New home sales plummeted 33% with the expiration of the tax credits. And now resales are confirmed at 20% off what was already 20% below historic norms. People can try to spin that all they want, but another 20% decline from already a weak sales volume does not bode well for the market.

"It was to be expected," LePage said, because many sales closed in May and June after buyers rushed to take advantage of a federal tax credit of up to $8,000.

Let's be a bit more specific here. Some kind of decline in sales was expected; that much is true. Nobody forecast a 33% drop in new home sales or a 20% drop in resale volume. If anyone had credibly forecast such a decline, the government probably would have extended the credit. I'm glad they didn't ask me.

About 34% of resales of existing homes involved foreclosed properties, compared with 33% in June and 43.4% in July 2009 in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. Foreclosure sales have been flat for the last few months, LePage said.

Home prices will also be mostly flat in the months to come, perhaps with a slight upward trend, Krueger predicted.

That is pure NAr shilling nonsense. What is going to make prices trend upward? Ballooning inventory? Falling demand? A weakening economy? The only thing holding up prices at all is the falling interest rates, and Low Interest Rates Are Not Clearing the Market Inventory.

"That won't change until we hit the wall in terms of supply," he said.

Irvine's inventory hit 879 homes on Saturday, August 21, 2010. Where exactly is this wall Mr. Krueger speaks of? Is it when we eclipse the 2008 inventory peak of 948 houses? Or have we already hit it because of low demand?

Krueger found some encouragement in the number of homes being snapped up by investors. Almost 22% of July home sales were to absentee owners who intend to resell or rent them to tenants.

Krueger found some encouragement? Good for him. Why do I care? Is this supposed to be a news story giving me information, or is this an NAr press release to make homeowners and knife catchers feel good about their speculative bets.

"There is pent-up demand for speculative product," he said, and even a shortage of foreclosure-related bargain properties on the market as far as investors are concerned.

The old "pent-up demand" nonsense. Desire is not Demand. If we had actual demand -- people with desire who can put dollars behind it -- we would not have a huge decline in sales volumes. What we have done is pull all our available demand forward with a plethora of government incentive programs. The evidence clearly shows a total lack of demand, nothing is pent-up.

Recent first-time buyer Steven Kaplan said he and his wife were not impressed with the distressed properties they saw on the market around Melrose and La Brea avenues in Los Angeles. Many were "short sales" priced for less than the banks were owed.

"What we were seeing for $600,000 were totally trashed houses," the 33-year-old sound engineer said.

The couple ended up buying a smaller house for less than $600,000 last month that didn't need a lot of work. He and his wife, Lola Stewart, had been thinking about buying a house for about five years. They decided to plunge ahead when they saw both home prices and apartment rents tick up a bit earlier this year.

This couple bought out of fear of being priced out. Very sad. This false price signal from the bear rally has enticed many to buy prematurely.

"We were looking to get a better place," he said, "and low interest rates made us able to actually afford something."

The lure of loans at rock-bottom interest rates, though, still isn't strong enough to overcome weak consumer confidence, said broker Syd Leibovitch, president of Rodeo Realty Inc. in Los Angeles.

"Interest rates are at 1950s levels," he said. "I am surprised that hasn't spurred more activity."

Inventory on the market is almost double what it was in February, Leibovitch estimated. "Agents are no longer complaining they have nothing to show. There are lots of choices now."

Mr. Krueger said we won't have any problems until inventory hits a wall. Isn't a doubling of inventory a telltale sign that we have have hit the wall already?

Agent Lynette Williams, who specializes in northeast Los Angeles and Pasadena, said she was also seeing more houses on the market, and some of them in select neighborhoods sell rapidly. Still, she is apprehensive about how the market will perform without federal tax credits. State subsidies are also phasing out.

Interest rates may be low, but getting financing is no picnic, she added. "Banks are scrutinizing everything."

roger.vincent@latimes.com

Banks are scritinizing everything? LOL! Let's go back to 100% financing on stated income and see how that turns out.

WAMU Option ARM

Today's featured property was purchased for $815,000 on 1/18/2007. The owner used a $652,000 Option ARM from WAMU and a $163,000 down payment. That has got to hurt....

She has squatted for about 18 months so far, so I suppose she is getting some of that value back.

Foreclosure Record
Recording Date: 05/10/2010
Document Type: Notice of Default

Foreclosure Record
Recording Date: 08/12/2009
Document Type: Notice of Rescission

Foreclosure Record
Recording Date: 05/06/2009
Document Type: Notice of Default

She has not received her notice of trustee sale yet, so she will likely get to drag this out for quite some time.

The real story with this property is the dramatic price reduction.

Date	Event	Price	Appreciation
Aug 20, 2010	Price Changed	$499,000	--
Jun 18, 2010	Price Changed	$625,000	--
May 27, 2010	Listed	$650,000	--
Jan 18, 2007	Sold (Public Records)	$815,000	0.0%/yr

This has been for sale since May, and apparently it has not attracted the kind of bid the holder of WAMUs trash wants to see. I imagine the seller hopes this will start a bidding war. At $499,000 with low interest rates, no HOAs and no Mello Roos, the price is attractive. The total cost of ownership is less than $2,000 per month. Surely this would rent for that much. To be honest, an updated 3/2 with a pool at less than $500K piques my interest (Did you see the cool home theater?)

Over the weekend, I profiled 5 FERN Cyn Irvine, CA 92604, also being offered for under $500K. It too had recently witnessed a dramatic price drop. That property might actually transact because it was an equity seller. These are both solid middle-class properties with costs of ownership at $2,000 a month. That kind of value -- prices with a cost of ownership below rental parity -- will entice buyers.

Perhaps two properties does not make a trend, but both today's featured property and 5 Fern Canyon show desperation by the sellers. Ballooning inventory and swooning demand will prompt more sellers to lower their prices if they want to transact. If enough of them lower their prices, that becomes the market, and prices fall.

Is this a trend, or are these two properties outliers that will be snapped up quickly for above their asking prices?

Irvine Home Address ... 14911 DOHENY Cir Irvine, CA 92604

Resale Home Price ... $499,000

Home Purchase Price … $815,000
Home Purchase Date .... 1/18/2007

Net Gain (Loss) .......... $(345,940)
Percent Change .......... -42.4%
Annual Appreciation … -12.9%

Cost of Ownership
-------------------------------------------------
$499,000 .......... Asking Price
$17,465 .......... 3.5% Down FHA Financing
4.51% ............... Mortgage Interest Rate
$481,535 .......... 30-Year Mortgage
$97,637 .......... Income Requirement

$2,443 .......... Monthly Mortgage Payment

$432 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$42 .......... Homeowners Insurance
$0 .......... Homeowners Association Fees
============================================
$2,917 .......... Monthly Cash Outlays

-$392 .......... Tax Savings (% of Interest and Property Tax)
-$633 .......... Equity Hidden in Payment
$29 .......... Lost Income to Down Payment (net of taxes)
$62 .......... Maintenance and Replacement Reserves
============================================
$1,983 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$4,990 .......... Furnishing and Move In @1%
$4,990 .......... Closing Costs @1%
$4,815 ............ Interest Points @1% of Loan
$17,465 .......... Down Payment
============================================
$32,260 .......... Total Cash Costs
$30,300 ............ Emergency Cash Reserves
============================================
$62,560 .......... Total Savings Needed

Property Details for 14911 DOHENY Cir Irvine, CA 92604
------------------------------------------------------------------------------
Beds: 3
Baths: 2 baths
Home size: 1,880 sq ft
($265 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1971
Days on Market: 87
Listing Updated: 40410
MLS Number: S618914
Property Type: Single Family, Residential
Community: El Camino Real
Tract: Wl
------------------------------------------------------------------------------
According to the listing agent, this listing may be a pre-foreclosure or short sale.

Expanded home in the Willows. Located on a culdesac. Remodeled kitchen with beautiful cherrywood cabinets. Bathrooms feature spa tubs. Bamboo style laminate flooring.