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High-end housing inventory will take a decade to clear

Posted: 19 Sep 2011 03:30 AM PDT

Banks are in no hurry to sell their high end inventory. Unless we see significant capitulation, the overhang will persist for a decade at least.

Irvine Home Address ... 25 RIDGEVIEW Irvine, CA 92603
Resale Home Price ......  $3,694,800

I can wait, I can wait,
I can wait forever

I know it feels like forever,
I guess thats just the price I've got to pay...

Simple Plan -- I Can Wait Forever

The high end market is a shambles. Sellers are slowly lowering their asking prices, but many act as if they can wait forever. The few transactions taking place are often at or above the peak which many have interpreted as strength. In reality, product is being withheld from the market to force the few buyers who can pay to come up with enormous down payments. Very little is selling.

The banks are responsible for this. Lenders inflated the housing bubble across all property classes by injecting excessive debt into the housing market. In particular, the Option ARM was widely used to underwrite huge mortgages to put people into houses they could not afford with debts they could never repay.

Today's featured property is a perfect example. It was financed with a $2,912,449 Option ARM. The owner quit paying shortly thereafter, and after a year or more of squatting, the lender took back the house for $3,206,666, the full amount on the note at the time.

No lenders are making such stupid loans today, and as a result, the buyer pool who can afford such a spendy house is dramatically depleted. The high-end market above $2,000,000 is returning to what it should be -- the exclusive domain of the very rich who can pay cash.

Unfortunately, there are very few households with enough wealth to put $1,000,000 or more into a down payment or an all-cash purchase, and we have a plethora of properties priced for absorption by these buyers. Whenever you have a dramatic difference in supply and demand, prices are bound to move. In this case, we have a huge overhang of supply and nearly no demand, so prices will inevitably fall.

High-end supply

I mentioned a fe weeks ago that Redfin now enables you to search for bank-owned homes both on and off the market. There are currently 144 in Irvine, 79 of which are not on the market. Many of the 79 are high-end properties the banks don't believe they can sell in today's market, so they are withholding them for better days... better days which are not forthcoming.

Lenders are making a classic mistake. They believe prices are depressed, and if they wait, strong demand will increase prices and allow them to sell at a better price. They are wrong. Prices are not depressed. Prices were elevated above reason, and they are now correcting back to affordable levels. Lenders are waiting for higher prices which will only be coming as wage inflation over time allows buyers to afford more. That will take a very long time. Further, the overhang of all this supply will prevent the appreciation lenders need to sell at a better price.

I am not alone in noticing the woes of high-end markets.

Higher-End Housing Hits a Wall

Published: Wednesday, 24 Aug 2011 -- By: Diana Olick

Most of America won't shed a tear for those who own higher-priced homes, especially given that the median home price in the nation has now fallen to just $174,000, but investors and homeowners alike should take note: Higher priced homes are taking a hit and the outlook for them is worse than the overall market.

That will have ramifications for recovery.

Despite the fact that just eight percent of US loans are currently jumbo, according to Inside Mortgage Finance, and that share will rise to just 10-12 percent when the conforming loan limit is lowered October 1st, high-end housing is already being hit harder than the overall market, which isn't exactly doing so well itself. ...

In order for the high end market to regain some semblance of strength, jumbo lenders will need to re-enter this space. Unfortunately, with default rates still being very high, lenders are not anxious to give away more free money to high-end squatters.

Recidivism rates on jumbo mortgage cures remain unchanged

by KERRI PANCHUK -- Tuesday, September 13th, 2011, 11:06 am

Default recidivism rates on jumbo and alt-A mortgage loans tracked at similar levels when comparing the first quarter of 2010 to the second quarter of 2011, according to a new report from Bank of America Merrill Lynch.

According to the analysis, the highest levels of recidivism come from mortgages refinanced in 2008, especially in the second half of the year. For both the third and fourth quarter of the year, more than half of the loans redefault after a year. Merrill Lynch defines a mortgage as a redefault when payments are missed for more than 60 days.

Recidivism decreased for loans originated sooner, so the redefault rates will invariably rise as time progresses, though potentially to lesser degree. JP Morgan is also the mortgage servicer with the highest level of recidivism rate among jumbos....


However, any lack of improvement on jumbo loans in terms of recidivism rates on defaulted loans may create a disincentive for the private mortgage market to jump into the segment, especially as conforming loan limits are dropping. ...

Yes, that is exactly what it does. Lenders are not going to jump in to jumbo space just because the GSEs are leaving it. There will undoubtedly be increased activity at the margin between $625,000 and $729,750, but the desire for mortgages over $1,000,000 will remain low until default rates drop. Unfortunately, default rates on jumbo mortgages will not decline any time soon. The loan balances are far too large relative the borrowers incomes.

This leaves us with a high end market floating in space. Lenders are unwilling to enter this space because borrowers keep defaulting because borrowers can't afford the payments. Unfortunately for lenders, they also own or control a huge number of properties they need to sell at these same price points. Each lender needs another lender to step forward and underwrite a loan they themselves are not willing to underwrite. It's a Mexican standoff resulting in a frozen housing market.

While lenders wait for one of their competitors to step forward to bail them out, they are stuck with large numbers of non-performing loans, delinquent mortgage squatters, and REO they can't get rid of without bank-busting losses. So what do they do? They cling to their wishing prices like any other seller in denial and hope.

1,267 days on the market and counting

I first profiled today's featured property back on September 26, 2007, nearly four years ago. I profiled it again back in March of 2011. It was purchased by a peak buyer who lost a tidy down payment, and now the lender is going to have to absorb the rest of the loss. Apparently, they are in no hurry.

Property History for 25 RIDGEVIEW

Date Event Price Source  
Sep 16, 2011 Price Changed $3,694,800 SoCalMLS #S526948  
Sep 16, 2011 Relisted (Active) -- SoCalMLS #S526948  
Sep 02, 2011 Delisted (Expired) -- SoCalMLS #S526948  
Jul 13, 2011 Price Changed $3,748,000 SoCalMLS #S526948  
Sep 07, 2010 Relisted (Active) -- SoCalMLS #S526948  
Sep 04, 2010 Delisted (Expired) -- SoCalMLS #S526948  
Jun 25, 2010 Price Changed $3,999,000 SoCalMLS #S526948  
Nov 12, 2009 Price Changed $4,099,000 SoCalMLS #S526948  
Sep 04, 2009 Price Changed $4,199,000 SoCalMLS #S526948  
Sep 04, 2009 Relisted (Active) -- SoCalMLS #S526948  
Sep 02, 2009 Delisted (Expired) -- SoCalMLS #S526948  
Jan 22, 2009 Sold (Public Records)
This home was foreclosed
and bank-owned
REO (Real Estate Owned Home)  
$3,206,666 Public Records  
Sep 04, 2008 Relisted -- SoCalMLS #S526948  
Sep 02, 2008 Delisted -- SoCalMLS #S526948  
Jun 05, 2008 Price Changed $4,249,000 SoCalMLS #S526948  
Mar 29, 2008 Listed $4,299,000 SoCalMLS #S526948  
Mar 27, 2008 - Delisted -- Inactive SoCalMLS #2  
Jan 27, 2008 - Listed * Inactive SoCalMLS #2  
Jan 26, 2008 - Delisted -- Inactive SoCalMLS #1  
Jan 14, 2008 - Listed * Inactive SoCalMLS #1  
Dec 22, 2006 Sold (Public Records) $3,953,500 Public Records

The bank has had this property on its books for two years now. They have made small price reductions, but they are still holding out for a wishing price they aren't going to get.

This is denial.

The listing and delisting with minor price reductions is simply foolish. They are hoping they hit the knife-catcher lottery, and so far, they haven't gotten lucky. They better hope they do so because if Bank of America starts foreclosing and liquidating in earnest, the extreme supply constriction they are relying on to force bids up isn't going to continue to work in their favor.

All it takes is for one or two of the major players to move from denial to capitulation, and the additional supply will severely weigh down prices at the fragile high end.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  25 RIDGEVIEW Irvine, CA 92603
Resale House Price ......  $3,694,800

Beds:  5
Baths:  6
Sq. Ft.:  6055
Property Type: Residential, Single Family
Style: Two Level, Mediterranean
View: Bay, City Lights, City, Coastline, Mountain, Ocean, Panoramic
Year Built:  2006
Community:  Turtle Ridge 
MLS#:  S526948
Source:  SoCalMLS
Status:  Active
On Redfin:  1267 days
At the very top of Turte Ridge, this is the ONLY Plan 3 that's hit the market and worth the wait. Highly sought after, this property is the largest of the LACima plan homes, with over 6,055 of living space on a huge lot at over 23,000 square feet at the end of a very quiet cul-de-sac. Absolutely no view obstructions. You can see all the way from the ocean to the Saddleback mountains with no roofs! Upgrades throughout the interior including faux wall painting, additional fireplaces and highly upgraded bathrooms. Wait till you see the view from the master bedroom!! This home is priced to sell.
Proprietary IHB commentary and analysis 

Highly sought after? That's why it's been on the market for 1,267 days, right?

This home is priced to sell. Then why isn't it?

Resale Home Price ......  $3,694,800
House Purchase Price … $3,206,666
House Purchase Date .... 1/22/2009

Net Gain (Loss) .......... $266,446
Percent Change .......... 8.3%
Annual Appreciation … 5.3%

Cost of Home Ownership
$3,694,800 .......... Asking Price
$738,960 .......... 20% Down Conventional
4.18% ............... Mortgage Interest Rate
$2,955,840 .......... 30-Year Mortgage
$753,755 .......... Income Requirement 

$14,420 .......... Monthly Mortgage Payment 
$3202 .......... Property Tax (@1.04%)
$585 .......... Special Taxes and Levies (Mello Roos)
$770 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$495 .......... Homeowners Association Fees
$19,472 .......... Monthly Cash Outlays

-$1872 .......... Tax Savings (% of Interest and Property Tax)
-$4124 .......... Equity Hidden in Payment (Amortization)
$1100 .......... Lost Income to Down Payment (net of taxes)
$482 .......... Maintenance and Replacement Reserves
$15,058 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$36,948 .......... Furnishing and Move In @1%
$36,948 .......... Closing Costs @1%
$29,558 ............ Interest Points @1% of Loan
$738,960 .......... Down Payment
$842,414 .......... Total Cash Costs
$230,800 ............ Emergency Cash Reserves
$1,073,214 .......... Total Savings Needed

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