I believe the low end of the housing market is finding a bottom. Due to the timely processing of subprime foreclosures, prices crashed hard at the low end, and shadow inventory is much less abundant. Low interest rates and lower prices pushed affordability to record highs, and investor interest has helped absorb the visible MLS inventory. As a result, properties priced below the median in most markets is probably not going to go down much from here.
The high end is another story.
Banks have not foreclosed on it’s high-end customers preferring to allow them to squat in luxury. Lenders know the losses here will be huge if they force the air out of the bubble they created, so they have buried their heads in the sand hoping the market would recover and make them whole. As a result, properties priced above the median rarely sell, and when they do, they generally get discounted slightly from recent comparable sales. There is no investor interest at these price points, and with the difficulty in obtaining jumbo financing to support inflated prices, demand is almost non-existent. If not for the prosperous 1%, this entire market would be dead.
The current circumstances at the top of the market are untenable. When sales start to pick up, expect prices to drop until they become better aligned with income and affordability like the lower rungs of the housing ladder already have.
For Luxury Real-Estate, the ‘Year of Capitulation’
By Robert Frank | CNBC – Thu, Aug 2, 2012 2:57 PM EDT
Even the rich aren’t immune to the pressures of the housing market.
Prices for homes priced at $1 million or more have fallen a 20 percent this year, according to RealtyTrac. The average sale price for top-tier real estate has fallen to just over $2 million, from $2.5 million in 2011.
Those prices cuts stand in stark contrast to the broader housing market, which is seeing early signs of price stability and even price increases for the first time in years.
Differences in foreclosure processing and loan availability explain much of the difference in performance between these two markets. The low end was crushed quickly and is now recovering whereas the high end avoided the crash which merely delayed the inevitable.
All that price-chopping at the top, however, has sparked a wave of sales as buyers scoop up deals and sellers accept the new reality of lower prices.
The number of transactions for homes priced at $1 million or more has jumped 18 percent this year, one of the strongest increases since 2008, according to Realtytrac.
This increase in sales is accompanied by a decrease in prices. That is a classic sign of capitulation.
Brokers for luxury real estate are already calling 2012 the “The Year of Capitulation” for wealthy sellers.
“I think sellers are now resigned to today’s prices and what’s actually selling,” said Paul Boomsma of the Luxury Portfolio, a marketing group for luxury homes. ” People who are serious about selling are ready to make a deal now, where maybe they weren’t a year ago.”
There are several factors behind the price drops. The high end of the market didn’t fall as much or as early as the broader market, since there weren’t as many distressed sellers that were forced to sell. Those wealthier sellers have hung on to their properties, waiting for prices to approach 2008 levels.
The key phrase there is “that were forced to sell.” Squatting is epidemic at higher price points.
Now that they see that the prices of 2008 aren’t likely to return anytime soon, many are deciding to drop their prices just to get a deal. The increase in sales has itself spurred sales, as wealthy sellers see a larger number homes in their neighborhoods trading at lower prices.
“There is now a critical mass of data so sellers can say, ‘Well, this is the new reality,’” Boomsma said.
Denial and fear have given way to acceptance and capitulation.
Of course, bargains are all relative in the mega-mansion market. And homes priced at $1 million or more represent a tiny slice of the overall market, with high concentrations in New York and California.
Yet some mega-mansions have seen price cuts of 30 percent or more in recent months.
Of course, if the prices was in the WTF category to begin with, price reductions to reality are meaningless.
A private beachfront-compound in Carpinteria Calif., has sliced $7.2 million from its price tag and is now being offered for $14.9 million, according to Luxury Portfolio. The property includes a six-bedroom main house, guest villa, tennis court, swimming pool, spa and 95 feet of beach frontage.
A historic estate in the horse country of Bedford, N.Y. has been reduced by $3.5 million. The estate was built for the Harriman family in the early 1900s and features an equestrian center and 100 acres of gardens, ponds and rolling hills. The new sale price: $26.5 million.
South Florida has seen a huge boost in luxury home sales driven by buyers from Latin America. But prices are falling there as well. An oceanfront palace in Delray Beach, with 15,000 square feet of living space, has been reduced by $4.4 million and is now available for $19.5 million.
“These sellers are capitulating,” said Daren Blumquist, vice president of RealtyTrac. “They are pricing to get these properties sold.”
Blumquist said many sellers may also be motivated to do a deal this year in anticipation of possible tax changes in 2012. If the Bush tax cuts expire, capital gains rates could rise from 15 percent to more than 20 percent. That added tax bill can grow to the millions of dollars when selling a mega-mansion.
“Election years bring uncertainty, so they might want to close a deal now,” he said.
I have been predicting the demise of the high end for quite some time. I have recently updated my monthly reports to reflect the historical relationship between median home prices and rental parity during the last stable period from 1993 to 1999. As you may have surmised, some of the premium neighborhoods in Orange County have always been inflated. Now we know just how much.
Relative to their normal level of price inflation, some of our high-end neighborhoods actually look affordable. Or course, some of that is due to low interest rates making the ridiculous look reasonable, but one could argue that some of our premium neighborhoods are a relative bargain today. Will they still crash? Not if lenders can help it.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
444 days and counting
Lenders are in no hurry to recognize losses. They aren’t foreclosing on high end properties, and when they do, they don’t lower the price to actually sell them. Take a look at the listing history for today’s featured property.
The original owners walked and signed a quit claim over to the bank on 11/21/2008. Since them, Commercial Bank of California has been screwing around with what will inevitably be a big loser.
Property History for 426 HARBOR ISLAND Dr
| Date | Event | Price | Appreciation | Source | ||
|---|---|---|---|---|---|---|
| May 01, 2012 | Price Changed | $2,595,000 | – | CRMLS #U11002173 | ||
| Feb 16, 2012 | Price Changed | $2,600,000 | – | CRMLS #U11002173 | ||
| Feb 16, 2012 | Relisted (Active) | – | – | CRMLS #U11002173 | ||
| Jan 20, 2012 | Delisted | – | – | CRMLS #U11002173 | ||
| Aug 25, 2011 | Price Changed | $2,749,000 | – | CRMLS #U11002173 | ||
| May 19, 2011 | Listed (Active) | $3,195,000 | – | CRMLS #U11002173 | ||
| Mar 30, 2010 | - Delisted | – | – | CRMLS #2 | ||
| Feb 08, 2010 | - Relisted (Active) | – | – | CRMLS #2 | ||
| Feb 06, 2010 | - Delisted | – | – | CRMLS #2 | ||
| Mar 09, 2009 | - Listed | * | – | CRMLS #2 | ||
WAMU loaned these people $1,856,250 with an Option ARM. Loans like this helped them go out of business. But that wasn’t the really stupid loan. The current owner, Commercial Bank of California, gave these people a $850,000 HELOC on top of the Option ARM. Now that is stupid.
It also explains why they have not been too anxious to cut their price. They are looking at a total loss.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
We're sorry, but we couldn't find MLS # U11002173 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
426 HARBOR ISLAND Dr Newport Beach, CA 92660
$2,595,000 …….. Asking Price
$2,475,000 ………. Purchase Price
1/11/2005 ………. Purchase Date
$120,000 ………. Gross Gain (Loss)
($198,000) ………… Commissions and Costs at 8%
============================================
($78,000) ………. Net Gain (Loss)
============================================
4.8% ………. Gross Percent Change
-3.2% ………. Net Percent Change
0.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$2,595,000 …….. Asking Price
$519,000 ………… 20% Down Conventional
4.05% …………. Mortgage Interest Rate
30 ……………… Number of Years
$2,076,000 …….. Mortgage
$499,309 ………. Income Requirement
$9,971 ………… Monthly Mortgage Payment
$2,249 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$649 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$30 ………… Homeowners Association Fees
============================================
$12,899 ………. Monthly Cash Outlays
($1,575) ………. Tax Savings
($2,965) ………. Equity Hidden in Payment
$735 ………….. Lost Income to Down Payment
$344 ………….. Maintenance and Replacement Reserves
============================================
$9,439 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$27,450 ………… Furnishing and Move In at 1% + $1,500
$27,450 ………… Closing Costs at 1% + $1,500
$20,760 ………… Interest Points
$519,000 ………… Down Payment
============================================
$594,660 ………. Total Cash Costs
$144,600 ………. Emergency Cash Reserves
============================================
$739,260 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."  |
$1,790,000 37 BEACON BAY |
0.2 miles 4 bd / 3.25 ba 3,140 Sq. Ft. |
|
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$1,999,000 24 BEACON BAY |
0.21 miles 3 bd / 3.5 ba 2,700 Sq. Ft. |
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$3,699,000 91 LINDA Isle |
0.27 miles 4 bd / 3.5 ba 3,207 Sq. Ft. |
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$2,549,000 207 PEARL Ave |
0.42 miles 3 bd / 3.25 ba 2,718 Sq. Ft. |
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$2,650,000 202 COLLINS Ave |
0.56 miles 3 bd / 3.5 ba 2,718 Sq. Ft. |
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$3,095,000 711 K THANGA Dr |
0.63 miles 3 bd / 4 ba 3,415 Sq. Ft. |
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$1,575,000 1014 SANTIAGO Dr |
0.65 miles 3 bd / 2.25 ba 2,671 Sq. Ft. |
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$2,240,000 510 KINGS Rd |
0.66 miles 3 bd / 3.25 ba 2,662 Sq. Ft. |
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$1,785,000 30 CASTAWAYS |
0.67 miles 3 bd / 3.5 ba 3,400 Sq. Ft. |
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$4,295,000 2461 BAYSHORE Dr |
0.72 miles 5 bd / 4.5 ba 3,300 Sq. Ft. |
30 Responses to “Real estate’s high end is finally getting whacked”
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Why is Laguna Woods so undervalued? Are retirees moving out of the state and not purchasing in Laguna Woods?
As the high-end price ‘whackage’ accelerates, all price tiers below will be pushed down accordingly. This aint rocket science folks.
As the high-end price ‘whackage’ accelerates, all price tiers below will be pushed down accordingly. This aint rocket science folks.
Laguna Woods is an age-restricted community of small, old condos with super-high HOAs. The HOAs drain most of the value out of the properties.
LW is very nice community. The financing may also be very limited. They also check to see if the new resident has sufficient funds to keep paying the HOA. Essentially cash deals with bg finanical checks.
Hmmm…trouble in local governments borrowing rates. Is this the canary in the coal mine for US Treasury and mortgage rates in the future?
Are California Munis Paying Loan Shark Rates?
By Herb Greenberg | CNBC – 17 hours ago
This is a truly astounding story: San Diego’s Poway school district is paying $1 billion to borrow $105 million.
And it may not be alone in San Diego or the state paying loan shark rates.
According to a story in the Voice of San Diego, a mostly investigative online news site, the city really had no choice. It was either raise taxes or float what appeared to be just another bond to fix its schools.
“Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.
“With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years.”
Never mind the irony of the advice coming from a consultant in Orange County, which once hailed as being the home of the biggest U.S. bankrupt county. This 40-year capital appreciation bond is really a zero-coupon bond that doesn’t require any payments for the first 20 years.
“And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up.
“The bottom line: For borrowing $105 million in 2011, taxpayers will end up paying investors more than $981 million by 2051, or almost 10 times what the district borrowed. That’s wildly more expensive than a typical school bond, in which a district pays back two or maybe three times what it borrowed.”
But wait, there’s more: Reporter Will Carless told me Poway apparently isn’t alone. He’s found another district that is spending $1 billion to borrow $160 million, and another that is on the hook for $280 million as the payment for $23 million.
Enough to make a loan shark envious.
That is the dumbest thing I have ever seen. They’re passing this huge debt on to future taxpayers while taking a free ride themselves. Outrageous.
That is truly disgusting. Future generations are going to be irate when they are old enough to comprehend the bill of goods they were forced to buy. Pathetic!
The bond in question assumes that property values are going to have to quadruple in the next 20 years for the district to be able to have the funds to start paying back the principal and interest that will be due. The worst part is that the bond cannot be refinanced, period.
Exotic financing is alive and kicking it seems.
I’ll bet they default or force a cram down 20 years from now.
Hah! What makes you think future taxpayers are going to be so dumb as to honor a brain-dead promise their great-grandparents made to a bondholder? All they need to do is pass a law voiding the bond, or find some compliant judge in their generation, and away we go.
No, this is a bond sold on the Greater Fool Theory: whoever buys it now is just assuming there’ll be a greater fool to buy it from him at a small mark-up. After all, it’s a safe investment! Backed by the Full Faith And Credit of the Great State of California! Tee hee. And, of course, the 2nd buyer is only buying because he assumes there’ll be a 3rd along momentarily…
Sure, someone will be left holding the bag, but not one of the first few buyers, and, very likely, the rate of return will increase the closer the bagholder comes, so people will continue to buy lottery tickets..
I love your cynicism.
As long as the votes keep voting for these types of measures and people to appoint/hire these highly paid consultants, these types of deals will continue.
The same old line: “… bond to borrow $200 millions for Z project. No impact to the tax rate, you taxes will not increase…” It’s a claim to get money from thin air. Sounds too good to be true, it’s likely false. Contract law applies to most of these measurers and the banks became super creditors, c.a., mid-1990′s.
Fundamental questions:
Who would buy such bonds?
What advantage such bonds have (from an investors point of view) over the hundreds (or thousands) of muni bonds now offered in the bond market?
If these bonds are paid as promised 20 years from now, the investors will get a good return. In many ways, bonds like this are superior to other bonds because you don’t have a reinvestment problem. Every penny you put into these bonds, plus all the interest, continues to compound at the same rate. Compare that to a typical bond which pays out each quarter. The investor must reinvest the proceeds, and the reinvestment rate is always changing.
The eventual owner will be the Federal Reserve.
Consolidation in the US labor market continues in July, with college grads being hit the hardest with negative job growth.
http://static4.businessinsider.com/image/501c4c0969bedd9a1500000b/college.png
Prices fell in 60% of the country in first quarter of 2012
Shrinking inventory and shifts in sales composition have provided a foothold for housing prices to start climbing, according to Fiserv, Inc.
The company released its Case-Shiller Home Price Insights Monday, showing that after six years of decline, home prices are finally starting to stabilize.
Prices increased in 40 percent of the surveyed 384 metro areas in the first quarter of 2012, and the report showed that it’s actually cheaper to buy than rent in many U.S. markets.
Single-family home prices increased in 151 out of 384 metro areas in the first quarter of the year compared to the same time in 2011. While average U.S. home prices fell by 1.9 percent on a year-over-year basis and are expected to fall another 1 percent in the next year, Fiserv Case-Shiller forecasts a 5 percent increase between the first quarters of 2013 and 2014.
Fiserv chief economist David Stiff attributed the price increases to a rapidly-falling inventory.
“Inventories of single-family homes have dropped below 2.5 million units, the lowest levels since 2004. This shrinking supply of unsold homes is nudging home prices upward in selected markets,” said Stiff. “However, negative equity remains a factor constraining supply in some markets, since many underwater homeowners cannot come up with the cash to cover the difference between their outstanding mortgage balances and the current market value of their homes. Many positive equity homeowners are also keeping their houses off of the market, waiting for price increases to boost their selling profits.”
In addition, the changing composition of unsold inventories and homes sold appears to be providing a boost to prices in some areas. In many crash markets, the share of foreclosed sales is shrinking as banks promote short sales and investors grab up repossessed homes. As a result, heavily-discounted sales are making up a smaller percentage of overall sales, resulting in an upward swing in prices even in relatively flat markets.
Many of the hardest-hit markets posted price gains, including Detroit (8.6 percent up) and Miami (6.4 percent up). However, prices continued to drop in areas still flooded with foreclosed properties, including Atlanta (down 17.4 percent), Las Vegas (down 7.4 percent), and Memphis (down 4.7 percent).
Rent prices have also increased, driven primarily by increased apartment demand. The mortgage payment for a median-priced home is now less than the median asking rent, making buying a more attractive choice in many parts of the nation. This follows a separate report from Zillow that also suggested buying is the less costly option.
As housing markets stabilize, the demand from first-time buyers is expected to pick up. In any event, the increased affordability of buying will likely push home prices upward as demand rises.
Fiserv advised investors to look west for price appreciation, as eight of the top 10 markets projected to grow at the fastest rate in the next year are in western states, including Oregon, Idaho, California, and Washington.
Of course, much of this forecasted growth may be thrown off track if economic conditions deteriorate.
“The state of the overall economy presents the biggest risk to the housing market,” said Stiff. “The economic recovery has stalled each spring/summer during the last three years, and last summer’s economic stumble was accompanied by a sharp decline in consumer confidence, which cut into home sales activity and pushed home prices down a little further. If confidence were to drop by similar amount this year, either because of the monetary crisis in Europe or the political impasse in Washington D.C., then we could experience another downward leg in home prices.”
“However, given that owner-occupied housing is incredibly cheap historically and falling confidence would be accompanied by lower mortgage interest rates, we may be at a point where housing markets can finally withstand a weak economy.”
I believe another reason banks have not foreclosed on high-end properties are due to property taxes. If they foreclose and take title, they will be obligated to pay the tax right away. If they don’t, then they leave it to the counties to collect from the underwater homeowner or negotiate after foreclosure. This gives them options.
Ir,
Do banks pay the property tax liens (mello roos and ad valorem) after they foreclose and if the County puts a lien on the property? I am sure they pay the taxes, but I am not sure if they are willing to clear title on a $5-$15K tax obligation. I am not sure if you can negotiate a tax lien as easily as a mechanics lien (hoa, contractors, engineers etc) as well.
Tax liens always survive a foreclosure, so the tax collectors know they will get their money eventually. Banks will typically pay the property taxes on their REO to avoid the ire of tax collectors. However, the tax lien process takes forever, so if they wanted to avoid paying taxes until a final sale, they could. Any obligation they can defer until disposition, they generally will. Banks are loathe to spend a penny on their REO because they are already losing so much.
Hard to spend $15K when they are loosing $200K.
Another problem with the mid-high end properties….who is going to be able to afford them 30 years from now at such inflated prices. A $600K purchase for example:
Future Price: $600K*(1.02^30)=$1,086,000
Income Requirement: Low estimate – $1,086,000/4 = $276K
High estimate – $1086,000/3.5=$310K
I estimated a 2% increase since you are going to need that to repay the interest payments and more. That’s telling me I need to sell my house to a couple making $275K-$325K.
What’s the probability that is going to happen in a 1.5% GDP environment, lack of jobs and high student loan debts. Zero. High end will have to come down.
Petey, how dare you estimate that CA RE will only appreciate 2% for the next 30 years! The people in the know say it is close to 8% based on historical numbers.
Great example. Numbers don’t lie. We’ll be lucky to see little to no appreciation for the remainder of the decade. Unless we go full Zimbabwe style, this is just the way it has to turn out!
Straight line appreciation to infinity is CRAZY. Ask CALPERS how that went. They projected 7.5% and got 1% for fiscal year 2011-12. Whoops. If they only get 2.5% – 5.0% they will have a $140 billion-$80 billion shortfall in 10 years. You can’t model a 7 billion people world economy with simplified straight line projections.
The fed may not go full Zimbabwe, but I do think the billions in second mortgages that are underwater will force them to keep mortgage interest rates low until price get back to peak values. That will trigger lots of price inflation in other goods and services.
Or the Fed may go full Zimbabwe.
Winded Economy Needs More Juice From Fed: Rosengren
By CNBC | CNBC – 9 minutes ago
Boston Federal Reserve President Eric Rosengren pressed his call for more action from the Fed to jumpstart a moribund U.S. economy, warning that higher unemployment and lower growth were likely without a bigger monetary policy boost.
“If you’re treading water, even if you’re a good swimmer, at some point you need to get to land,” Rosengren said Tuesday in an interview with CNBC’s “Squawk Box.” Rosengren is not a voting member on the Fed’s Open Market Committee (explain this) this year.
Headwinds stemming from Europe’s debt crisis and the looming “fiscal cliff” bode for more Fed bond buying, he said, renewing a call he made recently for bolder action from the central bank.
The sluggish pace of growth in the first half of the year augurs poorly for the second, Rosengren said. “My expectation is that the second half of the year won’t be much better,” he said, adding that in the absence of a new round of “open-ended” quantitative easing (explain this), or QE, the jobless rate could rise further from the current 8.3 percent in July.
Although the economy added more jobs than expected last month, growth has faltered since the end of 2011. He said relatively tame inflation gives the Fed more room for maneuver.
A third round of QE should be one of “sufficient magnitude” and linked to the economy’s performance, Rosengren said. Despite his sober assessment of the economy, the central banker did note signs of improvement in the housing market.
“We’re starting to see some legs in the housing market,” he said, partly because of the Fed’s cheap money policies.
The clearing of property tax is very political. I’ve seen large MA corportations with 10 year back RE taxes have them forgiven after a large contribution to the mayor’s community groups. I don’t know how it is with large CA banks and RE tax forgiveness or reduction by the collector. Some”timeshare RE taxes leins are auction off on pennies on the dollar for the country to try to get some taxes from the new owner/slave.
Why should the wealthy pay their mortages when they can live there for free? If they refinanced to remove all the equity, they already sold the property to the banks. the banks is between a rock and a hard place. If the bank FC and sell the property, a loss will need to be declared bring the bank into ill solvency land. It’s better to have someone living in it and taking care of it than having it vacant and the bank paying all the upkeep expense. But the worse case is a squatter that trashes the place without complete destruction.
When will the RE prices go down in the magical land of Irvine?
As long as banks continue to condone widespread squatting, prices won’t go down, particularly now that they have managed to withhold so much inventory as to create a shortage. Think about that. We have a shortage of inventory in an environment where delinquency rates are double historic norms. Crazy.
Rather than point to general market forces, or in addition, IR, you might consider the abrupt rise in the capital-gains tax rate that is scheduled to go into effect at the end of this year. Truly, if you have capital gains to realize, better get that done before 2012 ends — unless you have 100% faith that Romney wins the election and the Republicans take the Senate. Because if not…whoa, hold onto your wallet. Freed of any necessity for re-election, you are going to see Tax The Rich and Spread The Wealth like never before. Bend over, gentlemen! Obama wants to see what you’ve got hidden up there that he can spend on green jobs or SIEU pensions.