Thank you, Daniel Gross, for the mention in your latest article: Recession Literature, The best books, articles, and Web sites about the economic collapse.
Irvinehousingblog.com is an exemplary Internet mashup. Irvine, the master-planned community in Orange County, Calif., was in many ways the epicenter of the housing boom. Many of the now-defunct ambitious subprime lenders were based there. And the O.C. housing market was a hothouse of speculation and refinancing. Today, it’s the “seventh circle of real estate hell.” Using realty listings, public records about debt, and YouTube videos of popular songs, an anonymous blogger who goes by IrvineRenter skewers homeowners who paid too much and are now desperately trying to recoup their investments. Realtors who post lame photos, misspell words, or engage in silly promotion-speak also come in for ridicule. At the end of each entry, the blog calculates precisely how much a homeowner—or the bank that foreclosed on his or her property—will lose if the house gets its offering price.
It is very gratifying to see nationally syndicated columnists reading and appreciating the work we do here…
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Weekend Open Thread Chart Extravaganza
Irvine, California House Price Predictions based on Historic Appreciation Rates 1984-2026
Los Angeles House Price Predictions based on S&P/Case-Shiller Indices
Orange County House Price Predictions based on Price-to-Rent Ratio 1988-2020
Irvine, California House Price Predictions based on Price-to-Income Ratio 1986-2030
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I like the charts that support buying in 2009. Even if its not quite at the bottom at least it will be a lot closer.
I know government bailouts may stretch this out to 2010-11 but at least I can wish. Maybe the markets will have their way anyway.
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It would be interesting to look at a few houses and then give their “projected” prices going forward using your pricing models.
If a house in Irvine is at $600,000 now…where will it be in the middle of next year – or the middle of 2010? Just curious…
Also…I wonder what is really happening to apartment rent in Irvine? It is hard to tell because the Irvine Co. seems to have a monopoly, or at least a big say in pricing, so the market does not respond in the same way there as it does other places.
Thanks for the hard work!
Whoa, did you add the dark line or were they published that way? Did the CAR really put out a chart that shows prices returning to 2001 levels and then not returning to peak until the year 2020?
If you want to find the price to buy at in a particular neighborhood you want to find comparable sales that occurred around 2002. That’s the year the price on the way up will match the price at the trough. At best this is an approximation since the bubble didn’t hit all the OC neighborhoods at the same time.
BTW, I find the rent support graph suspicious. It looks as if they extrapolated the increases over the last couple of years and not based on the historical average.
I live in an IAC apartment. Not in Irvine, but close by. We got our rent increase notice last week. No increase at all, but we are not going to accept that price. They are advertising the same apartment on Craigslist for 5% less.
I suspect negotiating with IAC to reduce your rent would get similar results as with a mortgage payer negotiating with the mortgage servicer to reduce a mortgage. You’d be talking to a brick wall.
You’re most likely to get results by not renewing the lease, and moving. Although it can’t hurt to ask.
The rental growth in OC over the last 25 years has averaged 4.3%. OC ranks second only to Honolulu as the most expensive place to rent in the US. I agree, this rate of rental growth is not sustainable indefinitely, but it is a 25 year average.
The median home price data came from CAR. The projections were my own.
Actually, you would be surprised. Anything that is lumpy: cars on a lot, a house, an apartment should be considered negotiable…because there is a significant change to their performance between you deciding to buy/rent or walk away. But regardless, we plan on moving anyway.
I like that you’ve compared prices against different fundamentals.
Now, the main assumption you are making is that the pace of decline will match the pace of increase. I wonder though if the dynamics of this market are the same as the late 1980’s runup. Wasn’t that due to a general economy overheating, and then a fallback with the recession after the market crash?
This runup is of an entirely different nature – exotic financing that dramatically increased housing money supply causing house price inflation. Now that money has been turned off like a switch, literally almost overnight. To the extent that inflation/deflation is actually related to the rate of change in money supply, might we expect a much steeper cliff of prices???
Plus, what we have here is a huge expected influx of supply due to resets, coupled with a widespread restriction on demand from tightened credit. That, to me, indicates a huge, almost immediate shift in the equilibrium price. We’ve already seen 30%, and we are just getting started.
As pessimistic as you are IR, are you being overly optimistic about the pace this is going to play out?
IR, and all renters getting prepared to buy from late 2009 to 2011 :
Assuming the credit supply will get very demanding and bank will even ask for more than 20% down payment and less than 30% out of gross montly incomes, if you want to buy a 2500sq feet house in Irvine, how do you manage your saving to get the ~150-200k$ ?
In fact, assuming you already have the money, but know perfectly it is not the good time to buy, you cannot leave that into a CD or even bonds, as the taxes and inflation will hammer you.
And putting this in stocks may not be the best idea either …
There is a not-easy-balance to find between getting close to the RE bottom and buy to avoid equity evaporation, and finding the right short/mid term investment to avoid inflation hit or market crash.
Any idea ?
“As pessimistic as you are IR, are you being overly optimistic about the pace this is going to play out?”
You may be correct. I find it amusing when by projections are characterized as “optimistic.” When I first came out with them over a year ago, everyone thought I was a raving lunatic and there was little or no chance if would ever get that bad…
I also had people look at me like I was crazy when I told them prices would decline by 42% peak to trough in LA. Even more curious, a number of them didn’t think prices could decline at all.
For renter tro buy, my money is going to muni bonds for the next year or so. Many of them are far out of line with where they should be priced. It’s one of the best deals in a long time.
Nope IR, not “everyone.”
Long time lurker. You do great work, IR.
I have been wondering this same thing. I am returning to Irvine this summer to start a new job, with hopes of buying in three years (I will be living with moms until then, so I will be a rather motivated buyer).
As someone that is extraordinarily risk adverse and prudent with money (I only own one credit card, paid off, $1000 limit), where would be the best place to put my money while I save. I was thinking index funds. Pros/cons? Anyone have better ideas?
I predict over 50% drop from Peak. I remember new townhomes in Ladera Ranch on sale for $211,000 in 2001. They peaked at $675 in 2006, this area may fall even 60%, still the values will be higher than inflation adjusted 2001 prices.
If you are not an active investor or trader, I would suggest keeping your money in CDs or short term government treasuries. There is going to be plenty of volatility in the markets moving forward, and I don’t see any asset class doing consistently well for the next several years.
1. Stocks will remain volatile, and I would not be surprised to see even lower lows over the next 6 months.
2. Long-term Bonds do not perform well in a rising interest rate environment which we are likely to see over the next several years.
3. Foreign currencies and commodities have been doing very well as Bernanke has trashed the dollar. I would look for these trends to reverse sometime in the next 6 months to a year. When the economy bottoms out, so will the dollar. Also, if our economy drags down the rest of the world, they will lower their interest rates which will also boost the dollar.
If stocks, bonds and commodities are all going to be volatile and not appreciate consistently over the next 3-5 years, it only leaves the safe havens of CDs and short-term government treasuries.
Just my 2 cents worth. Don’t rely on me for financial advice.
How bad is the mortgage crisis going to get?
http://money.cnn.com/2008/03/14/news/economy/krugman_subprime.fortune/index.htm?section=money_latest
“In places like Miami or Los Angeles, you could be looking at 40% or 50% declines. “
IR:
Pretty convincing reasoning on the investment environment as well.
IR,
Great work on the graphs… one question. You talk about a GRM (gross rent multiple?), and that it should be 160, is that the same as the price to rent ratio nin the third graph? if it is why do you believe the grm should be 160 when the historic avg. is 181?
I agree that munis are probably a great deal, but it might not play out well as a shorter term investment. It’s probably not a risk worth taking if you want your money out in two years. I personally am sticking with CD’s for my down payment money. But, of course, these are just my opinions and should not be considered advice.
Saw this quote: “It is a good time to be a renter.”
My background: Business Economist, retired, cashed-out of OC real-estate in 2005.
Good time to Rent? Maybe, maybe-not. Rents (Los Angeles) are not stable, but increasing 5%/year and worse, property-owners are doing everything-possible to convince as many people as possible to *move out* (all the better to create more vacancies and likely rent-jumps greater than 5%). This is my first-hand observation, and I study this rent-increase phenomena with a microscope.
My friends all want me to come down to Irvine. OK. But rent there is $2400/month for a 1250sf neato place, but (again) how long can I stay with 5%+ annual rent-hikes? This Irvine $2400 is a whopping $800/month *less* than I pay for equivalent in L.A. But… I can’t keep “running to cheaper” forever…
Be advised that a “local move” cost (at least) the equivalent of $200/month (meaning the “new place” must be $200.month cheaper to “break even” for a year).
Another sad reality: If you rent “the best places” then moving-cheaper means a crappier-place (always problematical).
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What “renting” does is reduce risk (of “being wiped out” via buying) in exchange for a *premium* (rents “overly high” above some sort of “fair market value”). That’s a key-word here: “premium”. Rents are, in the view of most people, “skyrocketing”.
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The generalized assumption “rate of value-fall will equal rate of value-rise” (a “symmetrical curve” so-to-speak). is a high-risk assumption. I’d bet not, the fall will be more gradual because as time goes on, the current owners have “more to lose” thus act in a manner to hang-on-until-foreclosure.
What may happen is the rate-of-recovery will not materialize, and the “new buyers” may in-fact take many more years to “show up”.
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I haven’t seen any data regarding “Where do foreclosed-out people go to live?” Where else but a rent?
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I manage a Hedge Fund. An underlying Strategic Imperative is: “The gov’t, in any fiscal crises, can be counted on to *do the wrong thing* and exacerbate the problem”. Hasn’t failed me yet…
Regards,
Pencipa
Mistake above…
L.A. rent-equivalent (my new place in Irvine) is $400/month cheaper (above I stated $800/month cheaper).
Sorry…
Pencipa
I would look at a mix of TIPS and low cost NASDAQ ETF or fund. Many Tech stalwarts will reap big growth on the buildout of the Internet to handle video. They also benefit from the weak dollar.
With inflation blowing up, I like TIPS.
Index funds are good ways to diversify for the long term, but if you will need the money in the next year or two you may not want to risk having to sell your position in a bear market. If you have more than you need for a down payment, or if you are continually adding to your investment, you may find the risk acceptable. Also, putting money into something like this (like a % of each paycheck) is a just good habit to get into.
CDs get you about 3.5% +/- depending on duration and what bank is offering, and inflation is running higher than that. You’ll lose a little spending power, but you’re guaranteed to only lose that much.
Short-term Treasuries are paying near zero percent.
http://delong.typepad.com/sdj/2008/03/the-liquidity-t.html
TIPS are acting weird: the 5-year TIPS have a *negative* rate lately. (Well, technically the Fed will set a negative rate to zero, so it won’t actually be negative)
http://news.google.com/news?source=ig&hl=en&rlz=1G1GGLQ_ENUS256&q=Treasury+TIPS+negative&um=1&ie=UTF-8&sa=N&tab=wn
http://www.treasurydirect.gov/instit/marketables/tips/tips_negative.htm
WordPress is acting funny. Sorry if I doublepost.
TIPS are acting weird lately. The 5-year TIPS is at a negative rate. (Which the Fed will reset to zero)
No link this time, links seem to bollix WordPress.
Er. My comment about TIPS going negative should have gone here. Stupid WordPress.
I manage three hedge funds. I say rent.
Go for it. We live in an IAC community and have renewed our lease twice. Everytime we negotiated and brought our lease down.
I-Bonds always pay at least 1% above the CPI.
I live in an IAC complex in the Newport/Irvine area. As I posted above, the rent notice I got for renewal was 0% increase and the listing on craigslist for a similar apartment was 5% below what I’m currently paying. Looking at MLS and Craigslist over the last couple of months has seen a qualitative increase in the number of available 3+ bedroom places in the Turtle Rock/Newport Area. The trend for rents on the places is flat and maybe dropping a little bit.
The only conclusion that I can come to, is that those that were buying the condo’s (Quail Hill & Turtle Ridge) and smaller SFR’s can’t even afford to rent in the neighborhood. If this is the case, then it means that reality is going to hurt even more as one of the fundamentals, rental prices, is decreasing.
If you are looking for ~1200 sq ft. You might extend your search a little bit. Baywood in Newport Beach (next to Fashion Island) looks pretty cheap right now. They have completely redone the kitchens over the past several years, so the insides look pretty good. Again, check Craigslist to get ammunition for a good deal before going to the leasing office.
Median apartment size is smaller than median home size. So I’m guessing that if the index is based on the medians, then the ratio should be larger. When IR does the calculation, it’s an apples to apples comparison.
Yes, there are limitations to the base data. Comparing two gross, aggregate numbers is going to have some distortion from two property-specific numbers. The GRM of 160 I have been using is for comparing the rent on a specific property to the sales price of that property. The historic GRM from the graph comes from the US Census Bureau survey of area rents, specifically the 3 bedroom units in OC, compared to the median sales prices in OC. Both measurements have their flaws, but it is the closest approximation to the property-specific GRM I could construct.
I’m chief finance minister for the Empire of Sweden. Rents will go down in the short term, but will rise rapidly in 2010 when an influx of Swedes invade your nation. You’ve been warned.
I’m the king of a Greek Isle. I have 17 children and my kingdom includes an armada of fishing boats and a Mediterranean cruise line. My personal projects include building a giant hydrogen powered submarine. Rents in Southern California will begin skyrocketing tomorrow. Have a nice day.
IR,
Well done. May I ask what assumptions did you make on income? Quite bluntly, I expect income to take a regional hit until ~2013 in the OC area.
Got Popcorn?
Neil
I agree. These figures do not factor in a recession depressing incomes and rents.
I’m queen of Brevard County and Miami-Dade County, and hereby give notice I am invading his Greek Isle.
Thank you for the clarification.
Got Popcorn?
Neil
Another point for the future…
*California is broke*. The only alternative for the state is increasing the income tax because (I’m not preaching, just calling it as I see it; Maybe I’m wrong)…
A) Prop 13 is-what-it-is
B) CA “spending cuts” are out because the cause of the looming-bankruptcy was a huge increase (under Grey Davis) in “entitlements” (welfare/pension) which are near-impossible to un-do.
C) Republicans repeatedly “sell out the system” and go-along with the Dems. It doesn’t take 51% of the electorate to over-ride a tax-hike. So, “no checks/balances” in the political process.
d) Yes, the CA “Proposition” system may override a tax-hike, but then again the teacher/police/health lobbies are very powerful
Tax-hikes (and taxes) are virtually ignored in any “funding equation” due to the (oxymoron follows) “tax-deductable” feature of taxes.
If taxes rise, IMO that’s real-estate-armageddon.
Are we now outsourcing spam writers? It’s one thing when my job is sent to India, but it brings tears to my eyes when I can’t read some decent spam. What is this world coming to?
I love your blog. I live in Plymouth, MA (America’s Hometown!) and currently renting. I am trying to figure out when and if I should buy, because I have a family and would love to get out of a cramped apartment. All these charts seem to indicate that I should wait until 2009 at least – but I wonder if the fundamentals are much different in my area. Where could I get this kind of data for Massachusetts?
Thanks very much.
Petruk
Here’s another question:
Why don’t you take this website national, starting with the worst hit areas? Sort of a Craigs List of real estate disasters. I am sure you could find local writers to work out, particularly if you could work out a profit share system for adware revenue.
Cheers,
Petruk
Ahh…national media exposure. A double edged sword.
IR, thanks for the charts. I was looking them over and noticed a possible problem. In the OC price vs. rent chart, it assumes that the rate of decline matches the rate of incline in house prices. But if you look at the chart, the rate of decline does not match the rate of incline. The rate of decline looks much more gradual. I’m wondering if you used the rate of incline and decline of the price/rent ratio instead of the price?