I know that it’s got to be
I know I ain’t doing much
Doing nothing means a lot to me
Living on a shoe string
A fifty cent millionaire
Open to charity
Rock ‘n’ roller welfare
CHORUS:
I’ve got holes in my shoes
And I’m way overdue
Down payment blues
Get myself a steady job
Some responsibility
Can’t even feed my cat
On social security
Hiding from the rent man
Oh it makes me want to cry
Sheriff knocking on my door
Ain’t it funny how the time flies
Down Payment Blues – AC/DC
Every once in a while, I come across a song that really captures the real estate bubble. How many fifty-cent millionaires out there bought homes with 100% financing so they could put the house to work for them and do nothing?
I think of all the people utilizing 50% DTIs: steady job, can’t feed the cat, hiding from the rent (interest) man, Sheriff knocking on my door (REO)…
Now that the bubble has burst everyone has the downpayment blues. The horror of it. Getting a house will actually take sacrifice. The house will require an income rather than provide one. Do you think anyone will really want a house under these conditions?
Asking Price: $750,000
Income Requirement: $187,500
Downpayment Needed: $150,000
Purchase Price: $823,000
Purchase Date: 12/26/2006
Address: 3811 Claremont St, Irvine, CA 92614
1st Loan $658,400
2nd Mtg. $164,600
Downpayment $0
Beds: 5
Baths: 2.5
Sq. Ft.: 2,586
$/Sq. Ft.: $290
Lot Size: 5,166 sq. ft.
Type: Single Family Residence
Style: Contemporary/Modern
Year Built: 1970
Stories: Two Levels
View(s): Park or Green Belt
Area: Westpark
County: Orange
MLS#: S502078
Status: Active
On Redfin: 14 days
From Redfin, “Beautiful 5 bedroom executive home in desireable West Park. Large, corner lot with highly desired floorplan. Wonderfully remodeled kitchen with silestone counters, newer cabinets and appliances; wood floors in living and dining areas; scraped ceilings are accented by crown molding and recessing lighting; Anderson windows installed throughout. Walk to parks, pool, tennis, club house and schools. Motivated sellers- Call today for private showing. submit all offers.”
A well-written MLS description. Amazing. Of course, there is a misspelling (desireable) and a sentence starting with a lower case letter, but there are no unnecessary capital letters, and no exclamation points. COOL!!!
.
.
Asking less than $300 / SF in Westpark? That is progress. When properties like this one get down under $200 / SF, we will be getting near the bottom.
Do you think these sellers really are motivated given that they have zero dollars into the transaction? Since they are selling after only 8 months ownership, I conclude this was a flip gone flop. The bank is looking at a $118,000 loss after a 6% commission.
The holders of second mortgages on properties here in California are getting wiped out. I can’t say I feel bad for these lenders. Downpayments were one of the last barriers to entry into the housing market. The providers of these second mortgages were in large part responsible for allowing would be homeowners who are not responsible enough to save for a downpayment access to the housing market. This was supposed to be a good thing. However, since people with no money in the transaction don’t care about defaulting, these second mortgage holders are bearing the brunt of the housing price decline. The grand experiment of increasing home ownership rates through eliminating downpayments has failed spectacularly.
Downpayments are back, and they are here to stay. The entire market has a severe case of Downpayment Blues.
Finally, some decent music! Although, judging by the date of the sale, “Last Chistmas” by George Michael might have been more appropriate.
—–
IR,
Can you please explain how you calculate the income requirement? I actually really like this house (except for the kitchen). I don’t have the income you indicate, but I do have more cash than you suggest available for a down payment. Is there an easy way to adjust the income requirement based on what down payment I could come up with?
I am planning on waiting a couple of years before I buy a house in Orange County, but this is the first house that isn’t that far off from what I would want.
By the way, I think the flopper thought they got a “sweet deal” when they purchased the house for $823k last year. Oops!
“Getting a house will actually take sacrifice. The house will require an income rather than provide one. Do you think anyone will really want a house under these conditions?”
Great question since the word “sacrifice” has casually been stricken from the current American vernacular. I think the answer is “yes,” though. It will just be millionaires of this variety:
http://www.amazon.com/Millionaire-Next-Door-Surprising-Americas/dp/0743420373/ref=pd_bbs_sr_1/105-5694417-8238818?ie=UTF8&s=books&qid=1189083829&sr=8-1
Amazon.com: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy: Books: Thomas J. Stanley,William D. Danko
Not the fitty cent kind.
Great record, too.
Geezus, 3/4 of a million and you get crappy ceramic tile in the family room and kitchen (yea, babay bring back the 80’s), a master bath smaller than a second bedroom closet and low end appliances. Yea, this is a deal, I’de feel like a king living there. Bet, they’de throw in that Hummer if you asked nice. Of course, that probably belongs to the Realtard. I can’t beleive this is a flip. Other than the kitchen cabinets and counter (which I hate) this thing looks like it needs gutted.
The income requirement here appears to be derived from dividing the home’s asking price (as if it were worth that) by four. The downpayment amount is dividing the asking price by 5 (20%), which is a new concept, since so many are used to diving it by 10 (10%) or infinity to calculate that figure.
I like how IR is adding the income required and the down payment needed. It really makes a statement that the price of these houses requires a high income and a sizeable down payment. Thanks for all your great posts!
For the income requirement, I have used a very crude estimate of 4 times income for the total purchase price. When you factor in a 20% downpayment, the loan is closer to 3 times income. There are probably still some lenders will some programs that will allow people to borrow more, but this conservative number is where we are heading with the credit crunch.
“Downpayments are back, and they are here to stay.”
Aren’t they here to stay only until this bubble is forgotten? A few years maybe?
Sad but true…
IR,
You and Terry could be right but I have my doubts. In my view, this is the first time in modern history that “the little guy” has found himself one up on the lender on this scale…not by design, but by happenstance. In the street’s unquenchable thirst for returns, the unprecedented # of leveraged hedge funds don’t even know how steep their losses on these CDOs are yet. Risk hasn’t even been considered. When the inevitable accounting, or “mark to market” on these securities is finally forced, the losses will be unprecedented as well. The big guys stand to get hurt. After the smoke clears and some kind of workout-bailout deal is cut, I ‘think’ that tighter lending restrictions must be a part of the new regs…down payments being part of the underwriting process that has been abandoned for the past 5-6 years. Just MHO of course.
I totally agree with you. My lament was over basic human nature: when the dust finally does clear — 10 years or more from now — people will forget the horror of the bubble and they will begin a new one. I have yet to see any generation learn the lessons of generations past with regards to financial markets.
What happened during the last boom and bust with down payments? I was way too young to remember, but my uncle got burned on an Irvine condo. He bought in 89 then a few months later value dropped substantially. Since he put down 20%, he had too much at stake to just walk away. Despite the value dropping, his mortgage was still very affordable so he stayed put.
Were 20% down payments the norm back then? Were there no-down IO ARMs then?
I think the income requirement of $187,500 is too steep assuming one has the 20% $150K down.
You can get a jumbo 30-year at 8% right now. The monthly spend on a $600K loan with an 8% P+I loan would be around $3,700 including principal, interest, prop, tax, hazard, and some HOA. There is a tax deduction of approximately $1700 per month that has to be factored in taking the net out-of-pocket of approximately $5300 down to the $3700 level.
Even if you conservatively assume only 30% of income going toward housing costs, the income requirement to get this property, again, assuming you had the down, would be more like $145K per year.
I don’t know how you were able to deduce the size of the bath from the description. I like the look of this house. 🙂
Price is continue to come down…But if you are waiting for $200 sq ft, then you are probably dreaming…It can happen, but you (and all of us( won’t like the scenario very much at all…
20% downpayments were the norm, and exotic financing was available, but not used to near the degree it was in this bubble.
IMO, it was the 20% downpayments that kept the foreclosure numbers to manageable levels.
I don’t doubt credit is still being made available at terms that will allow someone with a lower income to get the loan. Credit is still in the tightening cycle. IMO we will get back to 30-year fixed, 20% down, 28% DTI before the tightening cycle is complete.
I would agree with IR’s point that sacrifices will be necessary to buy a house. And I also agree with covered’s point that many Americans don’t know the meaning of the word.
After all, why should they? We’re used to being able to secure a home loan for an obscene amount of money simply for breathing. We’re hounded by credit card companies (almost daily) who are trying to lend us money. Heck, even the credit card companies are all over college campuses signing up students to get them early. Don’t have any money to buy that new sofa or refrigerator? No problem! No down payment and no interest for 18 months! Want that $100,000 Mercedes? Why buy – we’ll lease it to you – that way, you only pay a fraction of what you would if you had bought it (just don’t go over the mileage limit, ha ha ha)! And you don’t have to put very much money down!
America has become a very “I want it, and I want it now” nation, complete with a negative savings rate. I hope (though I’m probably just being naiive) that one positive effect of the deteriorating housing market is that it will force people to wake up and go back to living at least a bit closer to within their means. If even a few more people realize they need to start saving and disconnect themselves from a consumer product-obsessed life, that’s a good start.
I would recommend a movie called “Maxed Out” – it’s about the nation’s obsession with credit, and it’s consequences. Some focus on the real estate world, too.
The most sickening part of it is when it describes the story of two mothers whose kids committed suicide because they were over their heads in credit card debt. They still received letters from credit card companies after their deaths offering them credit cards, saying they wanted their business back.
I’ve been reading this blog for a couple months now and love it. My wife and I both grew up in Irvine and would love to move back when the time to purchase is right.
My one comment about this place is the fact that this is not located in Westpark. This tract was one of the first developments in the city, I think called Culverdale. Westpark, or at least what I consider it, was a bunch of fields when this place was built.
Do they throw in the house with that tree?
ipoplaya,
Try Yahoo’s “How much home can I afford” calculator with the following parameters:
combined income: $187,500
down payment: $150,000
*your* loan assumptions: 8% on a 30-yr fixed jumbo
no other monthly obligations
estimate for taxes: $8,000
estimate for insurance: $1,200
See what you get for the home value you can afford… This is assuming very conservative lending/underwriting standards which is the fast becoming the norm in the marketplace…
“Flopper”…..NEW WORD ! Hell, they’re not flippers, they’re floppers ! lol
That probably was the original name, I don’t know for sure. This neighborhood is now called Westpark Village 1. It is the only neighborhood in Westpark with sub-neighborhood identification signage. It doesn’t look or feel much like the rest of Westpark.
Too thoughts, one, you don’t need $150K saved, if you’re going to put $150K down, you in reality, probably need $300K+ plus saved in various funds. At that level, I doubt many will move every penny they have to the down payment. Not will the banks allow it since they’ve started looking for reserves again too.
Secondly, the the DTI guidelines are all pre-tax, not post tax.
Here’s the rough table I ground out quickly in excel. A 40% DTI before tax (a stretch) drops to about a 33% DTI after tax. IF you stretch that far, don’t plan on buying much else.
Price 750000 750000
Down 20% 10%
1st Rate 8% 8%
2nd Rate 0% 9%
1st Loan Amt $600,000.00 $600,000.00
2nd Loan Amt $0.00 $75,000.00
1st Pmt ($4,402.59) ($4,402.59)
2nd Pmt $0.00 ($603.47)
Prop Tax ($648.13) ($648.13)
HOA ($45.00) ($45.00)
Int ($3,986.40) ($3,986.40)
Int 2nd $0.00 ($560.94)
Princ 1st ($416.19) ($416.19)
Princ 2nd $0.00 ($42.53)
Tax Rate 0.373 0.373
Deductible ($4,634.53) ($5,195.47)
Tax Savings ($1,728.68) ($1,937.91)
Expense After Tax ($2,905.85) ($3,257.56)
Total Cost after Tax ($4,015.16) ($4,366.87)
Total Cost before Tax ($5,095.71) ($5,699.18)
.33% DTI $15,441.55 $17,270.24
Annual Income $185,298.63 $207,242.89
40% DTI before Tax $12,739.28 $14,247.95
Annual Income @ 40% $152,871.37 $170,975.38
Required Down $150,000.00 $75,000.00
Required Savings? $300,000.00 $150,000.00
.33% DTI After Tax $12,167.15 $13,232.94
Annual Income After Tax $146,005.80 $158,795.24
I understand IR’s opinion that credit will tighten to conservative metrics if/when foreclosures worsen over the next couple years. And if lenders/investors are taking huge losses over this time that’s possible (try to keep in mind though, that losses are offset by gains, and these investors have made considerable gains; the only investors with “real” losses may end-up being those who were highly leveraged – e.g. hedge funds).
But I think we (IR & readers) frame the issue according to our financial beliefs. We know that you should dedicate less than 30% of your gross to your total housing cost if you want to live comfortably, absorb the changes life will bring, and invest. And we have no idea how the typical Irvine family (having bought a home in the last 7 years) grossing $80k can live with $25k in credit card debt, two $30k+ auto loans, and dedicate 45% of their gross to housing. Just thinking about others living like this makes me anxious.
And if these over-extended-brink-of-bankruptcy households don’t cause lenders/investors more loss than gain over the next couple years, I don’t think credit will tighten to the extent IR suggests.
I do think the combining of several risk factors will end though. e.g. subprime + 100% CLTV + pay-option ARM + 75% back-end DTI + no assets + no income verification = default.
But that would mean the 5% down 5/1 ARM at 40% front-end DTI with income verification would still be available because the risk to the investor is not outweighed by the return.
just an fyi, you are better offer splitting the 80% from a single jumbo loan into a 1st loan at the conforming limit and getting a second loan on a closed end fixed second.
so instead of getting “8% for a 30-year fixed” (actually more like 7.625%), a borrower would be better off getting a 1st loan at 6.25% for the first $417K on a 30-year fixed and getting a 2nd at 7.5% for the remaining $183K. Overall, it is much cheaper despite having to make two separate payments each month.
An excellent book, BTW.
I also agree, but it sounds more palatable if you call them “cycles” instead of bubbles.
Golf, how big is my bathroom?
“…that one positive effect of the deteriorating housing market is that it will force people to wake up and go back to living at least a bit closer to within their means.”
This will mean our consumption (i.e. economy) will decline. We will be like a severely overweight person who finally starts dieting and exercising. It will hurt in the beginning, but in the long haul we will be better for it, provided we stick to our regimen.
The irony is that economy-wise, this “contraction” period will be viewed as bad and something to avoid. “Eat! Eat! You must keep eating!” will be the sentiment – even if we aren’t hungary.
off the topic:
high end westpark house to rent for 3600K/month
http://orangecounty.craigslist.org/apa/415359124.html
“Former model home in westpark with 5 bedrooms and 3 baths and 3 car garage. High ceilings and very bright home. There is a one bedroom and bath downstairs.
Approx. 2750 sq. ft. of living space. Just a short walk to the association pool and tennis. Close to shopping and entertainment.”
a friend of mine purchased one of these houses for 1.1M last Dec. Imagine how overprice these houses are.
How does that AMT factor in to a household with that income level?
I don’t want to belabor the point, but then do you consider a financially conservative loan to be three times income? So someone earning 100k can (relatively) safely borrow 300k? That is a nice rule-of-thumb to evaluate real estate markets.
This isn’t the first time “the little guy” lost his shirt. Read Dr. Housing Bubbles excellent post today on the Florida real estate boom of the 1920s.
ipoplaya,
I think this is exactly why IrvineRenter was reluctant to include required income. It is a total judgment call. I say accept his assumptions and adjust according to your personal appetite for risk and your guess on what financing will be available in the near future.
Three times income for a loan is a great rule-of-thumb. In a low interest rate environment, this can go a bit higher because the same payment finances more money. The rough numbers I am using would have the loan be a bit over 3 times income.
That is NOT an easy question, but, AMT will reduce the tax benefit of home ownership if your household income approaches $150k+ and you have other considerable deductions (e.g. non-working spouse, 2+ children, etc.). Caveat – this is true in CA because of our 9%+ state income tax.
If your income is in this range and you live in CA (or another high tax state), don’t assume you’ll receive the entire tax benefit of home ownership. Run scenarios through TurboTax deducting potential property taxes and mortgage interest before you buy an “expensive” home with high property taxes.
check out the location of this dream home: only one house in from the 405. bring earmuffs with you so you can sleep at night. I am in Westpark nearly a 1/2 mile in from this place and we hear the roar of the 405 loud and clear. Can’t imagine what it is like so close. Oh and by the way, the diesel fumes are free. horrific.
Funny… I read something similar in the comments section about $300/sqft. Looks like we’ve blown through that even earlier than I expected.
The mass of foreclosures from resets haven’t even hit the market yet. Depending on what data you look at, resets for subprime peak in October. The foreclosures for those probably won’t be on market until second quarter of next year. Then a mass of Alt-A (a lot of them stated income loans) reset mid to late 2008. These are just the loans that will be forced into foreclosure.
Then there is prime. Think prime ARM’s will hold out? I don’t. Depending on rents I think many people will *choose* to walk away from their home because they think it is a waste of money. I think that’s a mistake long term, but I think people will still do it. Not the majority, but enough to have an impact.
This is just the beginning of a long painful decline.
I remember Culverdale! Yeah, it’s called Westpark now.
Thanks for the analogy. It is so fitting and a perfect visual. I think I’m going to steal it.
🙂
I think you’re right. Hopefully the spread-out nature of these events will foster an orderly correction of slowly depreciating home prices over a few years (maybe 5%+/- for 4-5 years).
To Irvine Renter- I believe the next bubble is being born right now, namely any thing Chinese. You are about to see thousands of new Chinese companies being birthed and brought public.
To Anonymous: Let’s stick with the “unpalatable” words, instead of using the NewSpeak that helps maintain a state of denial. One of our problems as humans is that we are very adept at using language to manipulate appearances instead of to reveal a truth. Time to drop the euphemisms and call a thing by its true name.
carl,
Your comment is a great follow up to keep in in perspective. I, for one, am glad IrvineRenter has included the required income and downpayment needed during these times of tightening credit because it is such an eye-popper and fosters discussion. Once credit loosens up again (and it will) these posted values will become less relevant and will likely drop off. But for now I think they are great jump off points and people can then adjust the variables according to their personal situation including risk tolerance.
I agree – it goes against what most peoples’ image of a wealthy person is. The other book, called the millionaire mindset, is also a good read.
Click on the addess in the post and it will take to to the Redfin listing which has pictures of both bathrooms. One is tiny with teal-green freaking tile from 1984 and the master looks like a hallway. This house needs help!
The income calculations are off:
I calculate a P&I pmt of $4,402.59 a month for 600k @ 8%. Taxes will be at least $782 a month. Insurance another150 a month. This puts the PITI @ $5,334.59 a month. THIS DOESN’T INCLUDE ANY OTHER CREDIT OBLIGATION.
Let’s assume a car payment, some credit cards, and maybe some school bills at another 1,000 a month. This puts the debts at $6,334.59 a month. A 50% DTI ratio requirement puts as at a gross income requirement of $12,669.18 a month or $152,000 a year. This is sillyness. It doesn’t take into account utility bills, car insurance, car expenses, food, water, etc..
The avergage OC resident is not even putting down 10% let alone 20%. They also have monster credit card debt, and 2nd homes. This is pretty expensive to be a starter home. This means the person buying will more than likely need to sell their existing home. Pretty tough to do right now.
I don’t feel comfortable buying anything with a DTI over 38%. If that’s the case here, you’d need a gross income of 16,667 a month, or $200,000 a year!
4 Irvine high-rise projects zapped
http://lansner.freedomblogging.com/2007/09/05/4-irvine-high-rise-projects-zapped/
Now, that would really throw a CDO curveball…
No quake coverage for 88% of California
http://lansner.freedomblogging.com/2007/09/06/no-quake-coverage-for-88-of-california/
The market for 2nd mortgages is tough right now though. I would still suggest to try and go that route since you’ll be below 80% CLTV. Sometimes Freddie and Fannie don’t like concurrent 2nd’s.
Remember, the more money one makes the LESS important DTI becomes as many expenses are regressive in nature. Thus simple DTI metrics are more valuable for marginal buyers, than they are for “wealthy” borrowers.
I was actually curious if anyone had any reasources for the following pieces of data:
1) Percent of two-income families in Irvine.
2) Percent of housing units breakdown, by rental and privately owned.
3) Average houshold income for both renters and homeowners as separate groups.
Welcome to *financial reality*….
California helps drive new record in U.S. foreclosure starts, group says
http://mortgage.freedomblogging.com/2007/09/06/california-helps-drive-new-record-in-us-foreclosure-starts-group-says/
More homeowners are struggling to hold on to their properties and more are losing that struggle, says the latest national report from the Mortgage Bankers Association.
The seasonally adjusted rate of homes entering foreclosure rose to a record high of 0.65 percent in the second quarter, up from the previous record of 0.58 percent in the first quarter and 0.43 percent a year ago.
The foreclosure inventory percentage — the percentage of loans that were in the foreclosure process as of the end of June — rose to 1.40 percent from 1.28 percent in March and 0.99 percent in June 2006.
And more folks are missing their monthly loan payments.
The seasonally adjusted delinquency rate for all mortgages climbed to 5.12 percent in the second quarter, up from 4.84 percent in the first quarter of 2007 and 4.39 percent a year ago.
Doug Duncan, the MBA’s chief economist, said during a conference call that the numbers could keep climbing over the next year, longer than previously thought, because investors have stopped buying as many as 40 percent of home loans for sale. That limits choices and drives up costs for homeowners needing to refinance and for home shoppers, he said.
“Even prime adjustable jumbo loans are not being purchased by investors. They have simply left the marketplace,” Duncan said. Jumbo loans are greater than $417,000.
Missed payments are up from the first quarter, except for Veterans Administration loans:
• The delinquency rate for prime loans rose to 2.73 percent from 2.58 percent.
• The rate for subprime loans rose to 14.82 percent from 13.77 percent.
• The rate for Federal Housing Administration loans increased to 12.58 percent from 12.15 percent.
• And the rate decreased for VA loans to 6.15 percent from 6.49 percent.
U.S. Home Foreclosures, Delinquencies at Record High (Update4)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0V97a_RmiMY&refer=home
Umm… no… let’s try to have some manners here:
A rude person might say that people are being foreclosed on due to irresponsible borrowing/lending and a housing bust.
A polite person would say that people are being given the opportunity to rent due to lifestyle choices and natural real estate cycles.
IR, do we know what is the avg. downpayment% for an Irvine home purchased in the last eight years? Thanks!
Maybe 5% nationally, but metropolitan areas like Orange County will be declining much faster than that (15%-30%? We’ll see.). I do agree with about 5 years for this thing to flatten out in terms of price/income ratio, but the question is: When will prices stop falling? I think (wild ass guess) 3 years? Let’s say you got a home for $450,000 in 2011 and in 2013 it’s still $450,000. Sure the price held in raw dollar terms, but the house in 2013 is actually cheaper in terms of price/income ratio, because wages have grown. My thoughts are that this bubble will deflate faster than the 80’s bubble due to the pure insanity of the lending. So, I’m just making seat of the pants guesses. Maybe they pan out, maybe they don’t. I don’t think the year over year declines will be stable. I think they will vary.
LOL! Whatever.
You want a detailed table search of the 2006 US Census data. Go to American Fact Finder. Select principle city, Los-Angeles-Long Beach-Santa Ana, Irvine City. http://factfinder.census.gov/servlet/DTSubjectShowTablesServlet?_ts=207159094459
From their do the drill down tables to find economic-demographic breakdowns, owners/households, rentals, etc.
For example, table B19051, ..52, ..53 show houshold earnings, household wages, household self-employment income.
Thanks for the help Anonymous. Perhaps you could post your numbers for #3, so we could all laugh together.
Here is what I found:
There are 51,199 households out of which 36.0% have children under the age of 18 living with them, 53.8% are married couples living together, 9.8% have a female householder with no husband present, and 32.9% are non-families. 22.8% of all households are made up of individuals and 5.0% have someone living alone who is 65 years of age or older. The average household size is 2.70 persons and the average family size is 3.17.
The median income for a household in the city is $85,624, and the median income for a family is $97,592. 9.1% of the population and 5.0% of families are below the poverty line. Of the total population, 6.1% of those under the age of 18 and 5.6% of those 65 and older are living below the poverty line.
I am wondering how different segements of the market are going to move, with the assumption that the entire market will not move in lockstep. (e.g. One bedrooms decline the most followed by two, then 5 plus, with 3 bedrooms holding value the most on a relative basis.) Perhaps its not that important. Perhaps someone with moer detail on the numbers/history could provide a little color.
I know of no source for that data.
“3) Average houshold income for both renters and homeowners as separate groups.”
Obviously homeowners would make more money than renters. Renters are most often those just starting out who are making less money and do not have sufficient savings to buy. That was changed somewhat when 100% financing entered the scene, but the general pattern still holds true.
When affordability becomes a problem (like now), high income households often choose to rent. This probably also distorts the historic pattern somewhat.
I have seen people attempt to turn this distinction into a bullish argument. It goes something like this: the median income of homeowners supports the median home price, therefore home prices are at fair value.
It is kind of silly when you think about it:
1. Wages did not rise much during the bubble rally. If the median income of owners was supposed to match the median home price, it would have done so prior to the rally when it obviously did not.
2. The line between the two is fluid. Renters become owners and owners become renters all the time. The lowest income brackets are priced out of the market by those just above them. Everyone seeking an advantage through exotic financing kept pushing prices higher until a new equilibrium was reached where everyone was on a neg am loan payment. Since this is an inherently unstable equilibrium, prices began to fall, and they will continue to do so until we reach the new equilibrium based on payments from a 30-year fixed, 20% down, 28% DTI program.
Thank you.
yeah, you’re right. I don’t think like the ceramic tiled floor either.
Me too.
Was Culverdale, then Old Westpark, now just plain Westpark. I vote, in the spirit of returning to prices of yesteryear, that we start calling it Culverdale again.
BTW, Rastaman I like the smell, and power, of my Diesel P/U. To promote one fuel over another is hydrocarbonist. 🙂
Do High Income households choose to rent? I personally don’t know anyone who has chosen renting over owning. Do you have the backup data for that? That can be a pretty tough sale to push through on your wife.
It goes back the emotional element of one’s home. As many people on this board have pointed out people form their self-image based on a number of factors. One of the biggest is where they live. Renting carries a stigma, while homeowners view themselves and are viewed favorably. At the most basic level the decision is purely economic, however in reality there is far more going on than numbers.
I was laughing at your debt to income comment about the wealthy. Sorry, “wealthy.” Whatever that means.
Yes, lots of high earners want to take on massive debt to income ratios for their houses. None of them care to do anything else with their money. In fact, I bet most of them intend on spending 99.9% of their income on housing related payments. After all, high earners became high earners through a lack of education and an irrational obsession with their house. They don’t care about fine dining, vacations, cars, clothes, jewelry or ,heaven forbid, investing. Those are things the poor do. It’s a new new era.
Awesome numbers dude. They really back up your take on high earners.
A significant portion of the readers of this blog have high incomes and chose to rent because the numbers favor renting at this time.
You right about it being a tough sell for the wife. Personally, I showed my wife how much it would take out of her spending money, and she was more than happy to rent. 🙂
“Renting carries a stigma, while homeowners view themselves and are viewed favorably.”
https://www.irvinehousingblog.com/2007/08/27/brio-new-world/
Perhaps, perhaps not…
And does any of that matter…
https://www.irvinehousingblog.com/2007/08/24/1190/
Some food for thought.
I don’t know the specifics for Irvine. I do know that average downpayments declined significantly over the last 4 years mostly due to 100% financing.
can you explain further? I for one will like it very much….LOL
“That can be a pretty tough sale to push through on your wife.”
This point cannot be overstated. Your decision to buy, if you’re married, is not made in a rational and logical financial vacuum. The decision is greatly affected by your spouse. It’s anecdotal (I don’t know how you’d collect the statistics), but most of my friends have been unwilling to buy and/or wanting to sell based upon the overvalued market. However, this belief/knowledge is suppressed by other factors related to family/spouse needs.
Specifically, one friend wanted to sell his home in Irvine when neighbors were selling for $1.1 million a year-and-a-half ago, but he could not convince his wife to sell and rent for a few years. Now houses in his neighborhood are selling in the very low $900s, and he can’t stop thinking about the “lost gain.”
Wel not quite everyone. I recall reading some post on a blog long ago about someone’s gardener who had such bad credit, he couldn’t get a car loan, and couldn’t even qualify as a renter.
So he bought a house instead.
🙂
I am going to look through all of the purchases I did in all 50 states from today back until January of 2006…..
I’ll be back soon with the % of purchases that had 20% down or more
Agreed. High earners rent when it makes sense. It makes sense now. I had pressure from my girlfriend about 3 years ago with an irrational argument related to our age and the fact that we didn’t own a home. It became quite heated and I finally blew up and said (unpleasantly) that I wasn’t going to lose every last cent of the money I’ve saved and invested over the past 10 years on a stupid home purchase. That money was hard earned.
So, emotions do come into play. Luckily though, the people that actually have the capital to risk seem to know better than to throw it all away on a bad purchase – well, some of us anyway. Now that she has her share of the down payment I notice that she isn’t so quick to jump into the market. When the bulk of it was my money what was the risk? Of course, now she sees $200k off mid priced homes from last year and still falling. So… I guess that might be a factor in her change of tune.
Come to think of it I had pressure from my dad just last year! Guess it’s called being an adult and making your own decisions rather than worrying about “stigma”. Children shouldn’t own homes.
all this for 3/4 of a million:
Diesel exhaust contains hundreds of constituent chemicals, including many that are human toxicants, carcinogens, or present reproductive hazards. Forty chemicals in diesel exhaust are on California’s list of toxic air contaminants, and California residents face high diesel-related health risks based on the heavy concentration of diesel truck traffic in urbanized areas and recent reports demonstrating that diesel cancer risks far outweigh cancer risks from other toxic air contaminants.
Go drive though the parking lot of the Irvine Ranch company rental buildings.
Lots of nice cars there, mostly in the garages, but you can see some exotics driving around form time to time.
OK. I’ve done 269 mortgages (including concurrent 2nd’s and HELOCS)in the last 20 months. (January 2006 til now. )
50 of these loans were purchase money loans (1sts and 2nds)
The number of actual purchase transactions was 28. This means that only 6 of the 28 purchase transactions involved one loan. Only 21% (1-in-5) of all the purchases I closed involved 20% down or more. The remaining 22 purchases involved 2 loans each, which means they could have been 15%, 10%, 5%, or 0% down.
This is nationwide as well. It will be too time consuming to go into further detail and specify how many were closer to 100% financing vs 85% financing. I can tell you that our 80/20 pricing was actually better than our 80/15/5 pricing. If they weren’t putting down 10% or more, they were probably putting down 0%. Very few people as I recall did 95% financing
Thanks. That is good information.
More importantly, for every one purchase in 2006, there were 8 Refis!
28 purchases on 50 loans, leaves 219 mortgages that were not purchases. Assuming a refi results in one loan and not two means 28/247 loan were purchases. 219/247 were not.
Tell me I’m wrong. Please. Any idea how many of those refi’s were money out? Credit Debt in? Increasing balance?
Sounds about right.
He’ll have the opportunity to enjoy the fresh night air then.
“That can be a pretty tough sale to push through on your wife.”
As others have pointed out, this is a bit of an understatement. I had to “prepare” my wife for more than two years. We sold our home and now choose to rent and it is working out well for us. Most anybody, actually everybody, thought we were morons for selling, and going against the crowd is harder than one would think. The only other folks I have met who have sold and are waiting for prices to depreciate are the folks I have met in here.
It’s gonna get ugly.
Everyone in OC is sitting on mountains of equity and nobody was abusing their HELOC…
Real ugly.
Air pollution statistics for various areas in California
http://airnow.gov/index.cfm?action=airnow.fcsummary&stateid=6
Also, I think I read some article (can’t find the link) that said the particulate pollution inside people’s cars was much higher (8 times?) than the highway air right outside their car, due to them driving behind trucks and so on. Not much people who took public transit (bus, train) except if it was not fossil fuel powered (ex. electric).
So living close to work is good.
Also read (can’t find the link) that an air quality study inside an office building turned up the surprising results that air quality inside the building was much worse 9-5 than after hours. The laser printer dust was the culprit.
That should read “Not much better for people who took public transit (bus, train) except if it was not fossil fuel powered (ex. electric).
it’s interesting that how i hear americans express this is in terms like “don’t buy stuff you can’t afford” – the emphasis being “you can’t affod it.” my foreign friends (scottish, korean) approach it differently – it’s more “don’t pay too much for stuff” or “if you can’t afford it, it costs too much.” they also haggle more – there’s less of an assumption that the asking price is appropriate.
It took me years to convince my wife that renting was even in the realm of possibility. And, I she is still not convinced. She grew up in OC, in a family whose primary investment was real estate. They basically bought places and tried to never sell them. That is the retirement package, built on the income from the properties they own. Obviously given housing prices, owning a cashflow positive rental is pretty much impossible at present, so keeping a home after moving is tough. At any rate, the real estate investment strategy has worked well for them, and of course enforced a very positive view on home ownership on my wife (which I agree with to a certain extent).
My own parents bought a house in OC in the early 70s (for essentially nothing), and STILL LIVE THERE. This one decision (or perhaps not moving is many decision) has been the greatest source of wealth imaginable. Can any of you imagine paying $200/month mortgage on 2000 sq.ft. home through the entirety of the 90s.
This knowledge has left a strong impression on me. The disparity between rents and mortgage is great indeed. The likely path of housing prices is downward, but I just can help thinking about the day when Irvine houses are $7MM, and I’m paying off only a small fraction of that.
Awgee,
But, that’s different than buying fresh into the market. Personally, I wouldn’t sell (provided I actually owned a home) even if I knew the market was going to crash – unless I hated the place or planned on moving for some reason.
You are taking an awful risk in selling high then buying cheap later. When is the market going to crash? You can see it coming, but you don’t really know when. I indirectly know some people that sold about 4 years ago. That’s a long time. How much longer do they have to wait till they make money off the deal? Will they even make any money off of it or will they lose money? I bet they lose money once their rent is factored in. How about the place they are in now? Is it as nice as their old house?
Then there is the new house you buy. You know the shape of the house you are living in. Do you have any idea if the new house is going to need repairs? How about neighbors? Maybe your new ones suck. Of course, if the old ones sucked then moving might be the right choice. And if your old house was a wreck, maybe dumping the money pit is a good idea.
Just my two cents. Everybody lives their life differently and if you sold two years ago you are in great shape in my opinion. But, that was a big risk unless you had bought in the bubble to begin with.
Within the last year or so, the spread on an 80/15/5 v. an 80/20 wasn’t worth putting down the 5%. e.g. The rate on your jumbo first would be the same, but the spread on the second would be just 25 bs pts (so you’d pay 9% rather than 8.75 for not putting down the 5% down payment).
Capitalism Works,
I hear exactly what you are saying. It is too bad the lending industry ruined everything:
https://www.irvinehousingblog.com/2007/08/27/brio-new-world/
“Previous generations had a formula for a “normal,” happy life. You used to save your money until you had a 20% downpayment, then you bought a house, and if you had increases in income, you could move up to a nicer place. Home ownership was a symbol of success. It proved you could save to reach a goal; it proved you were responsible; it made you happy. It was also a ticket to financial security as your home equity would become a savings account you could use to fund your retirement when you downsized to smaller accommodations. These were the rules of old.
The lending industry changed all of that. They eliminated all measures of responsibility including honesty with “liar loans,” integrity with low FICO scores, and accountability with 100% financing. When homes can be purchased by people who lie, cheat and steal, the prestige of home ownership is diminished — no make that eliminated. Home ownership no longer symbolizes sacrifice and success, instead it now is synonymous with greed and gambling in the commodities market. Welcome to our Brave New World.”
Mortgage Broker Survey Finds 33 Percent of Home Loans Failed to Close Last Month
http://biz.yahoo.com/ap/070905/home_loan_survey.html?.v=1
A third of home loans originated by mortgage brokers failed to close in August as investors shied away from riskier borrowers, a new survey says.
…
Three years ago, Popik said, a survey of real estate agents found that only 4 percent of transactions failed to close on average.
…
The survey also found that nearly half of borrowers with adjustable rate mortgages were not able to refinance their loans. That’s a major concern of policymakers as an estimated that 2.5 million mortgages given to borrowers with weak credit will reset at higher rates by the end of next year, according to the Federal Deposit Insurance Corp.
Mortgage brokers account for about one-third of total mortgage originations, and have originated a larger share of loans to riskier borrowers, so the percentage of failed loans in the entire market may be smaller.
“You are taking an awful risk in selling high then buying cheap later.”
I will admit that there is risk involved, but I will venture that there is less risk in selling near the top and buying near the bottom, than there is in holding onto a depreciating asset. How long will your friends have to wait? I dunno. How long will I have to wait? I dunno, but I do know financially renting and investing the proceeds from the sale are doing much better than holding onto a depreciating asset. Would I recommend it to anybody else? Not a chance. It is way to personal a decision and depends to a great extent on the ability to improve one’s position while renting. Holding onto a depreciating re property may be less of a risk for many. Like I said before, it is working for us. I don’t think success in this endeavor is to sell at the top and buy at the bottom, but rather to recognize the trend and ride it.
capitalismworks – I think I understand your wife’s feelings and thoughts. Our family has increased it’s assets mainly by riding the appreciation of So Cal real estate. But being born here and living here most of my life and watching my father invest has shown me that there are real estate cycles and they are odds on predictable.
I’d say that house might be worth half a million on a good day. People ought to start thinking about replacement value + land and realize just how much land is “worth.”
By the way, I have never had a mortgage more than double my income, and it was only that high on my first house. Today, I own my house free and clear. People told me I should have a big mortgage because of the tax deduction. I said, yes, it’s nice that the government will pay 30% of my interest, but who do you think pays the other 70%?
The in the picture isn’t as nice as the one I sold in Boston four years ago for $622,000. I had bought it five years before that for $452,000. It was overpriced when I bought it, and overpriced when I sold it. When the house we’re talking about is priced in the mid-400s, then we can start talking about the real estate crash being over with.
People are barely starting to realize how overinflated everything has become. But they’ll find out. Oh, will they find out.
Home-equity loans dry up
http://www.usatoday.com/money/perfi/credit/2007-09-05-credit-cards_N.htm?csp=99
Since 2001, more than $350 billion in card debt has been shifted into home-equity loans or into mortgages refinanced by homeowners, says Robert Manning, a finance professor at Rochester Institute of Technology.
…
From 2000 to 2006, the average card debt carried by Americans grew from $7,842 to $9,659, according to CardTrack.com. That totals $850 billion in credit card debt for 88 million Americans, it says.
…
Consumers with good credit scores who pay on time remain desirable. But card issuers will quickly raise rates and shut down a line of credit if there is any late payment or sign of a problem, experts say.
Punitive interest rates charged by the major card issuers, meantime, have reached nearly 33% — an all-time high, according to CardWeb.com.
“Card holders with deteriorating credit scores and credit problems are being hit with these extremely high interest rates, which simply exacerbate the credit meltdown,” McKinley says.
Agreed on all counts. The housing prices went crazy, and it pretty much sucks for everbody involved (longs and shorts).
Living within .33 miles of a freeway is detrimental to the development of a child’s lungs. Google it, the impact is horrible. Not to mention the terrible sound of traffic. I cannot stand the sound of cars, much less those God Awful motorcycles (which ought to be banned).
“Wealthy” in quotes refer to the high earning wave slaves (myseld included). Until I have amassed sufficient assets to provide an income that I can live off, I don’t consider myself truly wealthy. Notice I didn’t say asset wealth. Real wealth is measured by sustainable cash flow.
A big Mac costs the same no matter how much you make, so does gas, and movies, etc. etc. Obviously, as one moves up the socioeconomic ladder tastes move up as well, and most people spend every dime. That said If you make $1,000,000/year and spend 50% on housing, you still have a whole hell of lot more disposable income that some poor schlep making $100K spending the same 50%. Check out the savings/investment rates are higher income levels. It is quite apparent that the costs of living are regressive.
Thus, my original point about debt to income is completely valid. The simplistic rules are for the proles. If you make a decent amount of money you know your private banker by name, and he doesn’t use some rudimentary scale to decide whether to extend you a loan.
This one is for everyone. Besides housing what do you believe are the best investment opportunities going forward over the next 5 years.
Hmm. Well that sucks. Prices need to come down so I can stop overlooking at the 405 out my back window.
People Living or Working Near Major Freeways Are Exposed to 30 Times the Concentration of Dangerous Particles From Motor Vehicle Emissions
http://www.newsroom.ucla.edu/page.asp?menu=fullsearchresults&id=3600
Jumbo rates climbed in Orange County this week for the sixth straight week, while conforming rates fells. Jumbo loans are greater than $417,000 in California and most states. The average jumbo rate on a 30-year fixed with a one-point fee hit 7.570 percent, according to Newspaper Chart Services. Meanwhile, the average conforming rate for a 30-year fixed fell to 6.217 percent.
http://mortgage.freedomblogging.com/2007/09/06/jumping-jumbo-rates/
“The laser printer dust was the culprit.”
I would have guessed fellow employees. (Not me of course!)
Cash will be a great asset class. It will gain value relative to just about everything else. If the FED does lower interest rates, look for stocks and bonds to do well as the increased liquidity will probably flow there and create another bubble.
These quotes are skewed upwards because they include mortgages originated by brokers. The major banks are charging a huge markup against broker originations. The real number for prime jumbos is in the high 6s.
gold
I’d say th at the the “typical” Irvine income of $80K combines the income of all households: apartments, condos, SFH, renters, buyers, long time owners, retirees, etc…
A case of lies and statistics.
The applicable number is the typical income of the “Irvine home shoppers”.
Also, the Irvine market has always been a “move up” market. Granted, hard to believe that a 3bd/2ba condo like this is a “move up”….. and yes, it’s overpriced.
But, remember, since its inception, Irvine homes have alway been upmarket. For sure in TR. Back in 86/87 the largest homes in Westpark were going for $205K… the price of a fixer upper in TR.
But, even so, Westpark was more expensive than Costa Mesa, Tustin and anything south of the El Toro Y (except Laguna of course).
Adjustable mortgages were offered in the 70s already. Teaser rates and adjustable terms were offered too.
By the early 80s, adjustables were the best deal because interest rates were at 18% and the future was lower rates.
By the late 80s, rates were still in the 9%++ range.
Anything with less than 20% down required PMI. The typical smallest down payment allowed was 10% and that required PMI.
I just don’t remember 100LTV loans availabe
I think the best investments going forward for the next five years begin with things not denominated in american dollars (unfortunately my home currency, just like yours). But if you have to stick with $US then go for export-oriented companies. For something much more conservative, sticking with $US again, try inflation-adjusted TBills. Hedge a little bit with gold (5%).
what???
Investors are not nuying jumbo loans. Banks need to stay liquid so they aren’t retaining them in their own portfolio.
Please let me know where you can get a jumbo rate with no points below 7% bank or broker.
Agreed CalGal. Good to see that you have to make $150k to afford 800 sq ft. in a crappy condo somewhere.
I think it has much more impact when you see the actual income requirements to be able to afford these so-so houses. Would somebody making that much actually want to live there ? Maybe, but it won’t be me.
In a 70’s office full of smokers, you might have been right 🙂