Can real estate serve as a long-term reservoir of value? For the most part, the answer is no.
Asking Price: $690,000
Address: 18 Bayberry Way, Irvine, CA 92612
Agenda Suicide — The Faint
All we want is just pretty little homes,
Our work makes pretty little homes,
Agenda Suicide. The drones work hard before they die
And give up on pretty little homes.
Has anyone paused to think of the ramifications of what happens if prices never become affordable again? What happens if all future generations are priced out forever?
Lately, houses have been purchased by people with large downpayments. With the limited availability of financing–meaning lending based on real incomes and sustainable terms–people are only being allowed to borrow so much money. This new borrowing limit plus the cash reserves people have been putting forward have been sustaining our housing market for the last several months. How long can that go on? Forever?
Can houses become a reservoir of value? Will houses be passed on from generation to generation with each one assuming a massive debt and a mountain of equity? That seems pretty unlikely, particularly given the spendthrift ways of our HELOC abusing populace. As a reservoir of value, houses have proven to be quite leaky.
Someone, somewhere will be financing a home purchase. First time buyers without an inheritance will have an empty reservoir. Therefore, any neighborhoods populated by first-time buyers cannot by their nature be reservoirs of value. Also, area incomes are by far the biggest determinant of long-term property values. Take a look at what is happening in Detroit’s real estate market. Prices are far below replacement costs and in many areas are worth only their salvage value. House prices in these areas depreciate like cars because jobs are leaving the area and incomes are declining. There is no reservoir value in real estate under those conditions.
Even under the influence of irrational exuberance, there comes a point
when house prices reach the absolute limit of prices supportable by
wages. Once this point is reached, prices cannot and will not rise any
faster than the rate of income growth (unless the finance industry
“innovates” again). If appreciation is limited by wage growth, houses
cease to have significant investment value and only serve as an
inflation hedge. Once the illusory investment value disappears, people
will not receive a great rate if return on their investment, and they will not be motivated to overpay for it (owning for $5,000 per month when you can rent for $3,000). The loss of investment incentive over the long term would cause prices to stabilize at rental parity.
Houses in neighborhoods dominated by the working-class will be dominated by local wages. Entry level housing in these neighborhoods cannot be reservoirs of value because first-time buyers do not have sufficient savings to sustain inflated prices. Unique properties in high-end neighborhoods may store some value, but even these properties are subject to the wealth accumulated by would-be homeowners.
Real estate is a cashflow investment and an inflation hedge. Despite claims to the contrary, it is not the road to unlimited wealth and spending power.
Asking Price: $690,000
Income Requirement: $172,250
Downpayment Needed: $137,800
Monthly Equity Burn: $5,742
Purchase Price: $478,000
Purchase Date: 6/26/2002
Address: 18 Bayberry Way, Irvine, CA 92612
| Beds: | 4 |
| Baths: | 4 |
| Sq. Ft.: | 2,700 |
| $/Sq. Ft.: | $255 |
| Lot Size: | 3,200
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Townhouse |
| Stories: | 2 |
| View: | Greenbelt |
| Year Built: | 1967 |
| Community: | University Park |
| County: | Orange |
| MLS#: | S576481 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
University Park. Upgraded with Travertine throughout downstairs,granite
counters in kitchen,Customized bathrooms with custom tile in showers
and tub/shower and counter tops. Private patios in front and rear.
Upgraded dual pane sliders to patios. Tall ceiling in Living rooms with
lots of windows to ceiling in Living Room and entry way. Very Bright.
Two fireplaces, one in Master Bedroom and Living Room. Low association
fees with No Mello-Roos-Community pool,spa,and tennis
corts-Award-winning Irvine Schools and convenient to
shopping,resturants,schools,library,and frreway acess and close to
U.C.Irvine.
resturants? frreway acess?
This property was purchased on 6/26/2002 for $478,000. The owner used a $448,125 first mortgage and a $29,875 downpayment. It looks as if this owner paid down the mortgage! The current debt is only $332,840. If this sells for its current asking price, the owner stands to profit handsomely. Maybe conservative borrowing does pay off after all.
Is anyone going to pay almost 700K for an attached townhouse which has condo fees and a garage that looks like Public Storage (which gives you some idea of overall quality and “what’s inside”) in Irvine?
It has a dated, boring floor plan with nice floors and showers. The term “polishing a turd” comes to mind.
Pretty rare that a condo/townhouse has such a dominant garage. Not bk approved.
Look at all the crap in that one bathroom photo. Oh, I see she uses Oil of Olay too. Plus, IMO that kitchen doesn’t deserve granite countertops. The cabinets are old and painted and have out of date ugly knobs and handles (which are crooked). For the $690K price the kitchen isn’t worthy.
I agree Sue. That kitchen is very strange looking with the old cabinets and new granite. Seems like they slapped the granite on there in the hope it would make the house sell better but it looks like a huge waste of money.
With the doubly upgraded, you should have gone with the ‘upgrade ya’ direct TV video with Beyonce.
Is paying down a debt and then getting that money back really a profit?
You’re slipping, IR. “tennis corts”
Yes, I missed that one. The spell checker didn’t underline it and call it to my attention as “corts” is a word (plural of cort)
Your writing skills are top-notch.
Tsk Tsk Lee. You’re supposed to say: “You’re writing skills are top-notch”. You need to learn from the erudite young folks of today 😉
You’re = You are
“…learn from the erudite young folks of today…”
Stuff and nonsense! Prescriptivism shall triumph, spit fire though you may. We need merely introduce these straying souls to the wonder of wordsmithery, the sublimity of stylisation, and they will surely …
Ah, nuts to that. Just let anyone who gets 750 or above on the verbal SAT buy alcohol, that’ll do the trick.
If you want take it to the next level, write “You’re writing skill’s are top-notch.”
Are you guys kidding me? Lee wrote it perfectly, and I can’t believe that the people trying to correct him are getting it more and more wrong.
You’re = You are. Plug it into the sentence and see if it makes sense.
And you don’t add an apostraphe when you are trying to make skill a plural word = skills.
I usually don’t comment on that kind of thing but correcting the correcters makes me feel better about myself.
Oh and pulling out erudite, nice.
“Has anyone paused to think of the ramifications of what happens if prices never become affordable again? What happens if all future generations are priced out forever?”
The answer is easy – you get entire towns of old people, which in turn would sell to only older, “well-established” buyers. To see this effect, take a look at any of the major agricultural centers from the past. Towns based around a changing industry seem to constantly crash in later years.
If I am understanding you correctly, we would have a society were you would have to save for 20 years or more to get past the equity threshold to reach a point where you could finance the remaining purchase price. Under those circumstances, home ownership would be a privilege of those who inherit and those who are extremely frugal.
Several European markets exhibit these characteristics. In Germany for instance, well over half the population rents, and real estate prices are commonly elevated well above rental parity.
Rental housing in Germany is subsidized by the German government. They basically guarantee that anyone with a pulse and the ability to work will have a place to stay. Socialism, baby. Socialism.
“They basically guarantee that anyone with a pulse and the ability to work will have a place to stay.”
Sounds like the RE market in the USA for the past 9 years!
That’s very true. I rent my house for 2,400 and the owner could sell it for about 800,000. You do the math on that!
The house I rent was purchased by an older couple for their daughter, but she didn’t want to live there. Only the rich, and old can afford houses here.
The big problem in over-priced housing is actually the development permits. No one can build except for a few lucky (connected) developers. There’s no availability (at least where I live) and that keeps prices sky high.
Then people never move to SoCal in the first place, and those that are here that don’t own relocate to cheaper areas of the country, which is almost all of the US other than coastal California and the Boston to DC corridor.
Go to Germany sometime. Old folks own outrageously priced homes and everyone else scrambles and jumps thru hoops to rent.
Go out of California sometime, homes are affordable and stable in price for the most part. Even places like Arizona, Florida and Nevada which also had overheated markets, even at the peak, homes were still relatively affordable.
“even at the peak, homes were still relatively affordable”… using suicidal I/O loans.
OCrefugee, your connection probably dropped. I fixed the missing words for you! 🙂
That sounds like Huntington Beach.
How often do you hear about a financial market–any financial market–hitting a 20-year low in prices? I thought prices always went up.
Inland SoCal: House Prices at 20 Year Low
Median home prices drop below 1989 levels in some parts of Southland
Some parts of California have rolled back 20 years, but the high end areas are already at the bottom? I don’t think so.
Wow. The median for 93591 (Palmdale) is 44.2% below the April 1989 price. That’s probably 80-90% off peak.
I love the spin they use. I’d prefer a 13 year rollback.
This kind of makes sense. The housing boom and associated patterns of consumptions was a primary source of job growth in great sections of inland southern California. Housing was built and then over-built based on this activity. Now that that has shattered, it looks like you have a very severe imbalance between available housing and any interest to move to these places – or to remain in them if you have lost your income. In 1989 there probably was just a small fraction of the housing available, but the relatively few souls living out there had more stable interests in being there. Better demand relative to supply and more motivated owners…prices were relatively and possibly now absolutely higher.
One great quote in the LA Times Article;
Another tsunami of foreclosures is threatening to swamp an already saturated market. In Palmdale and Lancaster, 903 homes were sold in April, but according to ForeclosureRadar, more than 7,500 are in some stage of foreclosure.
Some people believe that the tsunami will never reach the OC, or if it does, it will peter out somewhere around Tustin.
I just cannot imagine OC being in some way effected by this catastrophe. There are areas in Riverside County next door that are looking like Lancaster. Look at the unemployment rate here. Are people just trying to avoid a panic? I cannot understand why prices are still so high.
You think OC will be unaffected?
“Some people believe that the tsunami will never reach the OC”
Are these not the same people that said we would never have a correction in Orange County real estate? Yes, yes they are.
And my gawd, we’ve seen the dow chopped in half, the collapse of the worlds largest insurer, the collapse of Wall Street & retail banking, millions of people lose their homes to foreclosure … but no worries OC, the tsunami isn’t gonna impact us.Sure it isn’t. >:(
IR:
So, if I understand you correctly, in the higher end market, buyers are coming in with large down payments. Is this because the number of lenders willing to make jumbo loans have dwindled? How much is this a factor?
Buyers are coming in with large downpayments because it is the only way to close the deal at current prices. If the lenders are only willing to loan so much, the only way to close the gap is with cash; therefore, only people putting down 25%-30% or more are closing deals. Lenders across the spectrum have reduced the amounts they are willing to loan because they have retreated to stable loan programs and verified people’s incomes.
I need someone to explain to me the difference between cash flow investing and regular investing. I just don’t get the difference?
Take stocks, you can buy hoping to profit when the price of the stock goes up (appreciation) or collect dividends (cash flow or income).
Same in RE, you can wait for the price to go up or collect rent.
What is really nice is when you get both.
Try reading this post:
Speculation or Investment?
I get the impression that this property is priced above current market right now. What do you think it actually would sell for if priced right now?
$550k?
$500k?
No. Not 500k, not 550k. Way off. Any 3 bedroom in UP under 550k barely reaches the market. One sold recently before ever hitting the market. Another sold within two days of being on the market. If you look, you will see that there are no 3 bedrooms on the market in UP now. There are two 2-bedrooms (one a short sale). Anything that came on the market in a 3 bedroom below 600k is sold. Anything above 600k sits there, 3 bedroom, 4 bedroom, whatever. The market for the lower end properties in UP is hot, hot, hot.
Correction – no three bedrooms below $600,000.
It is all in the financing. People can raise $500,000 with low interest rates, but it is nearly impossible to get any more, so anything requiring more borrowing or more cash just sits there.
Right. But it’s frustrating for someone trying to get in at the low end. I have seen three lower end properties in UP this spring get sold at around $550k and reappear within weeks on the rental market. Same thing with a 2-bedroom at $450+. If the buyers are putting down 20%, the rents being asked are not covering the monthly cost, which leads me to the conclusion that either cash flow investors are investing more than 20%, in the belief that the market will rebound quickly, or they are willing to take a loss on it now, with the same quick rebound belief. But they are pushing out people who want to buy a home for their families for the long term. Again, very frustrating.
Sigh…another correction. The three were between $500 and $550k, not $550k+. That’s my problem – type fast and don’t double check my facts :red:
That is exactly what they are doing. These people will all get burned because buying a negatively cashflowing investment in hopes of future appreciation is a loser’s game. These “investors” must get burned out of the market. They will be future inventory at a loss several years from now once they give up.
Yeah…but meanwhile, people who want to buy a house in the neighborhood suffer. These investors contribute to the desperation of buyers who are willing to pay a higher price, because if they don’t, some investor will come along and snap up the property at the higher price. If you wait for all of these people to be eliminated from the system, your children will be grown up and off to college while you’re patiently waiting. Look at this bubble. People who had an infant in 2000, when the bubble began and decided to wait for prices to come down, now have a 9-year-old and they’re still waiting. Can you blame them for jumping at the first significant price reduction? I don’t.
Renting a house in your desired ‘hood is the answer. The kids really don’t care if you are a renter or a homedebtor. And you won’t be caught holding the bag.
You’re right, I agree. You’ve got the kids in the neighborhood that you want to be in. It is just that renting feels like being in a holding pattern…never permanent. Plus, you know, how you can’t do anything to the house, etc… No control over your own housing. It really motivates a person to do the wrong thing and buy a house that you can’t afford. You have to have faith that the ‘poor’ financial decision would catch up to you in the end. Otherwise, heck, what’s the incentive.
“your children will be grown up and off to college while you’re patiently waiting”
This train is going to derail because the rails are broken ahead. Will you wait for the rails to be fix or get on that train?
If housing remains unaffordable for ever, what will happen? The banks and local govt. collect lots of interest payments and taxes! And if history repeats itself, the housing ownership will become concentrated into fewer shareholders. Then powerful shareholders will exempt themselves from much of the taxes.
Does anybody have data showing the number of homes purchased in the $500k to $700K range using FHA financing? I’d be really curious to see that data because it seems that the market has been flooded with buyers using this type of loan. Any help is greatly appreciated.
Two more years of home-price declines?
Yale economics professor Robert Shiller said in a recent New York Times op-ed piece that despite recent upticks, more home-price drops and price stagnation are likely to continue through 2010 and possibly into 2011.
Shiller, who forecast the stock market and housing bubbles and who helped devise the revered Case-Shiller Home Price Index, wrote:
“Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their ‘more adverse’ forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.
“Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics …
“But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.”
No way would I pay $550 for this POS. I’d rather rent!
Meant to say I wouldn’t even pay $550k for this place and $690k is out of the question. :red:
The 10-Year bond is spiking again this morning … now threatening 4%. If this continues, the gov’t/fed induced scheme of manipulated mortgage rates will wither on the vine.
Buy gold and silver now and sit back and enjoy the Zimbabwe like inflation rates that we will “enjoy” in the near future. Thank goodness that my student loans are at a fixed 3.875% rate — with the inflation coming, I will have been paid to attend college!
What is the rent on something like this?
The HOA fine is only $150, but there must be big special assessments to maintain the exteriors of these 40 year old townhouses, no? Is there any way to see the history of these assessments?
This townhouse to me seems very “median”. 3.5X $80k = $270k.
These are considered attached single family homes. The owners are responsible for maintaining the exteriors themselves.
It just pisses me off to see such a dirty ass bathroom in a photo trying to sell a $690,000.00 house. What a dumb shit.
Yeah, amazing that somebody can’t even bother to put the brush away before taking a picture of the bathroom. Of course, I can’t stand to leave the house with any brushes or bottles on my countertop. Just wish my wife would agree.
They were careful in their borrowing and careful in their remodel as well. (Tile guy in the family?) Granite in the kitchen & redone baths, but the cabinets and appliances are old. Obviously not professionally decorated with expensive stuff–they didn’t HELOC their way out of the place through foolish overspending. Wise.
Yet, it would have been wise to declutter before the photographer came! In this case, watching a little HGTV would have helped.
Two years ago this would have been a steal for those wearing bubble covered glasses. The math did work then and it doesn’t work now. The house looks typical for that area.
Is it owner occupied or a rental? If it’s the latter, that would explain the pictures. $3000 for monthly rental? IR, your generous.
I’ve lived in a house just like this, a few streets over for 16 years.
It is actually a very nice floor plan.
The value in real estate is immense if you play responsibly and pay off your mortgage. Even IrvineRenter can’t retire in CA if he doesn’t buy and pay off his mortgage – and the clock’s ticking (oh, and I don’t think he’ll find a decent woman willing to raise his brood in a hole, either 😉 ). Along with Prop 13, homeowners in CA are discouraged from selling and switching homes, especially at today’s high prices. Many do retain their home with plans of passing it down to their children at the parent’s original property tax levels, and especially with foreknowledge of the certainty of the Fed’s immense increase of the dollar money supply. US money supply has increased considerably since 2001, and a good amount of it has been locked into real estate for the long-run. US money supply won’t roll back to 2003 levels… it’ll grow every more rapidly this year and years to come, while the Fed combats the potential of deflation. Again, that money supply will find its way into desirable neighborhoods, much like the Dot Com bubble rendered forever unaffordable many neighborhoods in the Bay Area that were once starter-homes. This happened in a matter of months, not decades. Such incredible events do occur in California – and perhaps it is happening in certain Irvine neighborhoods. Keep in mind Irvine is only 40 years young, some tracts are just a decade or more young… they are just taking form and building their community; they may just create an oasis of high-demand properties like Saratoga or Cupertino in the Bay Area. One thing you never “feel” in this blog is the ambiance of living in Irvine’s good neighborhoods… it’s really a unique place with massive international property demand, mainly from asian all-cash buyers. Now, these dudes save diligently and invest wisely – they do their math well.