What is it worth just to be in the neighborhood? Why do the houses that surround you make so much difference?
Asking Price: $715,000
Address: 15 Cedarlake #60 Irvine, CA 92614
Down on the corner, out in the street,
Willy and the poorboys are playin;
Bring a nickel; tap your feet.
You dont need a penny just to hang around,
But if youve got a nickel, wont you lay your money down?
Over on the corner theres a happy noise.
People come from all around to watch the magic boy.
Down On The Corner — Creedence Clearwater Revival
Why do properties obtain a premium due to the houses around them? When you look at certain properties, comparable properties in other neighborhoods may carry a 25% premium that is reflected both in resale prices and in rental rates. Why is that?
One obvious answer is the perception of the quality of life within the community. This is what makes Irvine so special. The people who live in Irvine all believe in the Irvine story; low crime, beautiful surroundings, warm community, abundant conveniences, and other intangibles you can name. This makes Irvine attractive to high wage earners, and it makes properties in Irvine carry a premium relative to similar properties in surrounding communities (see Open Thread 7-11-2009 for an example).
Even within Irvine, there are Villages that command premiums over other villages. There are identical floorplans found in many of the Villages of Irvine, but they consistently show differences in rents and resale prices. This reflects a consumer preference for certain Villages that can be measured as premiums (sorry, I don’t have a good data analysis for you yet). This premium is understandable because some villages have a better location and access, differences in landscaping and monumentation, and of course, differences in “trendiness” and the “cool” factor.
Where it gets more difficult to identify and understand is when you get down to the level of the neighborhood. For instance, today’s featured property is very nice, but when you consider it is a duplex with no view and a tiny yard, what makes it so much more valuable than similar properties? It has to be the neighborhood. If you look back at the price history, this property has carried a 25% premium to the median throughout its existence. What is the advantage of being “in the neighborhood?”
I am always most struck by neighborhood premiums when I see pricing in beachfront neighborhoods. The properties right on the water are going to carry a premium because they are very rare and special, but why does the property across the street — the one with no view, no yard and no parking cost much more than a comparable property inland? The ocean air and climate is part of it, but many homes seem to command premiums far in excess of their use or utility. Is proximity to premium a premium itself?
How much of the premium in neighborhoods like this are the result of “keeping up with the Joneses?” Do people overpay for properties like this so they can be close to the really wealthy people who own on the water? Does it raise their status to be near others with status?
Some of these neighborhood premiums are easier to quantify than to explain. In the end, it really doesn’t matter because both rents and resale prices are effected, so the relationship to rental parity is the same. It is fun to speculate on why some neighborhoods are more desirable than others. What is your theory?
Asking Price: $715,000
Income Requirement: $178,750
Downpayment Needed: $143,000
Purchase Price: $795,000
Purchase Date: 5/27/2005
Address: 15 Cedarlake #60 Irvine, CA 92614
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 2,194 |
| $/Sq. Ft.: | $326 |
| Lot Size: | 4,000
Sq. Ft. |
| Property Type: | Condominium |
| Style: | Traditional |
| Stories: | 2 |
| Floor: | 1 |
| View: | Greenbelt |
| Year Built: | 1984 |
| Community: | Woodbridge |
| County: | Orange |
| MLS#: | S581448 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 6 days |
NOT A SHORT SALE OR FORECLOSURE! South Lake showcase home just steps to
lake, beach club, pool/spa. Completely renovated last year with $60k of
upgrades. Absolutely turnkey with new hardwood floors, new windows and
skylight, shutters and custom built-ins throughout, even in garage.
Huge master suite with retreat and walk-in closet. This model very
rarely comes up and there is nothing like it now on the market in
Woodbridge. It’s priced below recent comparable for a quick sale. Move
your family in for the new school year. This home will not last!
It looks like this property was purchased as an investment on 5/27/2005 for $795,000. The out-of-town owner used a $596,450 first mortgage and a $198,550 downpayment. If he gets his asking price, and if a 6% commission is paid, he will recover $75,650 of his downpayment.
Is this a fear listing? Is he selling out of fear before he goes underwater? He has reason to fear….
“NOT A SHORTSALE OR A FORECLOSURE!”
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I can wait.
Listing has been pulled. Maybe they found their chump buyer to transfer the toxic investment over to.
Or, possibly, they didn’t receive any offers close to their asking price.
I think the answer is that homebuyers are, as a majority, irrational. Take this listing, for example. “NOT A SHORTSALE OR A FORECLOSURE” Why do I care if this is a foreclosure or not? Does the property have less value because it is bank owned as opposed to privately owned? Nope. But many people price their properties well above REOs for some reason.
People will find a reason to pay up for a home, even if there is no real reason to do so. It’s a hedge against inflation; I’m getting an immediate tax break; the interest is tax deductible; it will retain it’s value better than other neighborhoods; etc etc.
As long as the majority of buyers are willing to pay up for a home, prices will stay inflated in those areas. One thing is for certain in today’s market…something has to give. If the buyers dry up after the summer buying season, prices will crash, even in the coveted areas. But if real inventories come down significantly, prices will stabilize, and may even rise a bit in the low end market.
My speculation: the buyers are drying up. The banks have done a good job holding inventory back, but they can only do so for so long. As the summer comes to an end, sales will fall off a cliff again, and the special neighborhoods will start to realize they aren’t so special anymore.
Just look at how houses are appraised. Moron A across the street paid 500K. Moron B next door paid 475K. Therefore, my house is worth something in that range or even worth more – definitely not less though.
WOW!
Thanks for that in-depth, empirical analysis. The price of a house is determined by how foolish the most recent nearby sales have been. Makes perfect sense; so simple a caveman could do it!
If X number of people are willing to pay Y for something, and the number of the items available is equal to X (assuming one per customer), than that item is worth Y by definition. Doesn’t matter if other people aren’t. If more become available (X+Z), the price will go down to match what X+Z people are willing to pay for it. Likewise, if inventory goes down, the price will go up.
That is, yeah, if a few morons are willing to pay $500k-ish, then you house is worth $500k-ish, assuming we haven’t run out of morons yet.
“That is, yeah, if a few morons are willing to pay $500k-ish, then you house is worth $500k-ish, assuming we haven’t run out of morons yet.”
But, But, But … the banks dictate this. Believe me, if the banks can find a new way to pawn doo-doo paper to investors, they can also find an unlimited supply of “morons” to bid up real estate.
If they could, prices would not have fallen as much as they already have. The moron supply has dried up in the past couple years. The only reason prices haven’t fallen completely through the floor is the house supply is also low.
The reason why the “morons” dried up was because the music stopped in the securitization market.
If X number of people are willing to pay Y for something, and the number of the items available is equal to X (assuming one per customer), than that item is worth Y by definition.
Sure – when paying cash. The game changes when you are talking about purchases made with IOUs.
You could put a price tag of a billion dollars on any house, given enough of an innovation in monthly payment engineering; somebody will sign and make payments regardless of the price absurdity.
This system of using comps is rigged in favor of the banks to keep pushing real estate values higher and higher. It allows the house “owners” to all act like a cartel and effectively implement price fixing.
If we were serious about appraising homes, the appraisor would analyze income data for the general area, approximate the dimensions of the average house and associate that with 3x to 4x median income. The buyers could then bid up house prices between 3x and 4x the median income based upon “location, location, location” etc.
This would keep prices bound to local area incomes and it would put a cap on how much people can borrow and lessen the amount of rope that they are allowed to hang themselves with. People are free to bid well beyond the appraised value of the house, but they are going to have to pay the difference with their own cash.
This kind of a system would keep the borrowing in check and prevent runaway bubbles that inflate whenever the interest rate is goosed by the government.
Will this ever happen? No. Appraisors would have to do a little more work and banks would lose a portion of their cash cows, and existing home “owners” would lose equity as prices fall. These parties carry a lot more political clout.
Income ratios have only an indirect effect on prices. Appraisals are based on how much somebody is willing to pay, period.
And, yes, the existance of loans make it easier for people to buy houses. The existance of silly loans during the bubble made it even easier. But the silly loans (mostly) don’t exist any more.
Appraisals are based on how much somebody is willing to pay, period.
Wrong. They are based upon how much the bigger of the fools is willing to borrow. It’s a system that strings people along and rewards the biggest risk takers.
I can tell that you are explicitly selecting your choice of wording when you use the word “pay”. I like that; it just sweeps the whole “borrowing” component of your argument under the rug as though all these buyers are spening their own cash freely and not shopping around for the best monthly payment schedule.
But the silly loans (mostly) don’t exist any more.
Now instead of Ponzi scheme mortgages, we have govt subsidized mortgages. What’s gonna happen when the govt removes that subsidy? Hmmm? I’ve read info that suggests that mortgages could increase 300-500 basis points within a week. How will that impact our real estate market?
FHA anyone?
I went to an open house on Sunday where the agent had hand-written signs on the lawn that said “surprisingly low down payment requirement”. One of the other people asked about it and she said “it depends, but generally 3.5% down payment”.
Was she just talking about the first time buyers FHA program, or are there still ways for convential loans to get funded at 3.5%?
How can crazy loans still be going on?
A fixed 30-year mortgage with a 3.5% down payment is much less silly than one with 0% down payment, no income requirement, and a payment so small that one ends up actually owing more on the principal every time they make a payment.
Definitely. But I was under the impression that banks were going to go back to old-fashioned 20%-down mortgages.
Except for FHA loans, they pretty much have.
Here is a perfect example of how this stupid system is gamed (this could never happen under the scheme I proposed):
Flippers’ toll: On Gulf Coast, half a billion in defaults
By Michael Braga, Chris Davis & Matthew Doig
Staff Writers
All across Sarasota and Manatee counties, the price increases defied logic.
More than 100 properties from Palmetto to North Port doubled in price in a single day during the recent real estate boom. Proposed condos — no more than ideas on paper — flipped two or three times before anyone moved in.
Some investors bought up dozens of houses within a few blocks. Within weeks or months, they flipped them at a profit.
A yearlong Herald-Tribune investigation has found that many of these sales cannot be explained by shrewd deal-making or as an innocent consequence of the real estate boom. Instead, they were manufactured by property flippers who found ways to drive up housing prices so they could make money at the community’s expense.
At least 37 groups of property flippers operated in Sarasota and Manatee counties. The groups bought hundreds of properties worth more than $350 million and sold them to associates for inflated prices.
Nearly 40 percent of the people involved in questionable flips in Sarasota and Manatee counties were industry insiders — real estate agents, developers, lawyers and mortgage brokers. Of the 37 groups discovered by the newspaper, 21 were organized by real estate agents or mortgage brokers.
Most flipping circles were organized by a leader who either recruited investors on the promise of easy money or conspired with friends and associates to sell properties at inflated prices. Some of these investors did not realize they were buying properties at inflated prices; others willingly lied about sales prices to obtain mortgages that more than covered the actual purchase.
Some flippers identified by the Herald-Tribune were seen as key clients by local banks and were allowed to pick their own appraisers or had loan approvals expedited to quickly close deals.
The Herald-Tribune found that some of those involved in flips were nothing more than naive investors. They paid far more than they could afford believing they could sell the houses before the bills overwhelmed them.
Others were irresponsible speculators who bought house after house with little or no money down and no clear way to pay their mortgages if the houses could not be resold.
Flipping schemes uncovered by the Herald-Tribune were so common that some investors who participated believed they did nothing wrong.
They viewed flipping as a legitimate financing tool, an easy way to demonstrate that property had increased in value so that banks would lend money against the equity. Banks fed that belief by approving deal after deal.
But others identified by the Herald-Tribune tricked investors into buying overpriced homes or conspired with associates to fraudulently drive up housing values.
Many arranged sales with fake prices so they could get loans that more than covered the cost of a house. Then they pocketed the extra money.
You have just described a market without short sales, and where the supply is fixed in the short term, and can increase in the long term.
For items which are owned at the rate of 1 or 2 per family, one can also look at the supply of families/households. Yes, California not only has too many homes, its supply of families is dropping. Families are much easier to move than houses.
Imagine a well-constructed home in Palmdale. The family living there has a job offer in Chicago. It’s not practical or cost effective to take the actual house with them. California house supply unchanged, supply of families minus one.
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http://www.crackthecode.us/images/caveman_appraisals.jpg
We just sold our house for what was probably a fairly reasonable price given the current market.
I understand the reasoning behind saying that it’s not a short sale or a foreclosure. We put it in our listing because we found that people just assumed that it was a short sale or a foreclosure and that we were desperate and would take any ridiculous low-ball offer that they gave.
“people just assumed … we were desperate and would take any ridiculous low-ball offer that they gave.”
Just out of curiosity, how far below asking as a percentage were some of the offers your received? 10%? 15%? 20% or more?
When we first put our house on the market, we got several offers of 15-20% off of our asking price. We sold for 7% off.
Congrats!
It also signals that this is a seller with whom you are actually directly bargaining with, not a short-sale where the current occupant cares very little about the final sales price and you need to be bargaining with the bank, which may or may not be interested, etc.
Many buyers, myself included, strongly prefer either an REO or a real seller so that the process is straightforward.
“The banks have done a good job holding inventory back, but they can only do so for so long.”
There are about 350 REO for sale in Orange County. Bank of America owns 15,000 properties in Orange County. What do you think will happen next?
Oh my. Where did that figure come from. Was it published?
No, it is one of those semi-secret numbers that nobody wants published. I know brokers who have been meeting with asset managers from different banks and other institutions. People running in those circles know the situation. The word is getting out in the Agent community.
There is a big push on right now for brokers and asset managers to set up systems to dispose of all these REO. Nobody is quite sure how to go about it. The problem is so big that even brokerage houses with hundreds of agents do not have the capacity to handle all the listings. We are probably going to see several big brokerages get a large piece of the REO pie.
Don’t forget that the problem is getting worse each month as defaults and REO keep coming in faster than banks are clearing it out.
I just did a little dance up and down my hallway 😉
Irvinerenter, that’s another statement made with complete authority that’s not close to the truth. There are 5,000 OC homes on bank’s balance sheets right now according to the Orange County Register (first link). I believe them because there were only 11,560 foreclosures in Orange County in all of 2008 (second link). It would be hard for BofA to hold 15,000 on their own, super double secret or otherwise.
http://mortgage.freedomblogging.com/2009/07/09/foreclosure-backlog-grows-in-oc/13319/
http://mortgage.freedomblogging.com/2009/07/15/oc-forecloses-hit-5-month-high/13709/
IR indicated that the number was not published! Did you miss that?
Also, I suspect that 15,000 BAC figure may be correct. The banks have been sitting on a lot of inventory for a long time. They’re trying to create a mirage … everything is about kicking the can down the road, and hoping for a better future.
Foreclosures can’t be kept secret. They have to change hands in a specific way. Don’t believe everything you read.
I know they change hands a specific way … I also know you’re not keeping count, and either is anyone else that doesn’t have an axe to grind.
Does anyone know the effect of 15,000 REOs in OC on South Bay cities? I would love to buy a house in Torrance where I work. I see Carson, Harbor City, and Gardena go down but Torrance is still very expensive.
Foreclosures are not the only way to get REO. Don’t forget deeds in lieu of foreclosure.
The 15k seems high, but that’s not the imporant number to me. 350 REO for sale currently, compared to 15k total foreclosures in the last year per OC Register’s numbers?
How many total sales in the last 18 months? That will tell the final tale. How is there only really 350 REOs on the market?
“Don’t believe everything you read. ”
Good point. But don’t you see he irony?
“Irvinerenter, that’s another statement made with complete authority that’s not close to the truth.”
My authority comes from two characteristics: (1) authoring something and (2) being accurate. I wrote a book on The Great Housing Bubble, so I have a deep understanding of the related issues. I operate this blog that keeps me in daily contact with important news events that impact our markets, and I work in a related industry, so I do have sources of information many others do not have. I share this information when I get it, but I represent it as anecdotal when I do.
I am telling you that Bank of America owns about 15,000 properties in Orange County. I believe my source to be reliable. I may be wrong.
You have come in here determined to prove I am wrong about something. Knock yourself out; I have daily posts going back to February 2007, many of which were predictive in nature. Look through all of them, and you will probably find some errors and inconsistencies. I am not perfect.
I am a source is information and analysis for people interested in Irvine real estate. I hope my writing is entertaining and engaging, but people primarily come here for the information. Based on the amount of daily traffic this site receives, the information must be of value to people.
Your quest to prove me wrong is starting to get old. I think you have something to add to the conversation, and it would be more fun if you joined in. The post I wrote on Monday was a direct result of thinking about responses to you in the comments from previous threads. Indirectly you have already contributed to this blog. However, if you keep attacking me in every post, I will ignore you. I am done defending.
What are you happy about? Last I checked, DJIA and SP500 are still going up. Bank stocks are not doing the GM version 2.
The bubble is starting to inflate again thanks to Benny Boy and his cohorts.
That’s just it: you act like your thoughts and opinions are superior just because you docuement them. I spent all last night studying up on NPV, IRR, etc. and came to the conclusion that your analysis of the investment value of real estate is a complete sham. In your article, you reduced a 4 year gain of $20,193 to $2,948 and a 30 year gain of $500,120 to $9,327. That doesn’t even match the 8% discount rate you were trying to imply you were using. You have many visitors because you say what they are interested in hearing. You’ve interpreted that the wrong way. I think some of your analysis is really useful and accurate, but I also think some of it is complete fantasy. You say you welcome different opinions and input, but your actions say otherwise. Stop taking everything so personally.
“Don’t believe everything you read.”
So we are supposed to believe the OC Register who accepts ad money from the established real estate industry, but not believe IrvineRenter because he is a sham?
Just want to make sure I am believing the right people.
I think some of your analysis is really useful and accurate, but I also think some of it is complete fantasy. You say you welcome different opinions and input, but your actions say otherwise. Stop taking everything so personally.
And from a long time reader and big fan of the Irvine Housing Blog, may I recommend, Mr. Newport Skipper, that you start your own blog.
You have become tiresome.
Rather than trolling away here, why not just hang out your own electronic shingle and document your observations in as much detail as you choose.
You know, when I looked over your writings in depth last night, I also came to the conclusion that some of your advice is terrible. You’ve said that the signal to buy is rental parity, but that could cost people dearly.
What happens if we have a market that is stable at true rental parity + $1 and that you are firm in your trigger? Let’s imagine that today that means a $1,000 owner’s payment is equal to a $100,000 purchase price. Your trigger hasn’t been met and you continue to rent. The market moves forward in tandem and after 10 years the new rent is $1,486 (4.5% annual increase) and the purchase price is $148,610 (4.5% annual increase). Your trigger never went off and you are paying the new market rent. At the end of 10 years, you have lost $27,459 in higher rent payments and you have also lost $48,610 in appreciation. All told, you are behind by $76,069. You have missed the opportunity to gain against inflation. Your advice is working now because of the price correction, but that does not make it a sound strategy. The amount above parity could be anything, not only $1, and the priciple would still be the same. In other words, prices could be 10% over parity but as long as the relationship is mainained, you’ve lost big.
Skipper,
Every one of your posts here is an attack on IrvineRenter. It’s got annoying. Please, stop polluting this blog and go start your own. Call it “Irvine Renter is wrong!” or something. If IR wants to engage you – he will go there. Majority of readers here are educated adults and are able to use our own judgment – we do not need childish “He’s wrong, I’m right” for that. Grow up. Move on. Thank you.
I second OC Prog’s opinion.
Speaking of clandestine matters:
The Miami-Dade property appraiser’s office is not recording sales amounts on any foreclosed properties. The reason: considered a “distressed sale”. The new property owner’s name, etc is recorded but with the former sale price. The article states that this has been confirmed by several individuals and calls to the appraiser’s office. Apparently this is not the policy in other counties.
Wonder if it has anything to do with assessments for tax purposes?
The link for anyone interested: http://eyeonmiami.blogspot.com/2009/07/housing-sales-data-contaminated-in.html?ref=patrick.net
There isn’t one attack on the person. These are legitimate topics and questions. You’re obviously here for affirmation, but I am here to learn something, and I have to say, I’m struggling with many things I see here presented as fact.
How could BofA get so many homes? I’m thinking that they include: BofA, Merrill, and Countrywide loans. They might also include mortgages not on those books, but where they are the servicers.
In addition, not all of the 15,000 would have to be one at a time foreclosures. If you take over a condo complex or a partially completed subdivision, you can get dozens of units at once, or even hundreds. For example, how many units in the North Korea Towers?
NS-
You don’t always have to agree with everything said in this venue. God knows I don’t, but you can’t come in here with an agenda to discredit IR when he’s been right for 2 1/2 years. What this tells me and others in here, is that you’ve been wrong, and now you’re bitter, and you’re looking for any way to discredit the truth tellers. You simply don’t have the authority to question IR, and any attempt to do so is mocked as sour grapes by the people you disagree with.
If you want to develop some respect in here, you don’t do it by attacking the truth tellers. Just stop the bullshit!
BTW, Newport Beach/Coast is getting killed, hammered, and pillaged, just like IR said it would. It’s a real decoupling effect. LoL What do ya’ think about that?
Is it possible for a foreclosure auction to take place, but the deed transfer to take place at a later time – bank doesn’t actually take possession for some period?
There are NO certainties in any forward looking analysis. IR has consistently demonstrated a fundamentals based valuation model of real estate. The objective is to provide a framework for evaluating the real estate market and the potential for future prices.
At the end of the day it was a lack of any link between prices and fundamentals that resulted in a lot of people and institutions going bankrupt.
Skipper,
Like I sad, IR is presenting the data and his analysis. We use our own judgment. When data is anecdotal, he says so. So far he’s been proven right. You base your accusations on the premise of RE appreciation in the future, starting now. I do not think it’s “In the bag”. Our credit/consumption based economy has yet to gain footing… when it does, things may change forever… Or just imagine China starts dumping treasuries… Or, god forbid, we have a Big One in the Southland… Enough scenarios for you?
Now, take it easy…
The owners of every property are public record. This can’t be hidden.
I suspect this 15,000 figure isn’t accurate. Do you have a source, or better yet an actual list of said properties? Are you counting every piece of real estate BoA owns (their bank branches, commercial properties, vacant land), or just residential properties?
Now, different market (San Deigo), but Jim the Realtor has been doing a search, and he has found very few REO properties that aren’t on the market. He thinks the shadow inventory is mainly in those houses that have received NODs but the bank has not yet foreclosed on, and I agree.
I am not attacking anyone. I am questioning some ideas that I think are flawed. Judging by the accusations and harassment, that is just not done here. There are no sacred cows. Let it go. I’m looking to buy in Newport, so your fear tactic isn’t going to work with me either.
All investing is forward looking. This is the only place I know of that refuses to acknowledge that.
Speaking as an engineer, having someone around posing questions that continually force me to recheck facts, calculations, sources and assumptions is not a bad thing. Irritating, but not bad. Sometimes saves my ass. 🙂
You must have a thick skin, at least in the blogosphere. Better to have a critic or two than an echo chamber.
I agree with JTR too.
NewportSkipper…AKA Nancy?
I think you’re missing the forest for the trees. The point with rental parity, is that if you wait to buy until rental parity has been reached, then even if things continue to go south closer to cash-flow positive territory, you’ll still make out okay because as a long time owner you’ll have saved money over renting. This is a buy signal even if the market is still going south.
In your scenario that particular buy signal will never be achieved, but 1 or 2 full years without any further price declines will be message enough for most people. And they’ll then be able to be confident than any remaining price premium that people are paying for the privilege of ownership is one that is sustainable.
That’s just “insurance” for your investment. It still leaves you behind financially. Time is money, literally. No risk, no reward.
I third. Move on.
I hope I annoy the hell out of you.
skipper,
If this comment:
That’s just “insurance” for your investment. It still leaves you behind financially. Time is money, literally. No risk, no reward.
was in response to my objection to your scenario, then
Note that you said “investment”. It’s a home, not an investment. And, in your scenario renting was cheaper than owning throughout, thus, you’re still saving money compared to buying during this time that you’re waiting to see where the dust settles. So, BS. There’s no way you can possibly know which method, jumping in when you divine it’s the bottom, or waiting until there’s solid evidence thereto is going to be the absolutely best financial option. Because only hind-sight is 20/20. So if it’s cheaper to keep renting? And so you’re paying a negative amount of money for that insurance? Can’t get a better deal than that.
The one thing we know will not happen is your V shaped bottom where things start appreciating at a clip of 4.5% a year from here on out. That’s just not what any previous bottom of this magnitude has looked like, so I don’t see what would be different this time.
You’ve never heard of studying past price relationships and market trends to form a current investment strategy? So historical data has no value to the traders at Goldman Sachs? Interesting point of view.
In my example, parity was maintained throughout (or at least near-parity). There was no savings to speak of. And as much as people want to believe a home is not an investment, rest assured: real estate of any kind is an investment. I also don’t think 4.5% qualifies as a “V-shaped” recovery. The whole argument is about theory anyhow. It makes no difference what or where we are talking about or for how much. This would be a good place for Irvine Renter’s post “Timing Does Matter”. Yes, timing does matter, but so do other factors.
I agree with Alan. I don’t want this blog to be an echo chamber. Without contrasting views, our views become more extreme in the direction we are headed. NS hasn’t called anyone names, been mean, or anything.
You have numerous errors in your analysis. First is the simple mathematical error; a 4.5% increase compounded over 10 years would total over 55% not 48.6%. Second, your assumption is that whatever the premium above rental parity is now, and it is much higher than $1, will hold for the next ten years. I believe the entire point of this blog is that the valuation of housing had gone beyond any reasonable measure. The consequence to those that bought at those valuations was that they could see potentially devastating declines in their equity. Today you see an example of this nearly every day on the blog. It is IR’s opinion that the current valuations are still very high and therefore anyone purchasing today still risks a significant loss in equity. His model demonstrates the level where it will be immediately economically advantageous for a renter to buy a house. This is a natural support level for housing and doesn’t rely on the unrealistic projection of steady price increases for a decade. Of course prices could never get to the model’s level, in which case you would not buy a house or they could go even lower in which case the rental parity buyer would lose equity. But in either case it is a better risk weighted analysis of housing prices than just buying at whatever the current market might be.
So if you have a basis for justifying housing valuations today (and just because they are lower than last year is not justification), then please let us know what it is otherwise your criticism amounts to wishful thinking on housing prices for the next ten years.
Skipper,
You make some good points and you obviously put a great deal of thought into what you write. Offering contrary opinions is good for this blog (see Larry’s comment about writing a text prompted by your contrary ideas). However, the tone of your posts comes across as mean-spirited; I don’t if this is intentional, but this tone does detract from what you are saying. (Do you remember that Nancy woman from a couple of weeks back? Do you remember the nasty tone of her posts? This nastiness overpowers the content of the text and undermines one’s otherwise well-presented position). Just food for thought…
John Omeara,
Thank you for this well-written reply and for (I presume) using your real name.
I’m suddenly inspired to use my real name for all future participation. I think doing so would keep me honest and respectful of others.
Mike Winfield
What is the total number of homes for sale in the OC currently?
The local media in Phoenix is trying to pump the bubble again. Yesterday evening, the local NEWS reported that bidding wars are sparking around the valley with houses selling within days of being listed. They interviewed a man saying that he thought it would be a lot easier to buy a house and that he has been outbid 10 times now. The NEWS anchor then irresponsibly stated that this was great for valley housing prices since once they got all these forclosures off of the market everyone else’s house value would go up.
No mention of the existing supply of houses, shadow inventory, or job losses around the valley. No sir, once all these forclosures go away then it’s back to sky high prices by law of Magic.
It’s no wonder everybody is so ignorant when your NEWS media is toting the water for the NAR. You would think that all of the realtor advertisements during the commercial breaks might clue the audience into the possible conflict of interest.
Nope. People are lining up all over to lose their money and catch falling knives.
Actually, when I was looking to buy towards the end of last year, I put at least 10-15 offers in and got outbidded every time. That news story is not false or hype. I admit, it is contrary to what shoul be happening in a major declining market such as today.
It is hype. They are looking at an increase in foreclosure sales and concluding that the market is bottoming out. It’s all hype.
I didn’t make any conclusion about the veracity of the story. I have no doubt that realtors are listing properties for very low prices in order to spark bidding between multiple parties. I have no doubt that people are picking through the housing bones.
So there are a bunch of bottom feeders looking to lose their money by buying up foreclosures. There are some increased sales – so what? The NEWS media jumps on this and implies to their viewers that the market is finding a bottom and even going so far as to say that it is going to increase housing values while electing to not mention just how this is supposed to happen when unemployment remains high, credit is tight, and a shadow inventory is soon to be unloaded onto the market.
They are exaggerating the effects and indirectly putting out the message to viewers “Buy now”.
Hype.
Hype is typically inaccurate. It is true that many people have bid on 10 or more properties and not have won once; therefore, not hype.
Hype is typically inaccurate.
Thank you. You would have to agree with me then that it is not accurate to imply that prices are stabilizing based upon some increased sales at the bottom end and that they are hyping up the increase in sales to be more meaningful than it really is.
Has anyone taken a look at the homes listed in the past few months and sold to see if there is an increasing gap between original list price and sales price? I see that people are asking higher prices for homes lately but if the gap between OLD and SP is growing, it just shows that the actual sales price is not moving, just the perception of what someone thinks they can get for their property is.
It is possible. The vulture funds and investors are bidding up and reselling them at a profit. My confusion is this: don’t bank use paired sales to compare what the same property sold for just a short time ago and realize that the current sales price does not add up to the appraised value? How is valuation done?
“Why do I care if this is a foreclosure or not? Does the property have less value because it is bank owned as opposed to privately owned?”
It might matter. Short sales often take forever to go through. REOs also often take a while for offers below asking price.
REOs often come with almost zero data about the property and wild attempts to get out making any statements at all. I’m just waiting to see “lazy/fearful realtor has not actually visited the site, buyer to verify house exists” in one of the REO ads.
And it’s off the market. Fear/confidence, spouse can’t stomach the potential loss of money already spent?
Some neighborhoods are nicer than others, for lots of different reasons. Parking, common areas, drivability, walkability, walking paths to lakes, beaches, parks, biking trails, walking distance to public transit (in some cities this is viewed as a plus).
Plus there was always the commonly held wisdom of buy the cheapest house in the nicest neighborhood not the biggest/nicest one in the cheapest nieghborhood. Probably both extremes should be suspect, expecially if the differences are subtle.
As for the off-the-beach example, having stayed in an off-the-beach home for a week recently, the ability to walk < 5 minutes to the beach instead of packing up the car is huge. There is value in that. Want to walk on the beach at night? You might have good views also even if you are not beachfront. Similarly, rooms at a beachfront hotel will carry different rates for oceanfront vs non, but the non will still be more than a far inland comparable room. Being a short-sale has its drawbacks, and foreclosures may carry some stigma, but the foreclosures I've seen in the >300k range haven’t had problems.
AZDP, sorry for this, but a good comp sold 3 months ago at 700k
http://www.redfin.com/CA/Irvine/19-Cedarlake-92614/unit-58/home/5645268
Imagine the comp sales approach to pricing stocks…Appraisers generally do rental equiv. also, and it would be interesting to see if there was any divergence during the bubble.
That is a very good comp. Looks like they might get asking.
The thing I don’t like about rental equivalent is that rents are subject to artificial inflation when housing values inflate. We see people paying 50% of their income on rent. Since it is a cash market, the scale of the inflation is not as grand as one fueled by Coldwell Banker dollars. Nevertheless, you are basically seeing people sacrifice 50% of their income in order to keep up with the inflated housing market.
Rental equivalent is definitely a good indicator that the housing market is in a bubble but I don’t think that it dictates what is truly affordable otherwise we would not be seeing declining rents as people lose jobs and have no nest egg to pay their rent with.
The only things wrong with an REO is that usually you can’t get the seller to pay for any repairs, and sometimes (but nowhere near always) they are in poor condition. But sometimes you can’t get an organic seller to pay for repairs either, and sometimes their houses are in poor condition as well. Speed-wise, typically there’s no difference, in terms of how long it takes to close.
Short sales, however, can take several months to be approved, if at all.
Another problem with short sales is that by the time the lender has approved a short sale price, the bidder has long since moved on. Since the market is declining, no new bidders are found to pay the previously approved price, so the process starts all over again.
All other things being equal, an REO and a private party-owned home should be worth the same.
Some people put a premium on the private party-owned home, others do not. I fall into the latter camp.
As a seller you have to ask yourself how good are your odds of finding a buyer from the first camp?
Another issue with REOs is they are usually exempt from some of the consumer protection laws like disclosures.
What is the value of this, hard to tell. But at the very least I would say an REO is worth equal to a small discount to a private party property.
When I was looking at single family homes several years ago, I looked at a home being sold by FNMA that had modifications that were not only unpermitted but obviously dangerous. The fire wall to the garage had been breached, no exit for a bedroom, with wiring that was frankly scary.
Sold “As Is”, with a FNMA loan, no disclosure, no inspection. From my perspective, it needed at least 10,000 worth of work to rip out the dangerous shit and bring it back to code. The Realtor didn’t give a shit, just said that was the way it was.
This certainly isn’t representative of REO’s, but it’s certainly something to be aware of.
I know this area. It is walkable to the nearby schools,the Woodbridge Village Center,the tennis club, and the lake/lagoon. If you have kids it’s a great area.Your kid can walk to school from K to 12th grade. All 3 schools are close. There’s a walking path around and behind it that many people ride bikes, walk dogs.
The price is ridiculous, but someone will buy it.
I have driven through this neighborhood as well. It is really cute. Everything is well manicured, and you get a sense that the owners have pride in their properties. The location is excellent, and the neighborhood is very quiet.
One of the fascinating things about watching Woodbridge has been the difference between in-the-loop and outside-the-loop. The condos on the fringes outside the loop are being crushed. There is little support of prices there. Inside the loop, prices are still holding up well. The natural balance of house prices is out of whack.
Yep, the inside the loop and outside the loop has a history. It’s pretty stupid considering you just have to cross one street (West or East Yale Loop)to be inside. The majority of apartments are outside so I wonder if that has any bearing. I think all of the Woodbridge schools are inside.
It may also have to do with the 2 lakes and lagoons are inside and easy to walk to.
Sue, I think you correct. People will pay more for one of these units that is close to one of the lakes so they can walk or bike over. Also, like you said, it’s walking distance to the shopping center. Same theory for beach properties…people will pay more in order to be close to the action.
This is a decent-sized place and with all the upgrades it wouldn’t surprise me if it went for asking.
I come here daily for a breath of fresh air.
ALL over the news a few years ago we heard, “RE will remain strong, Sub-prime is OK, credit issues are limited to sub-prime, it’s a great time to buy a house!!” blah, blah, blah…
IR has been accurate for MANY years…
This is what I call “The No Kool-Aid Zone”
or “Kool-Aid Free Zone”
Truthful – Real Estate Info which not only relavant to CA, but applicable to our whole Country..
Thanks IR,
It’s really good reading.
This via the OC Register:
Is Irvine Company hiring homebuilders?
July 21st, 2009, 5:00 am by ERIKA CHAVEZ, THE ORANGE COUNTY REGISTER
The Orange County Business Journal reports that the Irvine Company plans to launch an “executive builder program,” under which homebuilders would work as general contractors without owning the homes they construct.
From the article:
“It’s a shift from years past, when homebuilders would pay top dollar for Irvine Co. lots and then build and sell their own homes.
But with few homebuilders buying land for homes during the downturn, the program allows Irvine Co. to continue development plans, sources said..
…Under the plan, homebuilders would be paid a percentage of a home’s sales price for their work, sources said. They put that rate at 3% to 6% of the home’s price.
Irvine Co. would finance construction loans, they said.
The executive builder program is expected to start on upcoming phases of Irvine Co.’s Woodbury and Woodbury East developments.
The program also could be used as Irvine Co. moves ahead on its delayed Orchard Hills development planned east of Orange and Anaheim Hills, according to sources.”
The article says Irvine Company representatives declined comment, neither confirming or denying the report. I have put in a call to Irvine Company reps as well, and will update this post if they respond.
let’s see the chart,
http://www.redfin.com/city/9361/CA/Irvine
the general trend is still going down. are we headed to a v curve or w ? any1?
There are still quite a few Pick-A-Foreclosure loans that have yet to pop. Wait a couple years and ask again.
L curve
Creedence? I think you missed an opportunity for some classic Sesame Street here! 😆
Believe it or not, I did look into Sesame Street. There is a video of Madeline Kahn singing to Grover that I almost used.
Classic Sesame Street – Grover and Madeline Kahn
I was actually thinking I’d see Mr Rogers below the post today “It’s a wonderful day in the neighborhood”.
Children’s music is entertaining:
Sesame Street – Who Are The People In Your Neighborhood?
Mister Rogers’ Neighborhood Sing-A-Long
There were questions on who is the real owner. When I relocated, I signed my house over to the relo company and they paid off the loan, gave the equility to me and took over the tax payment, yard, etc. until the sale (>6 months later). The Relo company purchase did get recorded didn’t get recorded until the sale to the next owner. I don’t know if that’s done in in OC, CA.
House may be transferred back to the bank by non-FC methods–jungle mail, agreed walk aways, etc. They don’t always get recorded immediately. The bank can continue to act as the trustee of the property, which is usually in a bank officer’s name. May ways to hid the real owner, ie, bank. If the bank FC on 15K house last year, what percentage of them were sold? What about the year before? If not all sold, their inventory will be increasing.
The govt is still trying to get more rounds of house sales or should I say RE and bank fees. Only most people are not biting. No more negative DP, new buyers as some skin in the game 3% or more, but that won’t even cover the reselling RE agent’s fees, FC cost, etc. The loans are channeled through GSE’s to have the taxpayers cover losses to the bank and loan investors. Your tax dollars at work to support the RE agents and banks. Japan II here we come.
As for IR analysis, you can’t be right 100% of the time, but he doing a great job in explaining the market forces at work in RE and how to arrive at substainable house price.
Yes, he has plenty of useful information. I don’t want to take away from that. On the contrary, I would hope to add something. It’s received like a bag of poop, but oh well.
No, I enjoy your perspective. It’s needed or else it be boring here. Just need to keep away from needling one point for several replies. Maybe best to write it up in word and think it through so you get all of your point across clearer.
Amen to that…
Neighborhood can be viewed as a status symbol. Living in a wealthy, expensive neighborhood does give some people the sense of being part of something of a higher social stratum. How many people would prefer a low end BMW to a high end Toyota? IMO any premium associated with social status symbol in SoCal is quite high, since the extra features/utility alone can rarely explain the large price differences. Although the overall housing market will continue to fall for years to come in OC, the areas with a premium today will likely to retain that premium in the future, albeit at a much lower base price.
winstongator you wrote:
Is it possible for a foreclosure auction to take place, but the deed transfer to take place at a later time – bank doesn’t actually take possession for some period?
You bring up a good point. I read recently where in some counties,(I’m not saying OC), where banks did exactly that. Not only did the bank take it back in foreclosure they didn’t file the deed at all. Some of the houses were so trashed they basically “walked away from it” and said let the city take care of it. The cities then razed the property since some of them were condemmed. Amazing.
Geotpf you wrote:
Now, different market (San Deigo), but Jim the Realtor has been doing a search, and he has found very few REO properties that aren’t on the market. He thinks the shadow inventory is mainly in those houses that have received NODs but the bank has not yet foreclosed on, and I agree.
He also profiled a high rise complex that had to give back deposits when they didn’t sell enough to qualify the building for FHA status (70% sales).
There is a building:(The 679-unit Vantage Point complex in downtown San Diego). They have now reduced the price and are trying to sell them at a lower price and/or lease some. In either case none of this is showing up on the MLS. Granted they are not REO’s but this is a lot of units and an example of the “shadow inventory” out there.