Overpaying for real estate is a tradition in California. It is falling out of favor now, but it will probably make a comeback.
Asking Price: $819,000
Address: 10 E Yale Loop #1 Irvine, CA 92604
{book}
Saving nickles saving dimes
Working til the sun don’t shine
Looking forward to happier times
On Blue Bayou
Blue Bayou — Linda Ronstadt
It is a long-standing tradition in California for people to grossly overpay for housing and spend all their time and money trying to support their homes. In the past, this foolishness was actually rewarded by all the greater fools that did the same and bid prices up to the stratosphere. Of course, this is a Ponzi Scheme that eventually collapses like we are seeing now.
How much income should people put toward housing? (see Debt-To-Income Ratios: The Forgotten Variable) Lenders traditionally limited a mortgage debt payment to 28% and a total debt service to 36% of a borrower’s gross income — at least before they lost their minds in The Great Housing Bubble. The FHA and the GSEs will allow higher ratios, but not much higher.
The only way debt-to-income ratios higher than 33% make any sense at all is when people are profiting from appreciation. If the overpayment is an “investment” that people can convert to cash through HELOCs, then the housing Ponzi Scheme can really take off.
So far, it doesn’t look like our government is going to do anything to change the system that inflated house prices; in fact, it looks like they are working to re-inflate the housing bubble to the degree they can. If nothing is done to prevent this from occurring again, it certainly will.
I think today’s featured property is very attractive and desirable — except for the price tag. I would be delighted to live here.
Asking Price: $819,000
Income Requirement: $204,750
Downpayment Needed: $163,800
Purchase Price: $167,500
Purchase Date: 8/24/1978
Address: 10 E Yale Loop #1 Irvine, CA 92604
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,156 |
| $/Sq. Ft.: | $380 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Traditional |
| Stories: | 2 |
| Floor: | 1 |
| View: | Lake |
| Year Built: | 1977 |
| Community: | Woodbridge |
| County: | Orange |
| MLS#: | P696994 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
most desirable cities. Everything about this 2-story, 4-bedroom home
says luxury and elegance, from the lustrous wood floors to the
beautifully remodeled kitchen with Dacor cooktop, to the view across
the 30-acre lake while you dine on the front patio. Dozens of upgrades
like crown molding, recessed lighting, newer heating and a/c systems
& patio speakers in and out make this the home you’ve dreamed of.
Take a walk around the wonderful Woodbridge community or relax with
friends in your spacious patio backyard with freestanding spa. The
owners spent thousands on the master bath remodel, with travertine
walls and floors & rich granite countertop. Best of all, enjoy
everything Woodbridge has to offer: tennis, two lakes, lagoons,
clubhouse, barbecues, fire pits and approximately 28 community pools.
This is your once in a lifetime chance, better hurry!
This is your once in a lifetime chance, better hurry! Does bullshit like this really create a sense of urgency in people?
Today’s featured property was purchased on 8/24/1978 for $167,500. I don’t know what their original financing was. After 31 years of ownership, the property should be paid off. It’s not, of course, but I doubt any of you are surprised at this point. There were a few HELOCs in the 90s, but it wasn’t until 5/31/2001 when the owners refinanced with a $468,500 first mortgage that things get interesting. There is another mortgage recorded on 5/30/2003 for $322,000. It is unclear whether or not this is a refinance of the first — which would require them to pay back almost $150,000 — or if this was a stand alone second. Even if this final mortgage was their only debt, they now owe more than double what they paid 31 years ago. If both mortgages still exist, this might be a short sale.
While I agree with you generally, IR, I think that it is difficult to conclude, definitively, what the maximimum interest/debt service percentage should be when pricing real estate. The ratios you cite are excellent rules of thumb and have been proven valid over the past few decades; however, I think it is fair to argue whether, as the real cost of other commodities decreases over time (as almost everything does, in REAL terms) the amount of a person’s income that is reasonably allocated to interest and debt service might be higher than the historical averages. I am not arguing for accepting ratios of 60%/80% or anything like that, but it might just be plausible to argue that a ratio of 40%/50% might be reasonable in a high-cost (and high income) location such as Southern California. Putting aside the issue of whether a smart bank would loan based on a higher percentage of income (and God knows, they certainly did in the recent past) such a ratio would have to be buttressed by all the other good indices of a safe loan. The question is whether such a higher ratio of income-based pricing is sustainable. You believe it is not (and current circumstances certainly seem to support that conclusion) but I am not completely sure.
50%?
Sure. If you want to work until you die.
That is the point–
I’m not sure I understand your high income/high cost argument. The DTI ratio is a ratio…what about things being more expensive in CA changes that? If everything is more expensive in CA, then the ratio should still hold true.
From the anecdotes I’ve seen on this forum, there are arguments to be made that the CA DTI should be lower, not higher. Incomes in CA are not so appreciably higher than the US median to support the prices you guys seem to pay.
That is just the point, everything isn’t just as expensive in California. If incomes are higher, then other commodities represent a lower percentage of income.
Another way of saying the same thing is that the 28%/36% ratio is just a number that is meaningless without a context.
If incomes are higher, then other commodities represent a lower percentage of income.
I would call it goods and services instead of commodities.
The higher incomes in California also mean a higher percentage on the graduating tax scale, AND California also has the highest income tax rates in the country, very high property tax, a state capital gains tax, sales tax … tax, tax, tax!
I love CA … I’ve lived here my entire life. I’m not leaving. But I sure the hell understand why others would want to live a more comfortable life in another state, even making less money.
Why does everyone assume that incomes are higher in California? We have lived all over the country and I don’t think that there is a significant difference in pay for similar positions in different areas. For example, we moved from SoCal to Savannah, Ga and my wife’s pay went up.
Additionally, with the high state taxes, California salaries are effectively lower than other areas.
It costs more to live in California but it doesn’t necessarily pay more to live in California.
FH
I agree with Fish Head. For most professionals, their income will probably be lower in California than in another state. I have seen data that is roughly inline with this hypothesis.
However it is still possible that California has more jobs that typically pay higher amounts relative to the number of such high paying jobs in other states. In this case, California could pay less than other states and yet have higher average income than other states.
An example: a dentist in California might earn less than one in Indiana but dentists earn far above average so if California had a lot more dentists than Indiana then California’s average income would be greater than Indiana’s average income.
The better examples are tech and entertainment, as the # of dentists is fairly stable ratio to the number of total residents. CA has more high-tech jobs, per-capita, than any other state (at least in electronics, with SiValley), and more entertainment & entertainment related jobs by far than anywhere. High tech is mildly above average – maybe 1.5-2.5X average – but entertainment are way above average.
For high-tech, you’ll probably make more in CA because you will have more leverage, in terms of saying, “I’m leaving National and going to Maxim” when there are more different companies in an area.
I guess when one says ‘California’ here we mean the Bay Area or the LA/SD/OC region. I have no idea what industry you work in, but in high tech, legal, accounting, finance, and most of professions, average income in these areas is far more than it would be in other, smaller regions of the country (such as Savannah). There are two principle reasons for this, I think: i.) cost of living is higher, accordingly, compensation increases accordingly in order to motivate the work force, and ii.) the larger markets have more opportunity and hence more high earners. Part ii.) really drives the high end.
Freetrader2,
I think your assumption may be incorrect (my whole point). Professionals in smaller markets do not necessarily make less than similar professionals in the highly developed parts of California. My wife is a specialist in health care and has earned very similar salaries as we moved across the countries (to within a few bucks an hour). I’ve also noticed that friends in middle management, law, accounting, etc. earn similar salaries across the country.
I agree there may be differences between people’s pay in different areas but I think the differences are probably due more to factors not associated with geopraphical location. In other words, if you’re a CPA and you move from Seattle, WA to Southern California, your pay will not necessarily go up (A friend moved down a couple of years ago and makes about the same as what he made up north). I think a lot of Californians assume that they make more than their bretheren in other parts of the country because it costs more to live in Cali.
Also, I’m not talking about median income, that’s a whole other statistic. I’m talking about comparable pay for similar jobs. From what I’ve seen, there’s not a whole lot of difference for well qualified people around the country.
FH
I think we both probably just have mostly anecdotal data here, and perhaps some detailed data on our own professions — so perhaps we agree to disagree. It may be that that some professions are different than others. I can say with a high degree of certainty, however, that experienced accounting and legal professionals earn more in California than in other parts of the country, with the exception of the large urban areas of the East Coast — NY, Boston, and to some extent Chicago, where cost of living is also high. True also in the engineering areas, especially in Silicon Valley.
There is a bit of an offsetting issue in California in that because it is a popular place to live — a relatively pleasant place — the supply of professionals is usually pretty high. However, that impacts the entry level more than the higher levels.
50% LOL
But he draws the line at 60% No, Sir! 60% is totally outrageous! 50% is cool though.
Americans already spend a greater percentage of their income on housing than almost any other country in the world and freetrader thinks we can do even better.
This is a prime reason I will never move to California and be surrounded by other myopic-sighted people who think that this kind of debt is acceptable.
Unbelievable.
We probably pay more because the interest is tax deductible.
Actually, you can’t possibly know what level of debt is acceptable based on some out-of-context ratio — that’s my point. Adhering slavishly to a ratio that is supposed to apply in ‘all’ situations is as ignorant as it would be to act on an assumption that no matter how much one pays for property, no problem, because the price can only go up.
And I don’t — currently — live in California.
For some individuals, a 50% DTI could work, assuming they’re high income and extremely secure in their professional standing.
I’m not high income, but I enjoy excellent job security, with only 3 months of unemployment since 1998. I have no dependents. I lived with a DTI of 45% for several years, and I will never go there again. It was hell carrying all that debt without being able to build savings. I had money to do most of the things I wished to, but it was still no way to live.
Sure, one shouldn’t adhere dogmatically to a certain DTI number, but this is only the case for an individual. When looking at the aggregate population, an average DTI of more than 33% looks plain dangerous, because the average level of income, savings, and job security is just not high enough to justify a collective DTI that high – it introduces a feedback loop which makes recessions particularly brutal, with defaults creating greater job losses, which in turn create more defaults.
Hydro, I am sure that you are correct (although I haven’t seen the numbers myself). My point was simply that i.) the acceptable ratio must change over time, and ii.) the acceptable ratio would likely change over a societies range of income (obviously, generally speaking, the lower the income, the lower the acceptable ratio, although as Lee has pointed out taxes are a bit of a wild card).
A few kids will definitely impact DTI affordability, or any health issues that are just about guaranteed to happen to you during your life time……. but I guess that is what HELOCs are for…
The more things change the more they stay the same.
Food and energy costs have decreased over the last half century but we have modified our behavior as well. We eat out more, drive more miles and pay for health care, TV, cell phones. It probably is possible to support higher debt ratios but most people would be unwilling to live like its the ’50s (mmm, pot roast again).
My wife and I bought at the edge of our income after college and its not fun to live at 33% dti. This wasn’t that long ago so I can’t imagine any middle class family trying to live at 40% dti for an extended period. Its just too hard to deny every luxury to save for the inevitable emergencies – either income grows quickly or HELOCs cover any surprise expense.
Sounds like an acceptable ratio depends on one’s habits, expenses, and willingness to sacrifice to pay for a property.
50% DTI is sustainable, until house prices drop.
In other words, it’s not sustainable.
What do housing prices have to do with it? The ratio in question is what is being paid for the house. The amount 50% times X depends on what X is. It doesn’t depend on the PRICE of the real estate, which is a different variable (i.e., Y).
Buying a house with a high DTI is speculative in nature. As soon as house prices drop, people with high DTIs who are underwater will walk…. and you get the exact situation we are in now…..
you can look at it another way, if house prices go to the moon, there is no limit to DTI…. just level it up, asset bubble style.
but alas, i guess we always forget history and repeat it…
If home prices fall what difference does it make what the DTI is? If a person is underwater and they don’t want to pay the mortgage, they will walk, period. Whether the DTI is high or low is irrelevant. Admittedly, the higher the DTI, the more riskier the loan, all else being equal, but a deadbeat is a deadbeat (or an unemployed person is still unemployed) regardless of the DTI.
It makes a big difference. If DTI is 20-25% and you are underwater, walking is less desirable…. If DTI is 50% and your take home pay is 65%…. you better believe that makes a big difference…. one pay check away from disaster….
You haven’t shown that it makes any difference at all. There is no reason to believe that walking is ‘less’ desireable when the DTI is lower. Perhaps you mean to imply that a lower DTI would more likely be equal to or lower than a rental payment; accordingly, there is no economic benefit to walking.
BTW, obviously the higher the DTI, the higher the risk of deafult. I just don’t buy the cause and effect you are drawing, which is that this issue is one of speculation.
it’s not even worth arguing, the exact reason people are defaulting now is because:
a. DTIs were allowed to run wild with stated income loans
and
b. the asset bubble has deflated
nobody in their right mind would continue to pay 80+% of their take home pay each month when they are underwater and house price declines will continue for the next 3-5+ years, you would have to be a complete idiot…… the only reason someone would pay 80+% of their take home pay towards a house is if they thought it was a great investment…which is basically everyone who bought with a stated income loan in the bubble years with a high DTI…… they viewed it as an investment bound to pay off immediately… and hence speculative in nature….. Irvine Renter has a ridiculous amount of eloquent analysis post for you to read in the analysis section of this blog…
I agree it isn’t worth arguing. You are missing the point, and basically don’t seem to understand my point. Please don’t explain the housing bubble to me, or the lack of quality underwriting. Those aren’t the issues we are discussing.
Your argument is ridiculous, commodities and everything we need to live spiked during the asset bubble as well…
mav, you don’t what the hell you are talking about. Commodity prices — food, clothing, etc., have been falling continously for the past 1000 years. Energy prices went through a spike during the bubble but they still tend to decline over time.
A good friend is finding this out the hard way in LA.
Bought at a 50% dti in 2003 and he hasn’t been able to save anything. Any unexpected expense goes on the credit cards which have been mostly maxed out over the past 6 years. Refinancing again is no longer an option.
He’s still glad he’s not ‘throwing money away’ on renting. I wouldn’t want to see how much he’s thrown away on late payments and interest meanwhile. 🙄
This guy sounds just like all the other morons I know who are property “owners” these days. When we go out to eat together, and my wife and I can enjoy a normal meal, while our skimping homedebtor friends split a side salad & appetizer and drink water. Gee, I’m sure they’re glad they’re not “throwing away” their money on renting!
Or they just may be trying to lose weight…
BTW, I am not recommending this approach to any particular individual, and certainly not to myself. You are making a good case, though, that anecdotal evidence seems to support a presumption that 50% is barely sustainable in that individual’s circumstances.
Aren’t DTI’s usually quoted from pre-tax income? Unless you had a very low income, an 80% DTI would require borrowing just to make your payment. Even 60% for > 100k incomes would pretty much eat all your after-tax income. 50% dti’s are as plausible as prices returning to bubble levels within 4 years.
Having worked in banking I can assure you that anything higher than these ratios ALWAYS is unsustainable. If you are at 40 or 50% of GROSS income, you are one paycheck away from financial disaster period. It doesn’t matter whether you have a $15k or a $150k job, you are just not going to have a penny to build up financial reserves. The main reason I got out of banking was the banks lost their minds even though there were a minority of us bitching about the poor loans that were being made….
Taz, your point is fair enough if you assume that i.) every buyer has no savings or reserve and ii.) every buyer has a lifestyle that requires that they spend all the money not allocated to housing. Admittedly as the ratio goes up, ii.) is more likely to be true, but on a case by case basis you just don’t know.
I agree with you that there’s wiggle-room for personal preferences. There are people who are willing to commit 40% of their gross income to housing because it’s that important to them (for whatever reason); but these people are the exception rather than the rule.
The typical SoCal person wants a house that costs 4x+ their income (and is therefore willing to push their DTI to 50%), but they also want nice cars, vacations, etc. If you’re willing to sacrifice in every other area, then you can push your DTI. This just isn’t realistic for most people.
Why would a wealthy person spend more than 33% anyways?
They still have to buy their vacation homes.
If your income is $10,000,000 and you have a 50% dti, Im guessing you could still put enough away to pay for contingencies. A mil or two still go a long way even in this brave new world. If your income is $10K your screwed when your car needs new tires. It is dependent on income but for the vast majority the rule probably holds.
I would like to see stats on default vs. DTI for the fully amortized payment. I would also like to see higher interest payments for higher dti’s. A 500k home has a monthly cost of $3500, or 42k/yr. Who would be more likely to default, someone in that home making 100k/yr, or 200k/yr? Mortgage rates are supposed to reflect some default risk rate, which should push up the rate for the higher dti. But nobody defaults on mortgages, and if they do, you can just refinance or sell to fully pay off the loan.
Why isn’t someone’s income reflected in their credit score? Corporate credit ratings are highly dependent on profitability. GE’s fabled AAA rating was due to its stable cash-cow industrial segment. GECapital would never have achieved that rating on its own. The steady income stream from its regular business built the rating.
As an Obama supporter, I have been disappointed on the administration’s approach to the housing bubble. I don’t think they fully understand what the problem really was. Falling home prices are a problem, but they are caused by excessively high prices. The price lowering is moving towards an economic equilibrium.
Democrats don’t have to “understand” problems. They just think they can solve all problems.
Hmm, the second sentence should read – “They just think that it’s the responsibility of government to have to solve everything they perceive as a problem.”
Wow look at the photos!
Ah PhotoShop.
I think they had way too much fun with the shadow/highlights, had full night of total Cameraw fun, or decided to do some intense HDR photography. The left half of the kitchen looks like an illustration. Perhaps an inverted glowing edges layer.
The water is so pure blue that unless they salted/chlorinated the lake, it had to have been photoshoped.
Wow…
I love the attention to detail though. Check out the golden gate bridge on the TV!
That was a nice touch
WTF does ‘newer’ mean? Obviously not ‘new’. Cant’ you just write, heating/air system installed in 2004?
I prefer “used“
How Appraisers Are Threatening Real Estate’s Recovery
Published: Monday, 27 Jul 2009 | 3:02 PM ET Text Size By: Diana Olick
CNBC Real Estate Reporter
The good news is that sales volumes of new construction are rising; the bad news is they’re doing so despite growing trouble with appraisals.
I can’t seem to talk to anyone in the real estate industry on any topic without hearing something about appraisals. We’ve been over the new appraisal rules, requiring the fire wall between lenders and appraisers. We know the new rules are resulting in less qualified appraisers, perhaps with no knowledge of a local market, mucking up the process.
Now we’re hearing from builders that appraisers are using distressed properties, that is foreclosures and short sales, as comps for new construction. In her monthly homebuilding Survey, analyst Ivy Zelman notes:
Commentary in this month’s survey was dominated by frustration with inconsistencies in the appraisal process. Survey respondents are concerned that these appraisal issues will make it difficult to stabilize home values, as appraisers are being extremely conservative using foreclosures and short sales predominantly as comps, based on fears of potential backlash or liability.
Home builders are in direct competition with foreclosures in many markets, because a lot of foreclosures are new construction.
Builders can only cut their prices so far, given the money they’ve laid out to build.
The National Association of Home Builders’ Bernard Markstein told me this morning, that “in a lot of places the appraisers have not been adjusting for the fact that it’s [the comp] a foreclosed home or a short sale, and we’ve even had cases where appraisals have come in 10 or 20 percent below the construction costs of a new home.”
Clearly we are settling in for recovery, despite the expected bumps in the road ahead and the land mines of rising foreclosures.
The appraisal issue seems an unnecessary roadblock, when so many other tools, government and private sector, are being employed to jumpstart housing.
I love it how when you get an appraiser in there who doesn’t play ball with the builders and realtors – he is labeled unqualified and is mucking up the process by squashing bubble profits and getting in the way of everyone’s lifestyle and makework career.
Why are these realtors so surprised that a house can appraise for less than construction cost? Just because a builder spends X dollars entitles him to Y > X?
Oh boy and they really get pissed off when those jerks use foreclosures as comps! Oh man! That’s not fair! Real-estate only goes up!
Great article. I think they are still dillusional.
What I think is unfortunate is that these people still have not learned that nothing is valuable forever.
Those appraisers are doing what should have been done before the start of this mess, examined all options and ignored construction costs. They should have been impartial and completely separated from the Real Estate agents and Builders!
The video was great, I looked at one of the other videos featured on that channel about foreclosures.
Seeing police officers and little old ladies foreclosed out of their homes drains the schadenfreude reservoir very quickly.
Cheesy music(heck all 90’s rock really is) video but the stories are horrible
https://www.youtube.com/watch?v=SejeITkaOWc&feature=fvw
Article on squating in foreclosed homes
http://www.msnbc.msn.com/id/30148409/
I’ll bet that police officer or little old lady took out hundreds of thousands of dollars out of their home, or bought a place twice the size they could afford. Excluding job losses, divorces, and the like, if people were responsible, they won’t be foreclosed upon.
They obviously think that they are going to be able to bully appraisers into cooking the numbers by planting these articles into the media and generate pressure by shifting liability and populist rage of future price losses onto the backs appraisers.
This is what the headline should read:
How Appraisers Are Helping Real Estate’s Affordability
but no, the self-serving author wants to put her own spin on it and invoke words like “threat” and fire up the emotions of already-screwed bagholders looking for someone to rage against.
Trying to use the media to strongarm appraisers into cow-towing to the debt slavery industrial complex. I love it.
I think the appraisers are doing what is right.
This bubble is insane. The concept, having houses empty (REO) and not on the market just to keep prices up a false bubble–meanwhile a house squatting movement is emerging, is insane!!
Put the properties on the market and sink the prices! There will be inital short term shock, but that is far better than this lingering inbalance, where homelessness or homebondage is becoming the new social norm.
It’s definitely a step in the right direction. Now all they need to do is factor in the incomes of the area and lop off another 50%.
In the meantime, lenders need to begin the process of eliminating 30 year mortgages for people that do not have 50% equity.
And then we are going to be ready to have a serious discussion about buying real-estate.
I find this line of reasoning highly offensive to real estate investors and homeowners.
Houses should appraise for the purchase price compounded 15% per year since the date of purchase, with two exceptions: (a) if the debt on the house is greater than this number, then, obviously, the owner is unwilling to sell for this price, so the house should be appraised upward to match the debt plus realtor fees; (b) if comps are available which suggest a higher price, then, and only then, shall comps be used.
This strategy eliminates foreclosures and confirms that all homeowners, who all have wonderful marriages and families, were smart to buy a graceful home that can only appreciate in value, and hold it for 30 years. Also, it prices out forever those who were not wise enough to purchase a graceful home on time, or who do not have wonderful marriages and families.
You’ve gotta be kidding me dude. That’s not fair!
Oh dang I would go nuts if I lost 150k.
hahaha…that video cracks me up, i’d be pissed too but you just look like an idiot complaining like that. it’s the free market at work!
Dude-guy is funny, but I personally get a kick out of the woman protesting that “they” had promised not to go below “market value“.
I see how it works – the existing homedebtors get to act like a cartel and dictate “market value” to new buyers. Makes perfect sense.
Market value is at or greater than what I payed.
“They had no loyalty to the people that bought early. They promised they wouldn’t sell less than the fair market value!”
..And yet, they sold them to the highest bidder at auction with 100’s of attendees for 145K. What could be further from fair market value than the price from the highest bidder?
“Loyalty” to the previous buyers.
Isn’t that rich?
What a self-righteous little prick; acting like some kind of Julius Caesar. I hope he poured concrete into his toilet and mailed the keys back.
The only reason to adjust a price upwards for a REO to use it as a comp is due to the condition of the house (some, but most certainly not all, REOs are trashed). But that’s a case by case basis-if the REO is in good shape, it should be treated like any other sale. In general, REOs don’t take particularly longer or are more difficult to close than standard sales.
Now, for a short sale, I can see an adjustment being justified, due to the hair pulling agony of closing one of those. That is, if it takes six months to close on a specific short sale (not unheard of), when using that as a comp, I can see adjusting the selling price upwards (or throwing it out completely) to account for the delay-most people can’t wait that long.
I especially appreciate this quote: “we’ve even had cases where appraisals have come in 10 or 20 percent below the construction costs of a new home.”
So, where is it written that your (homebuilders) costs establish what the retail market value must be?
Time and again, we see people putting ‘improvements’ into their houses that never pay off. Well, it appears that builders do it too.
Having worked with homebuilder companies before (not in OC though) all too many of them are nothing more them poorly run family businesses. It really is amateur hour with some of these guys.
So, where is it written that your (homebuilders) costs establish what the retail market value must be?
Sounds like a Granite Counter Fallacy to me…
Wrong link. I should have used tinyurl.
Granite Counter Fallacy
The reporter and NAHB rep should have been aware of the current policy of the Miami-Dade property appraiser’s office. It excludes all foreclosure sales from its records, keeping the former sale figure instead. Why – it’s a stress sale. The article from the Miami Hearld and comments are eye-opening! The link:
http://www.miamiherald.com/opinion/columnists/story/1148898.html
I agree that this place looks nice. However…
1. $400 monthly HOA fee. Not quite North Korean tower crazy, but still too high.
2. Looks like it’s about $100k-200k higher than comps, although the fact that it’s a lake front property might explain that.
The lake view does look nice, but I wonder about the Yale Loop address. Its hard to tell since my “bird’s eye view’ link on Refin isn’t working for this condo, but in addition to being on the lake it looks like it may be right on the busy/noisy intersection of Yale Loop and Yale.
Yep– it is….. you can see it from the stop sign at Yale and Yale Loop.
If you think this price is crazy, look at 15 Lakefront listed below the map as similar for sales. It’s a condo on the other end of the same lake listed for $1,250,000 !!.
Others on the lake … pond~
22 Lakeview #89
Irvine, CA 92604
Bought 06/2005 for 653K
Asking 619K
51 Lakeshore #20
Irvine, CA 92604
Bought 04/2004 for 551k
Asking 460k
31 Lakeshore #20
Irvine, CA 92604
Bought 08/2006 for 775k
Asking 549k
Recent sale history on the lake … pond~
42 Lakeshore #54
Irvine, CA 92604
Jun 29, 2009 ~ Sold ~ $540,000
Jul 16, 2004 ~ Sold ~ $720,000
May 18, 2001 ~ Sold ~ $389,000
49 Lakeshore #21
Irvine, CA 92604
Jul 07, 2009 ~ Sold ~ $450,000
Jan 14, 2009 ~ Sold ~ $440,550
May 06, 2003 ~ Sold ~ $615,000
Jun 04, 1991 ~ Sold ~ $255,000
Like a roller coaster!
WeeEee!
http://www.crackthecode.us/images/roller_coaster_scream.jpg
Which loan is a better risk?
A. Borrower has $100K income, and $30K/year PITI (principle, interest, taxes,insurance) expense or a 30% DTI. 20% of gross income goes to income taxes, leaving $50K net income for other expenses from food to vacation.
B. Borrower has $500K income, and $250K/year PITI expense or 50% DTI. 30% of gross income goes to income taxes, leaving $100K net income for other expenses.
There are many other factors that would be reelvant to this analysis. Which borrower has more job security? Could borrower B get another job easily at that kind of pay? Many people making that kind of cash have volatile incomes. Convesely, doctors can typically take advantage of special loan rates because they are virtually never unemployed and all doctor jobs within a given specialty pay similar rates across a region. Is borrower B spendy or thrifty? How can the lender know? Does either borrower have other liquid assets? Even with a 50% DTI, borrower B has far more discretionary income than borrower A at a 30% DTI.
These questions are why there are so many loan choices and programs even in a rational lending market. Blanket DTI restrictions are not useful in a heterogeneous market.
Since income is on a bell curve, there are alot more Borrower A’s than Borrower B’s out there, so if you foreclosed on Borrower A after a default you’d find it much easier to find another Borrower A wiling to pay 30% DTI than another Borrower B willing to pay 50% DTI as (a) there are fewer of them and (b) not all them would go to 50% DTI. I’d also note that if you assume a 10% income shock, Borrower A has more flexibility ie if his income falls $10K, he spends $30k on house, 18k on tax leaving $42k of net income (84% of what he had before). If borrower B loses $50k of income he still pays $250k for house and $135k of tax (assuming still 30%), leaving $65k for other expenses (65% of what he had before).
That is not really a valid comparison. The comparison is really between $100k income, 30% dti, and $100k income, 50% dti. Now think, will the person in the 500k home, or the 833k home be the more frugal? Who’s got the 6-12 month savings cushion? Which one would you rather loan your money to? Many of these are ‘our’ loans as IndyMac and others are FDIC owned.
Banks should have this data, and it should be published. Take sales/refis from 2003-2006. The problem with underwriting was that default was not considered. Prepayment, mostly through sale or refi, was considered a much bigger risk to the note holder.
Nicely done. I agree completely. One might also argue that the impact of taxes is not wholly predictible — if one’s income peaks at 100k per year, you are already losing 6.2% to SSI, which buyer B doesn’t pay at the marginal level (this is partly or fully offset, presumably, by the higher income taxes B pays, but since you have already given B a higher effective tax rate I thought I would mention that as a nuance).
In response to Scott, I would say that i.) these are all just numbers, and meaningless out of context, so the Bell curve shifts around the numbers — one year the median income will be $50k, in a later year, it may be 100k; and a bell curve is just that, so the distribution is on both sides of the curve.
In response to Winston, he is just changing the rules — my point was exactly that income and expenses vary over both individuals and time, so to mandate for our thought experiment that income remain the constant among all the data points nullifies the whole discussion (although one could still make the same argument using time as a variable instead of income, but the effect would be much more subtle).
???
Keep the individual and time constant, and then vary the DTI. What impact does that have? One basic element of the scientific method is the isolation of variables.
http://books.google.com/books?id=okZN2avca3MC&pg=PA342&lpg=PA342&dq=dti+default+mortgage&source=bl&ots=svfSwIQ7BC&sig=JVAc0yecFN6X9okk3aNH4f8yNPg&hl=en&ei=catwSq_-D9-ZjAeW5tSSBQ&sa=X&oi=book_result&ct=result&resnum=1
“Like FICO, DTI is a well known determinant of default rates…After 30% the default rate begins to increase sharply.”
This is from ’97, and I’m sure a new handbook will come out sometime…
That’s right — which is why the variables are time (since time effects the relative cost of goods) and individual income (since different income result in different amounts available to spend for housing. I assume you don’t mean that it is impossible to analyze a problem with more than one variable.
’97 handbook? Are you kidding. Come on. That is just my point — the ratio is a rule of thumb that more, or may not, still be valid.
That is not really a valid comparison. The comparison is really between $100k income, 30% dti, and $100k income, 50% dti. Now think, will the person in the 500k home, or the 833k home be the more frugal? Who’s got the 6-12 month savings cushion? Which one would you rather loan your money to? Many of these are ‘our’ loans as IndyMac and others are FDIC owned.
In the meantime, lenders need to begin the process of eliminating 30 year mortgages for people that do not have 50% equity.
And then we are going to be ready to have a serious discussion about buying real-estate. http://www.yyoutube.net hotels
It seems pointless to argue that some people will take on 50% or 70% DTI. I am sure if you look for individual cases you will always find anomalies. But on an aggregate level data always regress back to the mean, and 28-33% DTI seems to be the range in which most of mortgage debts can be serviced without high default rate. Life style preference, job security, risk aversion… these factors may have a large impact on individual DTI, but should not change the sustainable DTI ratio for a large community. Once the aggregate DTI rises above 33% loan default occurrences will go up, spell trouble for that RE market.
There is no doubt that higher DTI equals riskier mortgage, all else being equal. That doesn’t mean that the level of supportable DTI shouldn’t change over time and across different income levels.
“So far, it doesn’t look like our government is going to do anything to change the system that inflated house prices; in fact, it looks like they are working to re-inflate the housing bubble to the degree they can. If nothing is done to prevent this from occurring again, it certainly will.”
In our current system there is no incentive and reward for policy makers to do things to prevent future disasters from happening, especially if the perceived catastrophic events (such as nationwide housing price decline, economic depression, war, etc) fall in the outlier of popular belief and social norms. So any effort to prevent an unlikely (thought of by the majority) disaster – usually comes with a social/economic price to pay in short run, but benefits our society/economy in the long haul, will NOT be recognized by the mass and rewarded in our current political system. Our politicians/regulators/central bankers understand this very well.
Here is a simple thought experiment – if Alan Greenspan had decided to run a tighter monetary policy and effectively nipped any sign of a bubble in its early stage, and consequently the great housing bubble never happened, would Greenspan be remembered as the leader who single-handedly prevented the biggest financial bubble in human history and its ensuing global economic meltdown? Of course not. In this hypothetical case Greenspan would most likely be remembered as the central banker responsible for a period of lukewarm economic growth (without the fake growth generated by easy credit), interspersed by a few mild recessions. So what would be Greenspan’s incentive to take away the punch bowl when the party was getting a little too crazy? Absolutely none.
The history books are crowded with heroic figures who led people out of a crisis. But you rarely see a name associated with preventing a crisis from happening in the first place, especially that crisis was never perceived by the general public as a likely event.
Great point on the long-term benefit vs. short-term cost.
With the increasingly sluggish economy in 2004, John Kerry would have had a better chance of beating GWB. That might not have been AG’s primary motive, but the politicization and timing are much more questionable than any current politicization at the fed. The raising of rates would have been an explicit sign that something needs correcting and would have impacted voters.
This is the fundamental behind the ‘never waste a crisis’ idea. People tend to forget as the time away from a crisis increases and it becomes harder and harder to implement any preventative measures.
Your point on AG also scares the shit out of me when we’re talking about expanding the regulatory function of the fed. Go back in time, and expand the fed’s powers, and AG wouldn’t have done anything different! If our regulator doesn’t see a problem is possible they won’t regulate to prevent it!
CA is seeing the long-term/short-term problem come to a head faster then the federal govt, and it will be interesting what changes are implemented and the consequences are.
That’s why Obama/Summers/Geithner’s plan to tighten regulation on financial market will inevitably fail. More concentration of regulatory power to Fed is ludicrous. Regulators will fail again and again because:
(1) no recognition/reward for anyone who sticks out his/her neck to preempt a potential crisis unless everybody believes there is one already in the making.
(2) we have a political system and business culture with greater emphasis on short-term track record – 4-year elections, quarterly earnings game, on and on.
I think this is an inherent problem with our democratic capitalist society (not that I think we can find a better alternative out there). Unless you believe the majority of our population are sophisticated, analytical, forward looking, attention to detail, and prudent. But if the opposite is true, there is no way we can prevent similar disasters from happening again.
I refuse to believe that we are at even a relative maxima in terms of effectiveness of regulation or cleanup of economic disasters. There have to be changes that would reduce the likelyhood of failures and would limit the damage those failures cause.
It starts with framing these problems as affecting everyone. It is silly to say, because of the pervasiveness of the problems, but at least pure housing bubble type issues are not present everywhere, and are worst in FL, CA, NV, and AZ.
Did poor banking standards cause the housing bubble, or did rising home prices cover up poor underwriting through the ability to refi or sell out of a terrible loan? Why if lending standards were universally bad did prices skyrocket only in certain areas?
More regulation is not going to be the solution. The only way to prevent future housing bubbles is to redesign the system to take away all the props for excessive risk taking in the first place. For the starter – what about we (1) do away with securitization of debt and GSE’s, (2) outlaw CDS. That should take all the steam out of our housing casino machine.
But as long as these bubble enablers stay intact, I am sure we will for sure have another one coming in not too distant future.
wow when you see an open house in the evening and the house is this old 1980 and they expect this much without a pool—the kool aid is still flowing and it’s now becomming a tidal wave of fear–I wonder what the heloc on this one is??
http://www.trulia.com/property/1083402366-8-Trovita-Irvine-CA-92620
The ultimate of WTF pricing:
http://www.redfin.com/CA/Irvine/5-Bel-Spgs-92602/home/5771481
I know, it’s a typo. Or is it….? 🙄
@_@ the pictures for this property is like… super bright.
Yeah that is the magic of photoshop.
I really love that program. I guess real estate agents do too.
Yeah, Obama’s got the plan to reinflate the housing bubble. That’s on everybody’s lips now. Right.
I’m amazed at the number of fools that are eating this up. You need to realize that the plan all along was not to prevent confidence and pricing from falling, it was to prevent them from falling too quickly. The PR engine from two presidents in a row have people convinced the bottom is in. People are convinced good times are around the corner. And *that* sentiment is precisely what is slowing down price drops for the time being.
Here’s the honest truth:
1) Your taxes are going up. Way up. State (CA) *and* Federal. If you don’t realize this you’ve been asleep for several years. (Anyone notice the HMID was cut this year for tax year ’08?)
2) Employment is going to suck for at least a few years, if not several.
3) The economy is becoming increasingly dependent on Uncle Sam being the funds provider. We’re literally becoming accustomed to bailouts, stimulus packages, cash for clunkers, loan mod programs, agricultural subsidies, defense subsidies, home finance subsidies, you name it, like it’s standard operating procedure. This will foster an uncompetitive economic context. You can stick that in your bank and smoke it.
4) Many defense jobs are about to get axed. I have friends in defense companies preparing their resumes.
5) Against this backdrop, interest rates are on their way up. Up. Not stable or down, up.
6) More jobs are getting offshored, while others are being converted to part-time/contracting. Bennies are getting cut as we speak. Deal with it.
7) Medicare and Social Security are broke. They can’t pay what they’ve promised. Period.
8) Many large pension funds are broke. They can’t pay what’s been promised either.
9) There’s a shitload of homes out there nobody really wants or can afford.
And amidst all this I’m supposed to believe that US and Fed inflation stoking is going to drive home prices up. Good luck with that. It ain’t. *If* inflation is successful, we’re going to be too busy offering handjobs to pay for our $100 meals and $200 gas fillups to worry about signing up for a mortgage at 12% interest.
Sorry, got here late.
So did Freetrader2 ever come to accept that half a pie was 50% in 1902 is still P in 2009 and will be 50% in 9002?
Values change over time, ratios do not.
Of course it’s pointless to discuss a 50% DTI, since it’s unlikely any lender is going to permit 50% DTI for the next 10 years.