With interest rates down to 4.85% on a 30-year fixed, people’s buying power is much increased. Prices that used to be ridiculous are now financeable.
Asking Price: $648,450
Address: 126 Arden 65 Irvine, CA 92620
I’m closin’ the book
On the pages and the text
And I don’t really care
What happens next.
I’m just going,
I’m going,
I’m gone.
I been hangin’ on threads,
I been playin’ it straight,
Now, I’ve just got to cut loose
Before it gets late.
So I’m going,
I’m going,
I’m gone.
Going, Going, Gone — Bob Dylan
According to the listing agent (she has worked with the IHB before, and we trust her), this property has over 20 offers, and several of them are over the asking price. She is no longer taking bids. Let’s take a look at an IHB property valuation report and see what the fuss is all about.
126 Arden IHB Owner-Occupant Brokers Opinion of Value .pdf
I am amazed at the impact 4.85% interest rates has on affordability. The GRM is 240 at that interest rate.
Do you have the courage to buy at these interest rates? I don’t.
Asking Price: $648,450
Income Requirement: $122,769
Downpayment Needed: $129,690
Purchase Price: $890,000
Purchase Date: 8/6/2007
Net Gain (Loss): -$280,457
Percent Change: -27.1%
Annual Appreciation: -12.7%
Address: 126 Arden 65 Irvine, CA 92620
Beds 4
Baths 2 full 1 part baths
Size 2,245 sq ft
($289 / sq ft)
Lot Size n/a
Year Built 2001
Days on Market 4
Listing Updated 9/24/2009
MLS Number S590041
Property Type Condominium, Residential
Community Northwood
Tract Ard
According to the listing agent, this listing is a bank owned (foreclosed) property.
What a beauty! Shows beautifully! Laminate wood flooring, plantation shutters, granite countertops in the kitchen. Master bedroom balcony, bathtub has spa jets, tile flooring in baths and more! Separate living and dining rooms, fireplace in living room. Kitchen opens to family room. Low maintenance front and backyards. Two car garage plus a long driveway. Walking distance to the assocation pool. Be sure to see this home!
assocation?
I hope you are enjoying your weekend.
Smart money buys cheap assets with expensive money.
Dumb money…well…
The financial blindness surrounding real estate in California never ceases to amaze me. Today’s property is completely unaffordable to a family earning $125k unless they entirely forgo life insurance, retirement savings, college savings (why 4 BR if no kids?) and many, if not most, of the fun things in life.
IHB,
I am impressed with your property valuation report. I just wish I had half the brain to come up with something like that. Thanks for all your efforts on this blog.
Funny, I’m anything but impressed with this home valuation. First off, it makes the claim that this house is worth over $700,000. I suppose we should be asking “on what date a few years ago was this analysis correct?” Furthermore, it appears to make the same tax savings mistake that is regularly made. Specifically, you must deduct from your tax savings the amount that you can no longer deduct when you itemize. That includes both the standard deduction and the individual deduction for yourself. Those total well over $10,0000 a year. Therefore that must be subtracted from the mentioned $757 per month. Therefore, you would be losing out on about $850 in tax savings to gain $757 in tax savings. There’s a winner for you.
Point two, I have used the standard that your total cost to own the home must be less than the amount you could rent it out for, plus 10%. This allows you the freedom to move out at any time, even if you are in a negative equity situation (as so many people are these days and consequently stuck in their homes.) If you apply that standard, the total cost to live in the home needs to come down. Since the real cost of ownership is actually $3118 + $93 (difference in real tax losses), you’re at $3211, fully two hundred dollars per month over the cost to rent the place. However, you’ve also put down a substantial amount of your own money. In that case you would have put down a large sum of money to at minimum lost a couple hundred dollars per month.
I know, you’re saying “but I want to live here.” Still, how much sense does it make to put down $150,000 of your own money, then spend an extra $1200 a year to buy a place that you could rent for $1200 a year less and keep your $150,000 toward a purchase in two years when prices have dropped another 20%?
This page gives you a pretty good look at the tax implications: http://turbotax.intuit.com/tax-tools/tax-tips/deductions-and-credits/5629.html
1. The valuation is based on the sub-5% interest rate. That math is what it is. If I had put in the 6.5% interest rates of three years ago, the value is significantly lower. In fact, this was the whole point of showing the analysis which seems to have eluded you.
2. It clearly does not make the tax mistake you are talking about. I have explained this several times including in Rent Versus Own. The marginal tax rate that I use is 10% below the borrowers highest marginal tax rate. Several people have run simulations using Turbotax, and the 10% reduction works well.
At this point, you must have stopped looking at the analysis because you failed to notice that I did account for the lost income from the interest on your downpayment. There is no adjustment required for tax reasons as I have answered above.
In your last sentence you finally get to the point. I also think it is foolish to buy in this environment — not because you can’t make the math work today — but because the math is going to change in the future, and that change will move prices against you.
Dear IHB,
Thanks for your detailed analysis of this property. I know you know that your points are in the property valuation, but I think that those of us who are not up to reading or understanding the fine print would enjoy/appreciate a brief summary of your point at the end. The kind you produced in the first three paragraphs of you response to Brian, in fact.
Without that, it looks like a real estate prospectus, and by implication you seem to be implying that this is a good value.
Thanks!
Excellent analysis, but I doubt the prospective buyers will consider it. People are still frighteningly irrational about purchasing a home.
::goes back and applies IR’s tax rate to above valuation::
Never mind the first part of my last comment. But the second part still applies.
The typical home buyer is an ignorant chump.
First of all, the idea of “loan” is complete nonsense when talking about banking. If I lend you 10 dollars then I actually have to lend you 10 dollars that I have posession of. I must take 10 dollars from my wallet and put it in yours.
Whereas banks don’t even have to have the money that they “lend” because they just wave a magic wand at the computer screen and the money just enters the economy out of nothing. Sounds like a counterfeiting scheme to me! If I just printed my own 10 dollar bill and gave it to you as a “loan” – I would go to jail. Yet this is exactly what banks do because the government gets to be in on the scheme.
Nevertheless, let’s go ahead and be good donkeys and pretend that banks actally loan money to people –
What is so magical about a 30 year loan? Why do we not have 35 year loans? Why not 40 year loans? What is the magic in the number 30? You never hear a single person question this. People accept the number 30 as though it was handed down to them from God.
We do have 15 year loans, but that never crosses anyone’s pea-sized brain. I mean, come on, who wants a higher monthly payment? The typical American wants what is best for him in the hear and now. Life is all about minimizing your monthly payments and maximizing your long term costs.
The people of this country have been completey brainwashed. They have been made to believe that they need 30 year loans in order to afford houses. They are too stupid to take 5 minutes of their day, pull their snouts out of their bucket of KFC and contemplate what the 30 year loan actually represents and its distortional influence on house pricing.
The banks know a very low percentage of people will actually stay in a house for 30 years. To them, these houses financed with 30 year mortgages never get paid off and repesent a never-ending cash stream that changes hands every 10 years of so. MOO!
Suppose that all of the mortgage masters came together one day and proclaimed that 15 year loans were the new ceiling. 30 year loans would no longer be available for borrowers. A great many of new borrowers would become absolutely incredulous at such a move. They have been made believe that if they do not have access to a 30 year loan, they cannot afford a house.
What they do not realize is that if the average chump cannot afford current pricing with a 15 year mortgage then sellers will be forced to lower their prices (probably 50%) and the buyers will actually buy the house for cheaper and pay it off in a reasonable amount of time.
The 30 year mortgage is one of the biggest crock of S*** perpetrated on this country. It rigs the game against prudent savers who have to compete with the counterfeit money being pumped into the system by the banks on behalf of some “borrower” who has no concept of how long 30 years really is.
Take the guy who works hard and saves 100K over a 5 year period and wants to go buy his first house. He finds that even though he has a higher down payment than the chumps and their piddly 10K down payments competing with him, it does not matter to the sellers because the banks will just conjure up the rest of the money out of thin air on their behalf.
Think about it. You begin to realize how our entire economy is smoke and mirrors.
It does not matter how smart and responsible you are – you have no choice but to play ball. The game is completely rigged against you because the creators know that the majority of the ignorant players will drown out the few that understand it.
We can try to kick and scream logic into our fellow man’s ears but they will almost never listen. This is our reality.
I don’t agree that you have no choice but to play the 30-year mortgage game. Well, probably in markets like Irvine you would, if you have to own a big house. I’m happy renting, and having no debt at all.
Absofuckinlutely.
7 years is a long time to stay in a house for most people.
With a 15 year mortgage, you might actually pay off some of the principal in that time…at least a decent chunk.
That’s why I’ll most likely move somewhere cheap and pay cash.
On the flipside, I hope there are lots and lots of chumps as I’d like to get a better interest rate on my savings and as long as dumb fuck sheep want to take out a bunch of debt and I get paid….cool!
Since you have some insights on reality, Make it work for you instead of complaining about it.
Look for ways in which you can exploit these insights to make money
This will not end well.
Interest rates are superficially low because of Bernanke’s financial wizardry. Like a beach ball being pushed under water, they will eventually pop. Natural law will take over. This will lead to the next big leg down in housing.
And because of this moron, financially responsible people who invested in CD’s and have cash in bank are getting almost 0% interest. But with all the money we are printing, inflation will surely go up and then the interest rate has to go up…
Were you as worried about inflation 2 years ago? That is when it really happened – through increased leverage at big banks. In fractional reserve lending, banks can create money, with the multiplier tied to the reserve ratio. That money has disappeared as the debt is wiped out in foreclosure, and Bernanke’s ‘printing’ is merely reducing the pace of deflation.
I agree. As soon as the economy picks up, money is going to leave 10-year Treasuries causing mortgage interest rates to rise. The best the FED can hope to do is control the rate of descent.
If you look at today’s featured property and the analysis of it, you see that the FED has managed to create temporary affordability. Three years ago, temporary affordability was obtained by unstable loan products. Now, we have stable loan products at unstable interest rates.
The flip side is that increased rates will lead to massive ARM foreclosures…. leading to further debt deflation… revisiting low rates… we are pigeon holed with low rates and debt deflation for years due to the leverage hangover…we may be looking at expensive money right now…. the monthly payment won’t matter, just keeping your income will…
This is heresy in California:
Don’t bank on your home as an ATM
The coming decades won’t repeat the dramatic rise in real estate values that previous generations experienced, economists say. It may be time to return to viewing the home simply as a place to live.
For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.
There have been booms and busts along the way, but from the second half of the last century through the start of this one, nothing derailed the real estate locomotive on its uphill climb. The train stalled here and there and rolled back now and then, but each time it roared back up and got homeowners to the mountaintop.
Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.
The economic fundamentals that drove home values up in the 20th century — sustained growth in incomes, population and household wealth — have been sputtering for decades. Though the future isn’t necessarily bleak, economists say there’s no reason Americans should continue to see a home purchase as a path to wealth.
“We can no longer assume that housing will be as good an investment for the future as it has been,” said Robert Reich, public policy professor at UC Berkeley and U.S. Labor secretary in the Clinton administration.
“We can expect a gradual rise [in home values], but not the bonanza we’ve become accustomed to between the end of World War II and 2006, and especially the last 20 years.”
Millions of homeowners have been rewarded handsomely as house values climbed steadily for decades after World War II. Houses in Valencia, for instance, sold for $22,000 to $33,000 in 1967 when that suburb was brand-new. Many of those homes sold in the mid-$500,000 range during the housing bubble and are now hovering in the high $300,000 range, property records show.
If you paid $33,000 for a house in 1967 and sold it in 2006 for $550,000, the annual return would be about 7.5%. If you missed the peak and sold this year for $375,000, you’d still have about a 6% annual return. Adjusting for inflation, $33,000 in 1967 would be equivalent to about $213,000 today.
But a broader look at home prices over time in Southern California shows that price appreciation usually has been more gradual than magical.
If you bought a home in 1988in Southern California for the median price of $133,500 (according to MDA DataQuick) and sold it in August for the median price of $275,000, that would represent about a 3.5% annual return. If you had sold the same home at the peak price of $505,000 in 2007, it would have yielded about a 7.25% annual return.
The same home purchased in 1988 and sold 10 years later, in January 1998, at the median price of $159,000 would have returned about 1.8% a year. Those more modest returns were quickly forgotten during the bubble years, when, for instance, the median Southern California home price shot up from $265,000 in July 2002 to $505,000 in July 2007 — an annual return of 13.8%.
The housing market may be hitting its bottom, as median prices lately have held steady or declined only modestly in many regions. But Reich and other economists say there are many fundamental reasons the coming decades won’t repeat the kind of dramatic rise in real estate values that previous generations experienced.
For one thing, many of the baby boomers who fueled the demand for homes in the 20th century are now retired or retiring, and as they move out of their homes, there are fewer younger people to purchase the houses. The years after World War II were exceptional, says Thomas Lawler, an influential housing consultant and a former Fannie Mae official.
“You talk about pent-up demand; you had all these people coming out of the Great Depression and others coming back from World War II at the same time, then that was followed by the baby boom” — a convergence of events we won’t see again, Lawler said. “There were all kinds of demographic conditions conducive to more positive increases in real home prices. Those fundamental things started to shift a while ago.”
Despite rancorous debates over immigration, the influx of new residents isn’t enough to slow the aging of the population. In fact, the Census Bureau estimates that California’s working-age immigrant population grew an average of only 2% a year in this decade through 2007, down from 4.4% in the 1990s and 9.5% in the ’80s.
Don’t tell this to the people offering over list price on the listed property. Of course they wouldn’t believe it anyway. They’ll have to learn it the hard way.
Do you notice how they cherry-pick their dates for appreciation?
The bought and paid for MSM desparately wants you to believe that 2002 was the start of the run up.
Do the math using the 1998 median price and you’ll easily see that is when the bubble started.
Yes indeed. Irvine has always been a bit pricey, but only after 1998 did its prices begin to rival those of the Bay Area. The BA SHOULD be more expensive, because it’s harder to get building permits there; TIC just blasts away hilltops and installs developments whenever it likes – no scarcity of land or housing to push up prices to satisfy demand.
Ever been to Oakland? Hell, they could blow up the whole place and no one would know the difference.
No, man, Irvine doesn’t have nowhere the land you think it does.
And the Bay Area is overpriced. Remember what happened to San Jose after the dot com bust?
It’s interesting that the author picked Valencia.
It just goes to show that if you buy from a builder you DO NOT get “value”.
I’ll use personal experience…well…my Dad’s personal experience to demonstrate.
In 1967, he bought a 2400sf co-op at 322 Central Park West (Manhattan) for $24,000.
When he moved to Los Angeles in 1970 he rented 415 S. Orange Drive L.A. 90036 for $300/mo. I’m not sure what it sold for back then, however, in 1973, The neighboring house sold for $15,000…
http://www.redfin.com/CA/Los-Angeles/423-S-Orange-Dr-90036/home/7091612
Look what $31,500 would have purchased on the most prime street in Hancock Park back in 1969…
http://www.redfin.com/CA/Los-Angeles/366-S-Hudson-Ave-90020/home/7091075
You make your money when you buy, not when you sell.
The current OC, CA issue is the attempt to retain the bubble prices instead of adjusting for “normal appreciation.”
IR, The maintance cost of 0.2% is realtor estimate. Even the Fed. govt allows a depreciation schedule of ~7 years on applicances. Some likely cost are AC system ($3000 to $5000 in S. CA), carpet replacement each 15 years, painting each 7 year, Irvine cement tile roof may last 50 years, but the unlining wood is likely to rot by then. I’ve haven’t check out the cost to pull a water heater permit, but one bay area county was charging $70 for just the inspection portion back in 2001. What’s the permit plus inspection cost here? What’s the landscape cost — I hear a daily drone of leaf blowers in Irvine, what the typical landscaping cost?
Lets just enjoy it while we can!
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http://twitter.com/OliverGraf360
IR,
A few articles ago, you solicited recommendations for format improvements. I have one.
1) Return to the use of Redfin links for the featured properties instead of the Ideal Home Brokers (IHB) links.
Bottom line: Redfin is better. I suspect this is the case under any circumstance (you can’t really expect to come up with an RE site that’s superior to Redfin, do you?), but Redfin is especially superior when the IHB link returns this message: “System Offline This site is currently offline”. I’ve gotten that message for several hours now.
-Darth
I was surprised to see how much of the first payment went to equity. I never really thought about how the low interest rates will help drive early amortization.
Aren’t all the comparable sales SFH in the report in gated northwood pointe? They are supposed to be more expensive than this detached condo. For me, at least 40~50k difference. Also, this is a REO property. That make 730k a fair market price at this moment.
This place will sell for a lot more than 650,000. I’m guessing that bidders will pushed it up to 725-735. We shall see.