In The Great Housing Bubble, I predicted Irvine resale prices would not reach their bubble peak for over 15 years. The analysts at Fiserv Case-Shiller have drawn a similar conclusion.
Of course, the owner of today's featured property doesn't believe that. In his world, prices never stopped appreciating in 2006.
Irvine Home Address … 35 WOODS Trl Irvine, CA 92603
Resale Home Price …… $2,589,000
{book1}
If I could … Maybe I'd give you my world
How can I … When you won't take it from me
You can go your own way Go your own way
You can call it … Another lonely day
You can go your own way Go your own way
Tell me why … Everything turned around
Packing up … Shackin’ up’s all you wanna do
If I could … Baby I'd give you my world
Open up … Everything's waiting for you
Fleetwood Mac — Go Your Own Way
Every seller must go their own way. Some accept the reality of the market and price accordingly. Some do not. Every owner wants house prices to take flight, particularly those who are underwater. Unfortunately, fundamentals that support the housing market can only go up so fast, and in case you didn't notice, wages are going down.
Fiserv Case-Shiller Home Price Insights: For Many U.S. Markets, the Return to Peak Home Prices Will Be a Long, Slow Road
Bubble-era home prices won't be seen again until 2025 or beyond in California, Florida, Arizona and Nevada
BROOKFIELD, Wis., Apr 08, 2010 (BUSINESS WIRE) — Fiserv, Inc., the leading global provider of financial services technology solutions, today released an analysis of home price historical trend data and forecasts for more than 375 U.S. markets based on the Fiserv(R) Case-Shiller Indexes(R), which is owned and generated by Fiserv, data from the Federal Housing Finance Agency (FHFA) and Moody's Economy.com.
The Fiserv analysis indicates the markets that experienced the greatest price bubble, including certain metro areas in California, Florida, Arizona and Nevada, won't see home prices return to peak levels until 2025 or later. That represents an unprecedented market cycle that will last a full generation from the top of the market in 2006-2007. Many other markets, including major urban centers in the Northeast and industrial Midwest, may need to wait a decade or more until prices return to their market peaks.
"Nationally, Fiserv Case-Shiller data points to a further seven percent decline in home prices through the end of this year, with a prolonged recovery beginning early in 2011. In many markets, the emphasis is on the word 'prolonged,'" said David Stiff, Chief Economist, Fiserv. "We see several powerful forces in the market that will severely hinder the housing recoveries of many metro areas, particularly in the hard-hit states of California, Florida, Arizona and Nevada. It will take these markets 15 or more years before home prices climb back to their peaks."
… Home sales grew dramatically, jumping from 4.5 million units in January to 6.5 million units in November 2009, the highest gains since 2006. This was attributed to lower prices, almost record-low mortgage interest rates, and the $8,000 tax credit for first-time home buyers. Another factor that temporarily slowed the erosion of home prices has been the financial institutions' inability to effectively sell homes with distressed mortgages.
… Detailed home price data and information on the Indexes can now be found at the new Fiserv Case-Shiller website at www.caseshiller.fiserv.com. At that site, users can get the latest housing news and find detailed information and home price forecasts for 381 U.S. markets.
In The Great Housing Bubble, I noted the following:
Table 11: Summary of Predictions for Irvine, California Home Prices
===================================== ======== ============ =========
The range of predictions for the decline of home prices in Irvine, California, is from 22% to 53% with an average of 41%. The predicted time of peak-to-peak recovery ranges from 2019 to 2033 with an average of 2028. Of course, since Irvine is in the heart of a bubble-prone market, recovery may happen more quickly, but then again, that would mean prices have entered another unsustainable price bubble.
My predictions of the bottoming price look unlikely at this point. The Federal Reserve has raised the trough with its activity. I think this pushes the bottom forward, perhaps to 2012 or 2013 and raises it. Nothing changes the underlying fundamentals. Unless we inflate another housing bubble, prices will take a very long time to reach the peak. 
What is happening in Irvine?
One measure of price activity in a market is dollars-per-square-foot. In The Great Housing Bubble, I described it this way:
The median is a good measure of general price activity in the market, but it does have a significant weakness: it does not indicate the value buyers are obtaining in the market. The houses or structures built on the land compose the most significant portion of real estate value in most markets. These structures deteriorate over time and require routine maintenance that is often deferred. During times of prosperity, many people renovate homes to add value and improve their living conditions. The impact of deterioration and renovation of individual properties is not reflected in the median resale value. Also, at the time of sale, there are often buyer incentives which inflate the recorded sales price relative to the actual cost to the buyer. These buyer incentives also distort the median sales price as a measure of value.
Many data reporting services measure, record, and report the average sales cost on a per-square-foot basis to address the problem of evaluating what buyers are getting for their money. For instance, in a declining market if people start buying much larger homes at the limit of affordability, the generic median sales price would remain unchanged, but since buyers are getting much larger homes for the same money, the average cost per-square-foot would decline accordingly. This makes the average cost per-square-foot a superior measure for capturing qualitative changes in house prices; however, this method of measurement does not capture the relative quality of the square footage purchased, only the price paid for it. High quality finishes may justify a higher price per square foot. There is no way to objectively evaluate the impact finish quality has on home prices. The main problems with using the average cost per-square-foot to measure price is that it does not provide a number comparable to sales prices since it has been divided by square feet, and it is not widely measured and reported.
The change in market mix will also impact the $/SF measure. Larger properties generally sell for less than smaller properties on a $/SF basis; therefore, when the mix changes to larger properties, the $/SF will decline. That is much of what is driving the slide witnessed in the $/SF measure since last September, a period within which the median went up.
If the Federal Reserve had not propped up the market last year, we would likely be seeing $275/SF to $300/SF across most of Irvine. We still might get there depending on interest rates and inventory. It doesn't seem likely that prices will go up given the current market head winds.
Didn't get the press release
The owner of today's featured property obviously did not get the Fiserv press release. In his world, there was no housing bubble, and his house kept on appreciating while the remaining housing market collapsed around him. This property value went up 20% since the peak in summer of 2006. WTF?
The owner put a large amount down, and he has only recently obtained a few private loans to get him through the recession. In his mind, he is still a millionaire.
Irvine Home Address … 35 WOODS Trl Irvine, CA 92603 
Resale Home Price … $2,589,000
Home Purchase Price … $2,171,500
Home Purchase Date …. 6/18/2006
Net Gain (Loss) ………. $262,160
Percent Change ………. 19.2%
Annual Appreciation … 4.4%
Cost of Ownership
————————————————-
$2,589,000 ………. Asking Price
$517,800 ………. 20% Down Conventional
5.24% …………… Mortgage Interest Rate
$2,071,200 ………. 30-Year Mortgage
$550,820 ………. Income Requirement
$11,424 ………. Monthly Mortgage Payment
$2244 ………. Property Tax
$417 ………. Special Taxes and Levies (Mello Roos)
$216 ………. Homeowners Insurance
$410 ………. Homeowners Association Fees
============================================
$14,711 ………. Monthly Cash Outlays
-$1851 ………. Tax Savings (% of Interest and Property Tax)
-$2380 ………. Equity Hidden in Payment
$1076 ………. Lost Income to Down Payment (net of taxes)
$324 ………. Maintenance and Replacement Reserves
============================================
$11,879 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$25,890 ………. Furnishing and Move In @1%
$25,890 ………. Closing Costs @1%
$20,712 ………… Interest Points @1% of Loan
$517,800 ………. Down Payment
============================================
$590,292 ………. Total Cash Costs
$182,000 ………… Emergency Cash Reserves
============================================
$772,292 ………. Total Savings Needed
Property Details for 35 WOODS Trl Irvine, CA 92603
——————————————————————————
Beds: 5
Baths: 4 full 1 part baths
Home size: 3,583 sq ft
($723 / sq ft)
Lot Size: 9,270 sq ft
Year Built: 2006
Days on Market: 12
MLS Number: U10001525
Property Type: Single Family, Residential
Community: Turtle Ridge
Tract: Arez
——————————————————————————
Beautiful Tuscan-style home in the Arezzo enclave of the guarded Summit development with 5 bedrooms & 4.5 baths. The home has approx. 3600 sq ft & is situated on a premier lot with 9270 sq ft. Beautiful panoramic views to Shady Canyon, the mountains, parkland & city lights views at night. The stylish flag-stone patio with fountains, built-in stainless steel BBQ & sideyard offers an incredible venue for outdoor entertaining. The gourmet kitchen with stainless steel appliances & granite countertops opens to a great room leading out to the backyard. A formal dining room is adjacent to the living room. Bedroom & full bath on the main floor. 2nd level has 4 bedrooms including a spacious master bedroom with private master bath appointed with Travertine. Large balcony from the master bedroom offers another incredible viewing opportunity out to the mountains & gorgeous parkland. Over $450K in upgrades! The Summit development offers a resort-style pool & clubhouse. Go to www.35WoodsTrail.com
Obtained a few private loans to get through the recession?
WTF is that about?
Don’t people who purchase homes like that have stellar incomes?
Oh…wait. The bulls all say that homes like this are purchased with “wealth” and not “income”.
So has the owners “wealth” run out?
If not, why take the loans?
I like the way the realtor makes a point about the supposed “over $450,000 in upgrades!” Interesting how if you take the original purchase price and add the $450k you get a number just above the current asking price. It must be the right number, dammit! Also, it’s only a 4% annual rate of return. That’s reasonable, isn’t it? The seller believes that he has an inelastic supply curve, apparently.
The cost to the builder to build this house in the first place (not counting land or permits or infrastructure, just the labor and materials to actually build the house) was almost certainly less than $450,000. $450k worth of upgrades my butt.
They forgot to mention the 90K Range Rover and 85K Escalade upgrade to the driveway.
Rents are now beginning to decline as well…
http://lansner.freedomblogging.com/2010/04/15/renters-costs-fell-0-7-in-march/62573/
BTW how does one draft a comment so that the ‘link’ is clickable?
Creating a link
Google Main Page
Voila.
Thank you kind sir.
beginning? ..more like it’s been happening since 2008.
Lenders are starting to foreclose:
Foreclosures up in 1st quarter; real-estate owned at record
U.S. properties subject to foreclosure action in the first quarter rose 16% from the year-earlier quarter and 7% from fourth-quarter 2009, consultant RealtyTrac reported Thursday.
Real estate owned by lenders is at the highest level RealtyTrac has seen since it began reporting the data, Chief Executive James J. Saccacio said in a statement.
The report “may be further evidence that lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure-prevention programs and processing delays slowed down the normal foreclosure timeline,” he said.
Foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on more than 932,000 properties in the quarter. That means one in every 138 U.S. housing units received such a filing, the Irvine Calif., firm said.
In March, 367,000 properties were subject to foreclosure filings, up 8% from March 2009 and up 19% from February 2010.
Nevada for 13 quarters has been the state with the highest foreclosure rate, RealtyTrac reported. In first-quarter 2010, 1 in every 33 housing units in the state was subject to a foreclosure filing.
That’s more than four times the national average and is up nearly 15% from fourth-quarter 2009. More than 34,500 properties in the state received a filing in the first quarter, down 16% from first-quarter 2009.
Arizona was second with 1 in every 49 properties subject to a filing in Florida was third with one in every 57.
Ten states account for more than 70% of the foreclosure filings in the first quarter, RealtyTrac reported.
In absolute numbers, California’s more than 216,000 properties subject to a foreclosure notice accounted for 23% of the nation’s total. Florida was second with more than 153,500 and Arizona was third, with nearly 55,700.
Jobless Claims Jump
Blamed on “administrative factors”
Labor department official’s professional expert opinion:
“I don’t think there is a whole lot of layoffs going on”
Yea, jobless claims are up. Spending is up. Up is down. Down is up.
The squatter stimulus appears to be working.
Allow 2% of the population to live rent free and you have ample growth. It helps that the 2% is the most irresponsible spenders. S&P500; over 1200 it’s party time!!!
I think it’s more a reflection of how the media misinterprets the signals and confuses the public. The media has been pumping a phony recovery to the masses over the past couple of months. If you repeat it enough times, people will start believing it and will head back to the mall.
I fail to see how a dysfunctional job market leads to a “surge” in retail sales. Perhaps more people went to the mall last weekend due to the media headfake. Maybe there were some big seasonal sales or industry gimmicks that got the masses excited.
I would like to know which retail outlets experienced this “surge”. Walmart? Those gaudy shops at the mall?
Last few times I was in a Best Buy the place was completely dead. 10 employees per customer. The TV and stereo sections basically empty. Everyone was mostly in the computer and video game areas – not exactly big ticket items.
I think you have to look at what you are surging against – namely some really terrible numbers last year. Its’ like saying my math grades surged from a F to a C.
2% of the population living rent free…and you thought the stimulus was only for the banks. There was trickle down after all!! Reagan and Laffer are right.
From the article:
Sacramento expected to return to peak value after 2039
lol
I think your prognosis might be too agressive. The real peak on Irvine was 2005. Five years have passed. That means only 10 years left for bubble pricing. It’s possible but I think it will take longer.
It would be nice to get back to some rental parity fundamentals on this blog. It may be the only fundamental calculation left.
Peak was in 2007.
Deal with it.
By 2007 most of the nice surrounding areas of irvine were already down 20%. Irvine was down maybe 10%. I’m not sure what I have to deal with, I have no debt. You might have to deal with prices in Irvine being higher now than early 2009. First we will need to get back to 2009 pricing.
This is Irvine, the bottom was in May 2009… and the peak…well, as I said before this is Irvine…there is no peak, just perpetual growth…given the current rate of appreciation, I predict that in 2036 people in Irvine will buy 3bdrm for 10 million with 30% down.
PR – Statistically, there were very few neighborhoods that had any depreciation at all in 2007 in Irvine. The facts are out there. Late 2007 is when you saw a bit of depreciation beginning to creep into the market.
Places like San Diego started early…2005. Most of LA started in 2006. And for a variety of reasons, many neighborhoods in OC started in late 2007.
That being said, as IR often mentions, there are several factors going away that artificially flattened prices (prices did not go up, only the median). They were, superficially low interest rates dues to Bernanke’s purchases of MBS, the $8k housing credit, and the temporary holding back of foreclosures. If you track sales on a house-by-house basis, pricing started dipping again in late January/early February of this year.
We have at least two more years of dropping prices before we reach rental parity. And as many have mentioned, rents continue to drop, this will not bode well in the medium term for prices either and moves the target lower.
This property has to be competing with new custom construction. How much would it cost to build a comparable home, where they buyer would get everything exactly how they want it? If I’m paying $2M, I’m getting exactly what I want – I hold that opinion at 1/4 the price point, but everyone has a price point beyond which compromise isn’t an option.
2.5M for a 3500 sq ft tract house in Irvine, one word…NO.
You can get on the 73 and drive south a few miles to Laguna Niguel and buy a similar brand new house in a guard gated community (San Joaquin Hills) for half the price or less. The Irvine premium is not that strong.
Great article on return back to peak pricing no time soon. California is in massive financial trouble, did anybody notice that the city of LA increased DWP customer rates yesterday so the city could survive for another few months. We will be hearing more and more of these stories in the near future. And there is no way any of this will be good for RE prices.
I completely agree with you. There are also high quality schools in and around these areas. In fact it’s quite possible that your children will do better in these schools and go on to better colleges. The irvine premium is real to a group of people. The reasons for some may be misguided.
Foreclosure-rates-surge!
There’s plenty more where that came from.
http://www.crackthecode.us/images/optionarmexplode.jpg
40,000 just doesn’t seem like that big of a number – I would have expected that number is significantly higher.
40,000 homes coming on the market over a period of two years will certainly have some effect, but how devastating could it really be?
Now those homes, combined with that evil dark scary monster we know as ‘shadow inventory’ coming on the market, could do some damage.
Soros not having a warm and fuzzy about The Financial Recovery. What does he know anyway. PFFF
Mortgage Modifications continue to fail
Treasury department has no explanation… (too much debt maybe?)
Are there any good resources for SD real estate trends? I never in a million years thought I’d consider living in SD, but my employer has a good opportunity for me there that I’m strongly considering.
Just to clarify – San Diego, NOT South Dakota. Anything similar to the IHB for San Diego?
As much as I hate city-data forum, you may want to visit the San Diego forum:
Patrick sometimes links to signsonsandiego.com for housing bubble articles.
~Misstrial
Sorry, links do not appear:
http://forums.redfin.com/t5/San-Diego/bd-p/SanDiego
http://www.city-data.com/forum/san-diego
Many of the areas that you would probably consider in San Diego are stuck in a similar holding pattern to that of Irvine. Some areas in the county have been hard hit and others have seen very little decline, so far.
The best site I’ve found for analysis is through Rich Toscano’s, Piggington.com. He also writes for Voice of San Diego and posts new articles to the site about once a week. (Hint: He’s still renting)
For another perspective, you might try Jim the Realtor’s site. He posts some good information for North County coastal markets.
But no, SD has no IHB equivalent. At least not since oc_renter retired from blogging.
Jim the Realtor…ask him
I miss oc_renter’s blog – I guess it was that Cary Burch (sp?) situation that got the best of him.
Anyway, the North County Times has a great article from Wednesday on the coming foreclosure surge for SD:
http://www.nctimes.com/business/article_fa8b8a2a-0fc6-526a-b125-d86bec3d79c4.html
~Misstrial
IrvineRenter: “The predicted time of peak-to-peak recovery ranges from 2019 to 2033 with an average of 2028.”
Note: It is pseudoscientific shamanism to average these values.
For example, I have 10 inch (height) black cat and 40 inch white horse. However, there is no average (10+40)/2=25 inch gray animal.
“Note: It is pseudoscientific shamanism to average these values.”
Note: all market divination is pseudoscientific shamanism. If you think another statistical method of analysis will get any closer to the truth, you are fooling yourself. There are too many variables to be accurate by any method.
If you really believe so, please explain why you are predictiong the great unpredictable.
In quantum mechanics, there is Heisenberg uncertainty principle. It makes a lot of things unpredictable, but helps to build very predictable A-bombs.
I think that some methods are definitely better than others. By the way, that is why I like this blog.
Someone bought one close by?
$2,000,000
28 WOODS Trl
Sold on Mar 12, 2010 0.05 miles
5 bd / 4 ba
3,800 Sq. Ft.
At the moment all homes, below 800k, have a hidden premium of 30-40k due to the tax break. Assuming that the tax break will expire, will it translate to a 30-40k drop in the median after april 30th or so…dont know. What is your opinion? I feel that the current spike sales is due to the tax breaks expiring in a couple of weeks.
What happens to the knife catchers are trying to flip before the deadline.
House prices, incomes, and down payments for Irvine are so high that the $8k tax break is virtually meaningless.
I will pay cash for my next Irvine home when the price makes sense. I re-initiated my search the last month or so due to the tax credit. If I didn’t think the long-slow-bleed was coming, the looming expiration would have definitely spurred action.
When you drive an old Honda and haven’t taken a vacation in years, reading IHB’s abuse stories is sickening. Don’t underestimate the appeal of “getting yours” even if what you get is a tiny fraction of the grifters windfalls.
If you are able to pay cash for your Irvine home I’m surpised that your income isn’t too high for the tax credit. Your income only needs to be over 250k and you don’t get the tax credit. Nice job saving all that cash.
Good observation. I’m a building subcontractor who profited from the boom, anticipated the crash, and didn’t leverage. BTW, I never made over $350k even at the top.
The greater fool comes to mind.
At above $1 million, the banks will not likely want to play this round with a nothing down loan. May HELOC in the future, but for now is will be a significant amount of cash needed.
As for the $8000 tax credit not being a factor, dream on. Say house is for $700,000, FHA 3.5% down, 1.5 % other closing cost. $35,000 needed to close less $8000 fed credit, less $3000 state credit, so only $24,000 to buy a $700k house. For many, $400,000 purchase price is likely, so only $9000 to close or purchase a house. They can stop paying until after the next election. In the inland empire and mid-American, the house price is under $200K, which is back to essentially no money down loans! Now that’s a win-win-win for the borrowers, the banks and political parties. Free rent and getting the bad loans off the bank’s books. Great stimulus package for the poor folks-We feel your pain and let me help you. Only losers are the taxpayers, who will pay for the free rent, house upkeep, bad loan, local property taxes, back payments on the utilities , banks fees, attorney fees for the eventual FC, REA fees, closing cost and depreciation.
There are lots of condo’s for under $500,000 in Irvine. And most families in Irvine have income under $100k, so $11,000 is a big deal for them
$450,000 in upgrades? Maybe I’m under illusions what can be bought nowadays with such an amount of money, but I don’t see this in the picture. Probably the photographer’s fault, I guess. He should have taken pictures of the golden shower curtains, too! And the realtor should have given a notice that the kitchen appliances aren’t stainless steel, but pure platinum!
8-/