Sentiment toward owner-occupied housing is changing, and people are starting to accept that housing is not the great investment they thought it was.
Irvine Home Address … 18 BAHIA Irvine, CA 92614
Resale Home Price …… $594,900
From the darkness, I walk into the light
From the day, I walk into the night
From the shadows, I will appear
With a message, for all who will hear
For the weak of heart, I will be strong
To the defenders of faith, I will belong
To the last of us, fight till we die
Till the keys, of the kingdom, are mine
Manowar — I Believe
Kool aid intoxication is an unshakable belief in real estate appreciation. As I wrote in Losing My Religion:
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the "higher power" of market forces — real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn't matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn't matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "Why Christianity Must Change or Die" in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California's religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California's Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.
Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.
The article for today's post calls into question some of the basic beliefs Californians have about real estate. Some may lose their religion, but some will decide that despite the obvious contradictions, they still believe.
Housing Fades as a Means to Build Wealth, Analysts Say
By DAVID STREITFELD
Published: August 22, 2010
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
I have written on many occasions about Our HELOC Economy. California is built on a foundation of borrowed money. We continually build Ponzi Schemes, and when they collapse and lenders no longer give us money, the entire economy grinds to a halt.
I believe it will take many years for lenders to repeat their mistakes of the bubble. The Ponzi era may not be gone for good, but unless the government starts backing cash-out refinancing and HELOCs, it is gone for the foreseeable future.
Of course, most current California home buyers don't see it that way. They believe HELOC riches are right around the corner, and banks will be willing to finance the profusion of personal Ponzi Schemes Californians are so fond of creating. It isn't going to happen. 
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
The fact that people believed these delusions amazes me. People were choosing to spend more on housing, but that was only because house prices were going up. More people were not moving to the coasts, but the people that were there were taking their home equity and buying multiple properties to create artificial demand. And despite running short of usable land, we have thousands of land deals all over California where the residual land value is negative right now. Each of these fallacies was promoted to the masses by the NAr to create false urgency to enrich realtors.
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Most people don't think about market conditions when they buy a home. Realistically, people buy and sell because of life's circumstances. This couple was going to buy now regardless of what happened in the market. Their house will decline in value for a while, but if they hold it long enough, they will be hurt less than those who bought from 2004-2008.
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
I am always astonished by how much people think house prices should go up — or even that house prices should go up at all. Do wages go up at 10% per year? Why should house prices go up any faster than wages? How can house prices go up faster than wages on a sustained basis? How are people supposed to pay for houses once it costs 100% or more of their income? Somehow logic seems to elude the average home buyer. Kool aid intoxication is very strong.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
realtors will never accept that real estate appreciation is a lost cause, nor will anyone who likes to use this fallacy to generate false urgency in buyers.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
Housing is special. Irvine is different. How many times have we heard that bullshit before?
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Wrong. Arizona may not see peak prices for quite some time, but it will recover. Of all the distressed markets out there, Phoenix is one of those most likely to make a comeback. The economy is diverse and the population is growing. I would buy cashflow properties there if I had more contacts. I am more excited about Las Vegas mostly because I have the contacts to get cashflow properties there. The economic story in Phoenix is actually more compelling.
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
The fantasies of Mr. Austin are shared by homeowners everywhere. He has been forced to let go of his fantasies whereas Orange County and Irvine home owners are still clinging to theirs.
The contrarian view
I would like to believe that stories like today's reflect a positive and permanent change in buyer attitudes, but there is another way to see it.
Housing must be nearing a bottom..
… Because now I'm starting to see more articles about how housing is a lousy investment and no one should buy a house. Anyone who's been paying attention knows that this statement is just a wrong as home ownership is always better than renting. Both statements are just flat out wrong. But that doesn't stop the pundits.
One sign of a market bottom is a change in sentiment. When an asset class is strongly out of favor with the investment community is often a great time to purchase it.
I believe we are about to see a leg down in house prices, but what happens after that is a mystery. There are far too many variables to predict. I am planning a future post to look at some of these scenarios and try to assess the probability of each. One possible scenario is that low interest rates persist until the inventory is absorbed, and the leg down we are about to see is the last one. This may not be the most likely scenario, but this winter should be (1) the bottom of the recession, (2) the peak of inventory, and (3) the bottom of buyer demand. When conditions are at their worst is often when markets find a durable bottom. Only time (and interest rates) will tell.
No money in, much money out
Houses were a great trading vehicle during the bubble. Lenders were giving houses to people with no money down, and when values went up, lenders gave people this money as well. With that kind of lender behavior, it isn't surprising that houses were in high demand.
- The owner of today's featured property paid $570,000 on 1/9/2004. He used a $456,000 first mortgage, a $114,000 second mortgage, and a $0 down payment.
- On 5/8/2006 he refinanced with a $586,000 Option ARM with a 1.25% teaser rate.
- On 11/26/2007 Wells Fargo refinanced his first mortgage for $604,000 and gave him a $37,750 HELOC. How stupid is that?
- Total property debt is $641,750.
- Total mortgage equity withdrawal is $71,750.
- Total squatting time was about 14 months.
Foreclosure Record
Recording Date: 11/12/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Foreclosure Record
Recording Date: 08/10/2009
Document Type: Notice of Default
Wells Fargo bought the property back for $663,586 on 6/10/2010. They will lose about $100K on the deal.
Irvine Home Address … 18 BAHIA Irvine, CA 92614 
Resale Home Price … $594,900
Home Purchase Price … $663,586
Home Purchase Date …. 6/10/2010
Net Gain (Loss) ………. $(104,380)
Percent Change ………. -15.7%
Annual Appreciation … -42.9%
Cost of Ownership
————————————————-
$594,900 ………. Asking Price
$118,980 ………. 20% Down Conventional
4.51% …………… Mortgage Interest Rate
$475,920 ………. 30-Year Mortgage
$116,401 ………. Income Requirement
$2,414 ………. Monthly Mortgage Payment
$516 ………. Property Tax
$67 ………. Special Taxes and Levies (Mello Roos)
$50 ………. Homeowners Insurance
$50 ………. Homeowners Association Fees
============================================
$3,096 ………. Monthly Cash Outlays
-$403 ………. Tax Savings (% of Interest and Property Tax)
-$626 ………. Equity Hidden in Payment
$199 ………. Lost Income to Down Payment (net of taxes)
$74 ………. Maintenance and Replacement Reserves
============================================
$2,341 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,949 ………. Furnishing and Move In @1%
$5,949 ………. Closing Costs @1%
$4,759 ………… Interest Points @1% of Loan
$118,980 ………. Down Payment
============================================
$135,637 ………. Total Cash Costs
$35,800 ………… Emergency Cash Reserves
============================================
$171,437 ………. Total Savings Needed
Property Details for 18 BAHIA Irvine, CA 92614
——————————————————————————
Beds: 3
Baths: 3 baths
Home size: 1,599 sq ft
($372 / sq ft)
Lot Size: 4,138 sq ft
Year Built: 1988
Days on Market: 15
Listing Updated: 40415
MLS Number: P747732
Property Type: Single Family, Residential
Community: Westpark
Tract: Pr
——————————————————————————
According to the listing agent, this listing is a bank owned (foreclosed) property.
If your client likes sunlight- loves a well lit home- then this is their home. Dozens of windows in this home and house is sunny and bright and cheery. A place to come home to after the end of a day. Upgraded glazed kitchen countertops. Gazebo/patio cover out back to relax. Centrally located near both freeways and near shopping centers. Lushly landscaped for the gardener in you.
Technically, this doesn't deserve the lite-brite graphic, but since the realtor went out of her way to sell sunshine, I thought she still deserved it.
I’m noticing a shift in attitudes toward homeownership, too, and you have to wonder if the general tone of public opinion isn’t a good contrary indicator of where housing may be going.
Right now, there is still a bias in favor of home ownership no matter how disadvantageous and expensive relative to renting it may be. But that is gradually changing, and more and more personal finance experts recommend renting as the safer strategy, and more potential buyers stay out of the market for fear of further price deterioration.
When everybody and his sister is totally opposed to home onwership and even the government subsidies disappear, prices will find a bottom and it will be a good time to buy. That time might be coming soon, around 2012, I would think. An interest rate hike would hasten it.
It is not cheaper to rent than own everywhere throughout the country. Also, IR can put up the Case-Shiller graph showing prices doubling from 2000-peak, but that is composed of some markets having more than doublings and some with much less. Charlotte, a major metro, with significant banking presence in BoA and Wachovia HQs (so they would have benefited from the bubble in terms of city income), only had a nominal 33% increase to peak. Also, the C-S graph IR has is inflation-adjusted. So if you account for inflation, Charlotte’s rise was about 14%, or 2%/yr.
Certain regions, pretty much the bubble areas, looked at housing as an investment. That was not true everywhere. WRT HELOC’s, if there wasn’t huge appreciation, there wasn’t HE to count on for “paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.”
Contrary to some opinions, there’s plenty of land in FL also. Look north of Palm Beach County and you’ve got a lot of fairly sparse area very close to the ocean.
You are shrewd to be alert for the moment when housing becomes an unloved asset.
However, I have yet to see a cultural shift away from a belief in real estate as a sound, must-have investment. This could be from living in Denver, where renters are still second-class citizens: an unwelcome presence at social gatherings and a topic of much derision when absent.
Things may be changing elsewhere, but the Stockholm Syndrome of learned ownership helplessness rules around here. You may bitch about your mortgage servitude, or even think of walking away, and admit that Denver housing is headed at least 15% lower from here, but the long term goal remains to keep your mortgage or dump it in favor of another one after rebuilding one’s credit.
Landlords and co-workers here look upon a renting professional with a high degree of suspicion, as if there is some felony conviction we are hiding, or we are members of a terror cell who need to be mobile in case of a change of plans. Everyone has come to admit that another drop will occur, but one must still suck it up and buy as soon as possible. If the Kool-Aid is still this thick in Denver, I imagine it’s still flowing in the wealthier parts of Orange County.
And the laws are skewed heavily in favor of landlords. If you rent, be grateful for the protection you enjoy under California law.
Being a landlord may convey higher status here in the US, but that’s not necessarily true everywhere and it’s certainly not set in stone. I finally got around to read Crime & Punishment this month, and one thing that struck me in the novel was that the landlords all appeared to be working class or lower class people. Gentlemen weren’t landlords — they rented from them. Weird, right? Even lowly clerks appeared to have higher status than the landlords. Of course, the novel takes place in mid 19th century Russia…
“In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.”
http://www.calculatedriskblog.com/2010/08/report-home-buyers-remain-optimistic.html
Of course this is from polling NEW OWNERS, so yeah…
I, too, have noticed a small change in attitudes toward homeownership. Just a few weeks ago, my brother told me that he doesn’t plan to buy a home. ever. My sister, who makes a pretty high income, says she’s perfectly content with renting and doesn’t plan on buying any time soon. Neither one follows the housing market closely, and, in fact, both are rather apathetic towards it, but I thought it was still noteworthy that they don’t blindly believe they should be buying. Our parents (homeowners) think we’re being stupid.
I think it’s possible that we may see a generational shift — similar to the generational shift in attitudes toward homosexuality. When today’s young college grads, traumatized by a long recession, finally establish their careers and pay off their enormous student loans, do you think they will be so eager to become home debtors?
It’s tougher when you never know when your job might end and you might have to move cities to get a new one.
Also, much easier for two single people who rent than for two single people who each own a small studio and who now want to pool households.
I’m just learning about government foreclosed homes and it seems like the dream has ended badly for many.
go away spammer
“If you get foreclosed on, but owe less than the value of the house at auction, does the bank force the sale, collect their due, and then cut you a check for the remainder?”
The above is a question from yesterday that you answered correctly, but my suspicion is that the questioner did not phrase the question to get the info they wanted, so here is the question that most folks seem to ask:
If the house sells at auction for more than what is owed, who gets the remainder?
I am reading this language from a Florida foreclosure judgement “If you are the property owner, you may claim these funds (additional money from the sale after payment of persons who are entitled to be paid…) yourself.”
That sounds like the ‘owner’ or defendant would be entitled those funds…not that there are any leftover usually.
Yes. IANAL, but I would be surprised if anyone but the foreclosed mortgagor would get that money, since the bank’s claim on the property does not extend past the amount of the note plus any fees for executing the foreclosure.
After all, the homedebtor is entitled to any appreciation when she sells, in order to foster the illusion of ownership, so why should the legal system create different conditions under a foreclosure?
The others owed might be liens for back HOA dues, or perhaps non-payment for services – thinking contractors on either new-construction or a renovation-flip gone bad. IANALE
awgee, thanks, I just revisited my post and was considering clarifying.
Let me give an example. If I owned a home valued at $500k, and had $200k of equity, but lost my job and could not longer afford my mortgage; what happens to the $200k equity when the bank forces foreclosure and sells?
It sounded like IR was saying the bank would offer it at auction for $300k, to get what is owed them. But surely if it was valued at $500k it would be bit up some. Well, let’s say it was. Does the bank then give the owner what’s left after they make themselves “whole”?
Huh? Nobody with equity would allow the mortgagee to foreclose – you sell the place yourself if you’re having cashflow issues. The premise of your question is flawed.
In 2005, during my tenure as Obersturmfuhrer on my local HOA, there were four foreclosures in my 144-unit development. The cause seems to have been job loss, or just general ineptitude, but it was rumored that the banks took their time and unloaded some or all of the properties for more than the notes.
The owners were, in at least three cases, royal screw-ups. I would bet that there were tax liens on these properties, so who knows how much was left over, but these properties were possible examples.
I guess I figured if people with “cashflow problems” will stiff the banks when they’re underwater, they’d stiff the banks when they’re above board too. Whether they’re attached to the house, doing it for the kids, or whatever.
“It sounded like IR was saying the bank would offer it at auction for $300k, to get what is owed them. But surely if it was valued at $500k it would be bit up some. Well, let’s say it was. Does the bank then give the owner what’s left after they make themselves “whole”?”
Yes, if there is equity left after all the various lien holders have been paid off in an auctions sale, the owner would receive a check for the remainder. This almost never happens.
First, the lien holders usually have claim to more than 100% of the auction sale price, particularly now with so many properties underwater. Lien holders usually add on so many fees and costs that it eats up the equity quickly.
Second, auction buyers rarely bid more than 80% of the value of the property, so the total of all lien claims needs to be less than 80% of full resale value in order for there to be a remainder for an owner. Again, this is rare.
When you combine high lien holder fees and costs with low auction buyer bids, there is very rarely any equity left to go to a foreclosed owner. However, if this did happen, the trustee would cut them a check for any remainder.
“I believe we are about to see a leg down in house prices, but what happens after that is a mystery. There are far too many variables to predict.”
Well, I’m gonna tell you what happens after that, and it is the same thing I have been telling you since I first started telling you. 🙂
2012 will be the bottom in prices in nominal dollars. The bottom in real dollars will not happen for another decade or so.
While I still think the economy is headed for troubled waters don’t be surprised if 3.5-4% mortgage rates juice areas like Irvine, and an eventual increase in jumbo availability creates real demand in premium coastal areas.
If the stock market crashes again, and 3.5%-4% rates are in play it will be the best time to buy in Irvine. Even better than spring 2009. Prices will drop back to the spring 2009 level and rates will be near 200 basis points lower.
All of this assumes you still have your job when the stock market crashes and mortgage rates are at 3.5%. If you are in the unlucky 5% who loses their job you’ll be SOL.
And, a few years down the road, when those 3.5% interest rates are gone? What happens to house prices as rates return to 8%?
I’m sure that you feel that rising interest rates will also benefit Irvine property values, but I’d still like to hear the explanation.
If interest rates move from 3.5 to 8 it will be due to inflation. As illustrated in the 70s you won’t get the drop you expect.
The other, less likely, scenario producing 8% rates is a massively recharged economy, ala early 2000. What will drive rates higher is inflation or a growing economy, both of which will have a positive impact on prices. I expect those positive impacts on prices to be countered by the impact of lower rates, and you end up with either stagnant real prices net inflation – you may have appreciating nominal prices, but ‘real’ prices will be mostly level.
So, in summary, Irvine prices will rise, or stay stable, under either low rates or rising interest rates.
Thanks.
Wrong, it the DOW hits 2009 lows Irvine prices will drop from current prices.
(BTW, I intended my above reply to be to PR. Sorry about that.)
This assumes that inflation is an increase in the price of all goods and services, including labor, across the board, so that wages rise with property prices. If inflation were always so benign, fewer people would object to it, but it’s usually either capricious in its targets, boosting the costs of some things far more than others. Seems to me that energy prices are far more likely to rise than housing or wages. Any coming inflation had better produce healthy boosts in personal income for real estate to remain stable.
I agree that inflation, together with climbing rates, may not hurt real estate prices, but there are some causes of inflation which could leave incomes and employment in bad shape: either the abandonment of the dollar as the world’s reserve currency, or, more likely, the appearance of bond vigilantes – like killer bees, they are always on the way, but they have yet to arrive – who will dump treasuries and other U.S. debt in favor of fixed-income securities elsewhere. This has not happened, but it’s a big concern in the future, and it would raise interest rates without boosting incomes. Uh-oh!
Since prices already need to drop to come into line with incomes, I think there is a wide array of possible outcomes accompanying any interest-rate hikes, and not all of them will be good for real estate values.
I won’t speak for PR, but when I say that, I am only accounting for interest-rate related impacts on prices. The degree to which Irvine ownership costs are higher than the cost to rent can have a negative impact on prices, regardless of interest rates. Interest rates should impact a property price in Irvine the same way it impacts a property in any other part of the county, but obviously the price movements of the past decade have been highly geographically dependent.
Winstongator and Planet Reality:
You two are apparently delusional and have never sold capital goods in an inflationary environment before. People and businesses purchase capital goods (i.e. cars and houses) based primarily on what payment they can afford or choose to designate towards that good.
As interest rates rise, the monthly payments jumps significantly. Using the example of a $200,000 mortgage (stay with me here, I’m going to do some basic math), a 30 year fixed mortgage at 3.5% is $898.09/month P&I, at 8% that payment jumps to $1467.53, at 12% it is a whopping $2057.23.
Just going from the 3.5% to an 8% interest rate environment causes a 63% increase in payment. Are you two truly so delusional that you think people’s incomes will increase 63%? If you don’t believe that, the price of the good must drop in proportion to the rise in interest rates to maintain the payment. In my example, that would mean that a mythical buyer, buying a payment of $898, would now be only able to carry a $122,500 mortgage meaning that the asset value must drop in price by $77,500 in order to retain payment parity.
@tazman:
So do you think housing prices will drop 63%?
Both, decreasing housing prices and increasing income will cover that 63%. I think you knew that though.
1. Rates cannot go to 8% arbitrarily, the general economic climate including inflation will push the fed to allow rates.
2. Are people really getting 3.5% 30yFRM’s?
3. There are other costs besides P&I that are not interest rate related, plus many get the deduction benefit.
4. There are examples of this in the downward environment: from Jan-02 to Jun-03, 30yr-FRMs went from 7.1% to 5.4%, for a 180k loan is a rough change in payment from $1200 to $1000. Did prices around the country instantly jump 20%?
5. The fed has shown it can keep mortgage rates as low as it wants, and with its hoard of MBS’s, it has more leverage to increase rates too. Remember Greenspan lamenting how his raising short-term rates didn’t impact long-term rates enough? Selling long-term paper should have a bigger impact on long-term rates than selling short-term paper.
6. When rates are 8% and prices have nominally-fallen > 50%, I’ll buy you a beer.
In 1990 rates were ~ 10%, Case-Shiller(LA) was around 100. 1993, rates were ~7.5%, CS-LA was around 80. Those C-S numbers are NOT inflation adjusted, so you could take another 10% off for inflation. So a 30% decline in the face of a 2.5% decrease in rates.
While incomes might not be 63% higher, if mortgage rates are at 8%, do you think unemployment will still be at 9.5%? More employed people, expands the buyer pool, changing the mix of buyers.
I’m not a housing bull, but think that some of the ‘prices have another 50% to fall’ is hyperbole.
My contention from the beginning has been that re prices will drop 78% in inflation adjusted dollars from the top to the bottom. I have been saying that since 2005 when we sold our home, and I have not changed my mind. Yet.
PR is wrong. Inflation will not be like the 70’s. The price of food and energy will increase drastically. Wages, income, and the housing will either decrease or move sideways.
Great theory.
Buy food now or be priced out of eating forever.
Why would I buy into a falling market even if interest rates are low? That’s exactly why there is disk of deflation because people are waiting to get the goods cheaper. The same is valid for housing. In addition, I am not willing to pay a baby boomer a 8% annual return for holding a house for 20 years so he can secure his retirement, not gonna happen. If I have to move somewhere else to get reasonable prices, so be it. But prices will come down, because a lot of people are thinking like me – what is the fair value if we look at a 2-3% annual house price inflation over the last 20 years, not what is a crazy bubble seller asking for. The other aspect holding people back is the fear of loosing their job, and that’s not going to change any time soon.
fair value based on 3% annual appreciation for 20 years is 80% higher price.
factor in the improvement and development of Irvine and OC in last 20 years, it has to be worth something significantly more than inflation would suggest.
Factor in ‘affordability’ index that interest rates went from 18% in the early 80s (20 years ago) to today of 4.25%, the prices would should be higher.
Factor in that real incomes have gone up (vs nominal incomes) and again, it points to housing being higher.
I dont think saying inflation is 3% so it should only be as high as the national average rate of inflation captures all the factors that have yielded the higher prices.
That is not to say you should pay WTF prices…but it isn’t as simply as nothing has changed except inflation has raised prices.
I beg to differ on your pointe as to Irvine getting better over the past 20 years.
I has not….
sorry, “better” is an opinion. I should have said more developed. more jobs, more malls, more restaurants, higher rated schools…doesn’t mean better.
I certainly remember Irvine 20 years ago..it had lots and lot of orange grooves, more open spaces and alike. Which is better, you can certainly “beg to differ” on.
Irvine is better than it was 20 years ago.
More crowded but at least it’s just not Carl’s Jr that is open past 9pm. And we now have Targets and Costcos.
Hard to remember Irvine without the Spectrum, Westpark, QH, Oak Creek, West Irvine, Woodbury, Portola Springs, Northpark(s) and NWP.
It’s not very hard to remember open skies, open fields, the smell of orange blossoms in the spring…..Strawberries, beans, avocados. The roaro of a Hornet, the stumbling marines at MUGS AWAY (sorry…only on the border of Irvine haha)
So, so you think you can tell Westpark from Hell,
blue skies from pain.
Can you tell a green field from cold steel retail?
The faster I can get to retirement and GTFO from this area, the faster I’ll be laughing at all the socialist government control that Irvine is the bulwark for. You all DESERVE the Donald Duck, AND Larry Agran ($128 million for a BALLOON so far at the Great Parking Lot!!!)
Here’s to hoping that all the Turtle Rock owners lose 70% of their value! Bring on the depression, hell who cares, I don’t have anything to lose anymore…but the real question is…do you? LOL.
We had Target and Mervyn’s then.
We didn’t have so many lights on this side of UCI.
Traffic was better, people knew how to drive and we had less lights.
The speed limit on Culver was 60mph (OK, this after the 55 was dumped).
We could smell the orange groves all the way from TR.
Bonita Canyon Rd was a two lane road with turns and no cops.
The only thing that is better, IMHO, is having a Trader Joe’s and In’N’Out by UCI.
Besides, Costco is in Tustin. The Price Club (then) was in Costa Mesa.
[quote]I am not willing to pay a baby boomer a 8% annual return for holding a house for 20 years so he can secure his retirement, not gonna happen.[/quote]
i’ve decided that i won’t buy from a flipper. i hate flippers.
this is irrational. i should not care who the seller is. it hurts me (taking longer to buy) as well as the seller.
i would rather rent than help a flipper out.
of course if the flip is priced way below market, i will reconsider. lol.
I obviously can’t speak for everyone, but I can speak for my circle of friends, of my generation. I frequently socialize with working professionals of my age, both within my industry and outside. We’re all in our early 30s with incomes 50-75% higher than the Irvine average. The only ones who bought homes in the past five years were those who got gifts from their parents (likely extracted equity from their homes) or those with equity from the sale of a previous home. I don’t know a single person who bought a house with money that was saved up the hard way.
The rest of us are happily renting until we can figure out where we want to stay put, and find a reasonable price. Just because I can afford a monthly mortgage payment doesn’t mean I’m comfortable allocating that much toward housing.
Most of the signs point toward price declines over the next few years. Since that’s the case, why should anyone rush into buying something, unless it’s a *very* good bargain?
lowrydr, I’m in San Diego, but the situation among my circle of friends is exactly the same. I’m an engineer working at a scientific engineering firm, so almost all of my friends and acquaintances are young scientists and engineers. We each make a decent wage, yet the few who have bought homes all bought with sizable contributions (50 to 100K) from their parents. Like you, I don’t know a single person my age who was able to buy in San Diego without help from his or her parents.
Is it cheaper to rent than to own in SD? I was out there in March and it is somewhere I’d like to move. Not happening, but still a nice area.
Yeah, it’s still cheaper to rent. I like SD, too, but I prefer central San Diego, where the buildings are older and there’s a lot more history. Unfortunately, all of the tech companies are up in north county, which is pretty much indistinguishable from Southern Orange County — both in terms of appearance and price.
Year after year, article after article, ignorant hate filled comments….all are helping me come to the decision of WALKING AWAY from my home.
Thanks to the many and varied articles, I now know how to properly game the system for my maximum advantage. Yes, YOU will end up paying the full price on my condo, but that’s not my fault, nor is it my problem. That responsibility…. will fall on those wonderful conservative and liberals, the republicans and democrats that YOU voted into office, and THEY voted to pay he banksters.
Put that in your pipe and smoke it David 🙂
“…the republicans and democrats that YOU voted into office, and THEY voted to pay he banksters.”
Watch it, buddy!
As my ultra-conservative friend – with whom I usually disagree – says, “Most of the stuff I hate was perpetrated by people I voted for.”
I cheerfully agree that I have also voted for asshats who have ruined this country, so watch what you say about us status-quo enablers.
That had me busting at the seams….well done Cabron….well done 🙂
I agree with you, Marc.
We bought in 1993 and again in 1996 in spite of the fact that experts were saying that “housing will never again be the investment that it was for our parents”. They were right, in a way. It turned into a crazy party that will hopefully, never be seen again. But it worked out much better financially to own than rent back then, so we bought. And now the experts are making that point again. When I look at the Case-Shiller, though, I wonder why the dotted line stops at 110. Why don’t they think that it’ll drop below 100? That trajectory seems more likely to me.
I’ve been watching the inventory, and although it’s been rising, it doesn’t reflect the massive shadow inventory that we’ve been reading about. That, coupled with the low sales figures, can only mean that there’s another bailout in the near horizon (or things are going to get dramatically worse). The banks/AIG were mostly bailed out of their derivative bets. Their bad loans have yet to clear the market, if they are still holding on so tightly to their squatters.
“…there’s another bailout in the near horizon…”
HUD has introduced the “FHA Short Refi”:
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-173
Well, that SUCKS.
I want my mortgage to be written down too.
What next, the Feds will give houses away if you vote for Maxine Waters?
Paging AZDavid!
Or just buy a place and rent it out to him… he doesn’t believe in “owning” and this way you’ll be “helping” out his local economy.
Fewer Homeowners Behind on Mortgages
http://online.wsj.com/article/SB10001424052748703959704575453532991332448.html?mod=WSJ_hps_MIDDLEForthNews
Mortgage delinquencies remain high at 1 in 10 loans
http://latimesblogs.latimes.com/money_co/2010/08/delinquencies.html
You’re right. I’m just looking into government foreclosed homes and the numbers are huge.
If IR is right and housing only goes up with inflation.
Given that fixed rate mortgages have pretty low rates at the moment.
Then the question is – is long term inflation going to be more or less than that?
That’s one question, but there are others.
Only those who buy or refinance at such low rates will benefit from them; for the moment, this is not a large percentage of the population. Historically, few remain in one home for more than 7 years, so it will likely be nothing more than a short-term benefit, with insurance against a rise in interest rates and home prices, for most of today’s buyers. Nice to have, though.
If you know you’re unlikely to sell within 30 years, and you love your place, then these rates are pure gold. Your cost of ownership is relatively low, and fixed.
As far as the larger market is concerned, however, they’re a liability, because at some point in the future, rates must rise, which will crush home prices further.
I intend to rent until mortgage rates approach 10%.
Snicker! From the doctorhousingbubble comments on 8/25:
It’s different here!
Here n. Wherever you happen to live.
More fun:
Damn that cold weather in Santa Monica and Beverly Hills!
I hear Palmdale has lots of sun and heat, and it’s even cheaper than Burbank!
This one went back to the bank at $663K
They listed it at $594K
Surprised they listed it below what it went back for.
The difference should be immediately priced in and not result in consistently higher rates of appreciation. A 1br apartment costs more in NYC than in Charlotte, but that doesn’t mean that the price of an apartment should always be rising at a faster rate than charlotte.
Correct real prices may be stable but I expect them to drop.
Nominal prices would probably be stable or higher.
Canadian winter home buyers – the floor for sand-state real estate
Aboot time some foreign cash buyers stepped in, eh?
This is my favorite version of the foreign cash buyer story. If this saves Phoenix, they have the local NHL franchise to thank for it.
Here’s hoping that those people assimilate. I hope they have initiative, and don’t just sit around all day, committing crimes and using public services.
The Quebecois have been stepping in at the bottom of nearly every Florida property bubble.
This home is currently in “backup offer accepted” status. At close to $600k asking, it’s **currently** reasonable.
**Currently** reasonable doesn’t mean it’s reasonable in my state of mind. I’d say $450k would be within my ballpark.
I’d like to know what it is sold for later on.