Hope springs eternal, and denial rules downtrodden financial markets. However, locally it appears that housing market watchers are beginning to accept that house prices will not be going up soon.
Irvine Home Address … 22 BUTTERFLY Irvine, CA 92604
Resale Home Price …… $460,000
There's gonna come a time when the scene'll seem less sunny
It'll probably get druggy and the kids'll seem too skinny
There's gonna come a time when she's gonna have to go
With whoever's gonna get her the highest
The Hold Steady — Stay Positive
No matter how bad things get, some people just choose to stay positive. It is a healthy way to manage one's emotions, but it is an incredibly poor way to manage one's finances.
Is 'flat' the new 'normal'
BY JONATHAN LANSNER — Sept. 30, 2010
Perhaps "flat" is the "new normal."
It's hard to find anybody who's really excited about housing's short-run outlook as the real estate market seems to be having some difficulty adjusting to homebuying without federal tax incentives.
LOL! Having some difficulties? If by difficulties he means that New Home Sales Plummet with Expiration of Tax Credits and Existing-Home Sales Sink to Lowest Level Ever Recorded, then yes, the market is having some difficulties.
Take housing tracker Veros from Santa Ana. They project Orange County home prices will rise 2.2 percent in the year ended September 2011.
Eric Fox, Veros' economic modeling VP, says "affordability is the driver" that will keep local housing prices up. Previously, Veros' forecast that home price will be up 1.8 percent in the year ending June 2011.
To Fox, local home affordability – a mix of depressed values and cheap mortgage rates — will largely offset the area's relatively weak job market. Fox also think rent-seeking investors will play a big role in supporting local home prices, as these cash-rich buyers won't have the tall hurdles — overall angst or loan qualification challenges — that currently chill some buyers seeking their own shelter.
Nearly every market myth in one brief statement. I can't say Mr. Fox has earned much of my respect.
First, market values are not depressed. We are recovering from a housing bubble, and prices are still artificially elevated not depressed.
Second, cheap mortgage rates are not offsetting the weak job market. Low Interest Rates Are Not Clearing the Market Inventory. The banking cartel's withholding of inventory is what is offsetting the weak job market. Demand is very low as sales volumes are well off historic norms. Only the lack of inventory is preventing a total price collapse.
Third, rent-seeking investors are not attracted to Orange County's housing market. Why would anyone accept a 4% return in Orange County when they can get an 7% return in Riverside County or a 9% return in Las Vegas? Only foolish speculators who believe rapid appreciation will return to Orange County are buying at current valuations.
Forth, foreign cash buyers can not, will not, and are not saving the Orange County housing market. This dumb idea is brought up periodically, and it is crazy. Perhaps FCBs have some small impact in some small neighborhoods and isolated enclaves where the activities of a few buyers can make a difference, but the OC housing market is much too large, and the number of FCBs is much too small to stem the tide.
That outlook for essentially flat pricing fits a pattern we've seen lately: Home-price gains – at least what's reported in various indexes — have been shrinking.
The latest reading of the price pulse in Los Angeles and Orange counties in July's Standard & Poor's/Case-Shiller housing indexes:
- On a month-to-month basis, LA/OC prices rose 0.35 percent in July — fourth consecutive gain but the smallest since a drop in March.
- On a year-over-year basis, LA/OC home prices rose 7.5 percent in July — seventh consecutive gain but also the smallest since March.
- Sobering thought: Even with the recent gains, LA/OC prices by this measure are 35.6 percent below the 2006 peak.
Be prepared to watch the Case-Shiller index roll over in the coming months. We all know that the market hit some severe "turbulence" in May when the tax credits expired. Since the Case-Shiller is both a moving average and delayed by three months, we are only now seeing the impact of the sudden drop in demand and pricing. Nobody watching the market since May has reported increasing demand or rising prices. Going into the fall and winter with elevated inventory, these numbers can only get worse.
… HARD SELL …
And it's not just pricing, as buyers pull back in many parts of the market
In the 22 business days ending September 8, DataQuick found 52 of 83 O.C. ZIPs had year-over-year sales declines as overall countywide sales were off 14.9 percent vs. a year ago. The current sales pace is 69 percent of the average 3,597 homes sold per month in the 20 years ended in 2009.
Statewide, California Association of Realtors said August's homebuying was down 14.9 percent from a year ago. And what sells takes more effort: CAR's unsold inventory index for single-family resales in August was 6.1 months (to deplete the supply of homes on the market at the current sales rate) vs. 4.6 months a year earlier.
These sales numbers are a catastrophe. If the majority of the market were not tied up by banks who refuse to sell, prices would crater.
As expected, homeowners sense house shoppers' change of heart.
According to surveying by online real estate trackers HomeGain, 15 percent of Californian homeowners predicted this summer that their home's value will rise in the next six months — slightly less than half of the 34 percent who foresaw appreciation just three months earlier in the spring. Nationwide, the drop off wasn't as steep as 18 percent expected appreciation in the most recent survey vs. 27 percent in the second quarter.
But here's what really noteworthy: when just 15 percent of Californian homeowners see appreciation — and that makes our state a national leader in property optimism!
That is a very low number. Homeowners are the group most likely to have a rosy outlook for appreciation because they all want home prices to go up. Position bias is strongest among those who stand to make large amounts of money if a position goes in their favor.
HomeGain's third-quarter survey placed California in a tie for 9th place ranking among the states (along with Maryland) for the share of folks predicting upcoming appreciation. (Back in the second quarter, optimism was tied for 7th with New York and Colorado!)
California real estate agents, who were also polled, had equally and curiously "high" relative optimism — as 14 percent told HomeGain pollsters that they foresaw appreciation within six months. That tied us for the 6th most upbeat real estate pros among the states (withTexas.)
I am shocked! realtors think house prices are going up? Actually, I am surprised that so few (only 14%) do believe house prices are going up. Of course, all of them are telling their buyer-clients that house prices are going up in order to manipulate them into buying, but secretly only a small handful truly believe prices will rise. The duplicity is disgusting.
Perhaps, growing Californian pessimism comes from what buyers (or the lack thereof) are saying, as pollsters found agents saying 25 percent of California homebuyers currently believe homes are overpriced by 10 percent or more vs. 13 percent in the second quarter
… BUT NO 'DOUBLE DIP'?
Still, the market watchers at Beacon Economics don't think the current malaise will turn to anything ugly.
"Although home prices are not going to rocket back to pre-recession peaks anytime soon, fears of a significant double dip in home prices are likely exaggerated," Beacon economists wrote in a recent forecast. "The fundamental drivers of long-term home prices paint a picture of a housing market that has emerged from collapse healthier. Home prices have largely stabilized despite a small drop in the wake of falling sales; the price of an existing home is still more than 16% above the April 2009 trough. Additionally, measures of affordability show that California appears poised for slow but steady growth once the labor markets have healed. At roughly 6-times per capita income in the state, home prices are beginning to make sense again. As income continues to grow at a moderate pace, home prices will likely follow suit at a more tepid but sustainable pace."
Six-times income is now a good measure of affordability? It is amazing how super-low interest rates distort reality. Ordinarily, I embrace most of what I read from Chris Thornburg and Beacon Economics, but the above statement reads a bit like market cheerleading. I'm sure many loan owners read that will a small sense of relief. Denial requires constant reinforcement.
Flat is not where it's at
House prices are going to head lower in Orange County. When the bulls start to accept that prices may actually stay flat, it becomes pretty obvious that prices will head lower. We are not witnessing the despair after the crash which signals the bottom, we are witnessing the acceptance that comes before capitulation. Expect to see house prices grind lower for the next two or three years with greater declines at the high end than at the low end. Afterward, expect tepid appreciation until the overhang of distressed inventory is pushed through the system. The bear rally engineered by the Federal Reserve is over. The second leg down — a less steep and more controlled decline — is about to begin.
HELOC Metamorphosis 
I don't think most HELOC abusers set out to be thieves. It is a slow transformation. Like Patty Hearst went from being a shy heiress to a gun-toting bank robber, most HELOC abusers get a taste of free money, like what they get from it, and then they just dig the hole deeper and deeper until there is no escape. Perhaps HELOC abusers will blame banks for keeping them financially hostage and claim mass insanity as another manifestation of the Stockholm syndrome.
- The owners of today's featured property paid $317,000 on 10/31/2001. They used a $253,600 first mortgage, a $31,700 second mortgage and a $31,700 down payment.
- On 2/26/2003 they refinanced with a $290,000 first mortgage.
- On 10/23/2003 they took out $100,000 in a HELOC.
- On 4/7/2004 they got a $150,000 HELOC.
- On 5/7/2004 they obtained a $136,000 HELOC.
- On 3/17/2006 they opened a $250,000 HELOC.
- Finally, on 8/3/2006 they refinanced the first mortgage with a $560,000 Option ARM.
In short, these people committed every sin of bad mortgage management including periodic refinancing and obtaining an Option ARM. The worst part is that they probably don't realize they did anything wrong. I imagine they think they were behaving responsibly and if the housing market hadn't crashed, everything would be fine. I believe people have failed to learn the lessons of poor financial management, and I also believe we will likely repeat this cycle because of the poor lessons people have learned.
Irvine Home Address … 22 BUTTERFLY Irvine, CA 92604 
Resale Home Price … $460,000
Home Purchase Price … $317,000
Home Purchase Date …. 10/31/2001
Net Gain (Loss) ………. $115,400
Percent Change ………. 36.4%
Annual Appreciation … 4.2%
Cost of Ownership
————————————————-
$460,000 ………. Asking Price
$16,100 ………. 3.5% Down FHA Financing
4.74% …………… Mortgage Interest Rate
$443,900 ………. 30-Year Mortgage
$92,448 ………. Income Requirement
$2,313 ………. Monthly Mortgage Payment
$399 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$38 ………. Homeowners Insurance
$215 ………. Homeowners Association Fees
============================================
$2,965 ………. Monthly Cash Outlays
-$377 ………. Tax Savings (% of Interest and Property Tax)
-$560 ………. Equity Hidden in Payment
$29 ………. Lost Income to Down Payment (net of taxes)
$58 ………. Maintenance and Replacement Reserves
============================================
$2,115 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,600 ………. Furnishing and Move In @1%
$4,600 ………. Closing Costs @1%
$4,439 ………… Interest Points @1% of Loan
$16,100 ………. Down Payment
============================================
$29,739 ………. Total Cash Costs
$33,300 ………… Emergency Cash Reserves
============================================
$63,039 ………. Total Savings Needed.jpg)
Property Details for 22 BUTTERFLY Irvine, CA 92604
——————————————————————————
Beds: 3
Baths: 2 full 1 part baths
Home size: 2,000 sq ft
($230 / sq ft)
Lot Size: 2,720 sq ft
Year Built: 1976
Days on Market: 122
MLS Number: S619416
Property Type: Single Family, Townhouse, Residential
Community: El Camino Real
Tract: Ig
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Great Value for SQ/Footage, Spacious Home with Vaulted Ceilings, Open Floor Plan. HUGE Family Room with Lovely Bricked Fireplace and Wet Bar. Living Room with Fireplace, Formal Dining Room, Kitchen with Newer Appliances and Countertops. Extra Room with air conditioner off of the Large Master Bedroom that can be used as an office, den, playroom or storage. Central air through rest of the house Large Private backyard that backs to Greenbelt 2 Car Garage with newer roll up door. Walk to shopping, Restaurants, Award winning Schools
I don’t know if you can count the foreign buyers out.
Bank of Japan says they are willing to buy ETFs and real estate investment trusts to do quantitative easing.
http://ftalphaville.ft.com/blog/2010/10/05/360571/qe-wars-japan-edition/
If one central bank is willing to do it, why not another? If I were China, buying American hard assets would look a lot
more appealing than buying US Treasuries.
Agree,
That certainly seems to be the case within certain sections of Irvine.
There’s no denying TIC’s recent success with the 2010 New Home Collection and upcoming Portola Springs projects where FCBs are the driving force behind sales.
“The worst part is that they probably don’t realize they did anything wrong. I imagine they think they were behaving responsibly”
How is that….
They took out a loan they knew they couldn’t ever pay back. That’s not wrong. If they couldn’t afford the payments, they shouldn’t have borrowed the money.
The could afford the payments, until the OARM resets.
“Not a problem, our mortgage broker will just roll us into another OARM when that happens.”
I have relatives that did this, and when I tried to warn them off I heard a “we trust the real estate experts(agents and mortgage brokers), what do you know about real estate”.
They really were doing what they thought was best for their family. They never refied and have made extra payments on there mortgage. They are so far underwater they may lose it all, but there is not much point in trying to consul people. Loan recasts around the end of the year…
I know someone (indirectly) that did exactly this. She was asked how she could afford the reset and her response was that she would “just refinance”. It was a faith based approach to managing your finances.
The advice being given during this time period by agents and brokers was repulsive.
“Do you really think you will still be in the property in five years?”
“You can just sell and make a bunch of money and move up in 5 years.”
“If the bank is giving you the money you must be qualified to pay it back, don’t worry about it.”
etc, etc, etc.
Did they spend their HELOC money on that atrocious furniture? This is one of the most badly decorated houses I’ve ever seen, topped only by the condo decorated in pink and white and gold you wrote about a couple of years back.
If they want to sell this place, they should empty it out and have it professionally staged.
Looks like old people live here… 70s-80s my guess based on furnature.
How do we get a handle on the number of FCB’s there really are? Anecdotally there appears to be a lot of them purchasing in Northwood.
I think realtors that hold the position prices are going up should be required to participate in the deal – meaning their commission should be deferred for a year – if prices go up they receive the commission, if they don’t they don’t – The buyer is putting their money on the line – if the realtor is going to take a position then they should as well – if not then they should keep their opinions neutral. Nice way of saying no one is interested in a position from someone with an incentive.
Agreed.
When we were shopping models four years ago, the sales people always had an answer for my hesitation and comment that the prices were insanely high. They would share the typical realtard dribble about “prices always go up” or “it’s a great investment” etc.
That’s when I’d say “Great! If I could just get in writing from you that your company will cover any depreciation, that would be great – since you’re so certain of appreciation and are promising such, let’s just memoralize it.”
I remember being at social gatherings before the bubble burst and when I would tell people that I rent they would look at me like I was crazy. One occasion stands out in my mind in circa 2006, I said, “I rent because it’s cheaper than owning right now,” the guy turned to the person next to him and said, “it’s strange it seems like everyone that rents has some excuse on why they can’t buy.” I had to bite my lip. Not sure if he’s been foreclosed on yet or if he’s just squatting.
What’s crazy even today agents are still spouting BS that people need to hurry up and buy before rates go up. I was just at an event the other day and the guy was showing agents how to create urgency with the rate argument by showing their clients how much less they could afford when rates go up. There were circa 1000 agents there hanging on this guys every word, I raised my hand and said, “Aren’t rising interest likely to put downward pressure on prices?” He responded by saying “I’m not an economist,” This guy flies around the country teaching this bs, showing agents how to manipulate with bad information disguised as financial advice and then does not take responsibility citing lack of economics education. Unbelievable
What’s crazy to me is when people turn back to these same agents later when they’re under water for help.
“…it seems like everyone that rents has some excuse on why they can’t buy…” That’s a good one. Those are the moments when you just wish you could pull-out your financials and compare with the homeowner “who can really afford what?”
LOL— or punch them. I’m normally good at letting things go but for some reason that one got to me and has stuck with me.
My wife’s from Minnesota so she wants a big yard our kids can play in so we’ve been saving and thank goodness we did not give in/up a few years ago when every week the OC register was printing the 20%+ gains. I was getting so frustrated I told her if it kept up much longer we were moving out of CA, I think my wife wanted to hide the newspaper from me.I finally rented a home with a decent lot (for Irvine) so that we could be happy and we don’t have to rush or settle.
I remember when we first rented in Newport Beach and I was paying circa $1400 for a 2 bedroom apartment thinking it was crazy that I was paying $400 more than my parents were for their huge house in North Dakota. I’m starting to get desensitized to the pricing here but I couldn’t imagine paying $650k for condo I could rent for 2k. My annual/bi-annual trip back to North Dakota and Minnesota usually helps me to put things into perspective. I purchased two duplexes there for circa 150k each, they each get about $1600/month for rent. I was looking at the numbers, 300k and $3200/month+ income while the first home I rented in Irvine cost $2000/month and was selling for circa 650k. However, after a few days in ND in the middle of winter I remember why there’s a premium here too.
More fun to play dumb.
Ex. “Oh really? That’s interesting. What are your reasons for buying?”
Then play 20 questions, tease their arguments apart and keep at it until they get fed up at not being able to win the argument or have you give up the subject :).
Sparky- I like that idea. I’m so sick of writing offers and having agents trying to convince me their listing is worth 5-10% more than the recents comps.
So what are these foreign cash buyers doing with the homes? Are they buying the homes because they are moving to the US? Buying them as 2nd homes for when they are here on business or vacation? Or they buying the homes as investments?
Obviously there is no one answer, it depends on the buyer, but what seems to be the common reason? I sort of put the options in decreasing order of stability. If someone is bringing a big check to live in Irvine, then that sort of demand is good… somewhat limited because how many green cards are we really giving out? But it is at least real demand.
If it is for a vacation or business home, that is a ok, at least it is not necessarily speculation, it is just a choice of what to do with their money, and as long as they use the house, it may be worth it to them to keep it even if prices or rents drop.
But for either renting or speculation, that is pretty weak… all it will take is a currency swing or seeing that appreciation isn’t there and they might start wanting to dump the asset and go.
It won’t be the first time the foreign buyers were late to the game and overpaid for hard assets.
Flyover country doesn’t have FCBs, so the concept is somewhat foreign to me.
If you want to see what FCBs can do to a housing market (or foreign investors in general), take a look at the history of the Honolulu real estate market.
Renting the mansion out to boarders …
http://www.tampabay.com/features/humaninterest/mansion-proves-to-be-more-than-a-roof-over-their-heads/1125350
A while back you did some neighborhood profiles. I’m wondering if you could udpate them or talk specifically about some neighborhoods such as Quaill Hill, Turlte Ridge, Northpark, etc.
That is a project I plan to return to at some point. I was planning to do some of those this fall as I was hoping I would have some time to explore more Irvine neighborhoods in greater detail. It still may happen, but it may be a few months as I am focusing so much time on Las Vegas at the moment.
HELOC Syndrome is the phenomena where those taking out mortgages leverage their indebtedness to obtain mortgage equity withdrawals which finally results in borrower bankruptcy.
Yen Carry Trade Syndrome is the phenomena where the ruling class in Japan encourages continual leveraging of borrowed funds to make global investments which finally results in a Zero Interest Rate Policy causing currency debasement and soaring commodity prices and eventual worldwide debt servitude.
Japan in a unilateral action, went nuclear in the currency war that started September 15, 2010, when it intervened in the currency markets and sold Yen.
Today, October 5, 2010, Japan took the ultimate action: In a unanimous vote, the Bank of Japan’s nine-member policy setting board set its interest rate at zero, in an attempt to stop the rise in its currency and to appease political dissent with ongoing deflation.
EconomicPolicy Journal relates that the Bank of Japan announced that it may buy J-Reits and J-ETFs as well, in an attempt to appease Japanese politicians who relate they have had enough of deflation.
Shaun Richards relates: “In addition it stated that it would look at establishing a temporary 5-trillion-yen ($60 billion) fund to purchase various financial assets such as government securities, commercial paper and corporate bonds in an attempt to stimulate the economy by lowering longer-term interest rates or what are more commonly called asset purchases or Quantitative Easing. The central bank will offer another 30 trillion yen ($359 billion) through its loan program.”
The Euro, FXE, jumped to 137.85; the Yen, FXY, rose to 118.91; and the US Dollar, $USD, fell lower to $77.81, as currency traders went long the EUR/JPY, which traded up to 115.08, seen in the chart of FXE:FXY, trading at 1.16, causing the Nikkei 226, ^N225, Japanese shares, EWJ, EZJ, as European shares, VGK, UPV, and the most speculative of assets, to rise strongly.
It is quite a stunning thing when a central bank goes to zero; the central bank of Japan in effect became the unitary, and sole provider of capital and money in Japan crowding out all bank lending. It has in effect integrated banking and government into a state corporate combine; and effected a bloodless coup, establishing state corporatism, that is state corporate rule over the people of Japan.
The bank of Japan became Financial Regulator and Seignior, that is Credit Boss, overseeing money, lending, credit banking and, investment in Japan.
The currency traders and the central Bank of Japan, have “scorched the investment skies” and have taken the “global currency war”, to an all new level, with the result being the US Dollar, $USD, going down in flames. The Yen Dollar ETF, JYN, like the Yen, FXY, rose.
And gold, $GOLD, became ever more, the sovereign currency and storehouse of investment wealth.