One benefit of gridlock in Washington is that our government will be hampered in its ability to meddle in the housing market.
Irvine Home Address … 63 DARTMOUTH 62 Irvine, CA 92612
Resale Home Price …… $430,000
When you try your best, but you don't succeed
When you get what you want, but not what you need
When you feel so tired, but you can't sleep
Stuck in reverse
And the tears come streaming down your face
When you lose something you can't replace
When you love someone, but it goes to waste
Could it be worse?
Lights will guide you home
And ignite your bones
And I will try to fix you
Coldplay — Fix You
Many in Washington believe they can cure the ills in housing if they manipulate conditions enough. The government can pass some law or fail to enforce another to accomplish their ends. Unfortunately, the meddling cures nothing and the crisis drags on while the bureaucrats lament their lack of control over the housing market and push for more. If prices were allowed to crash everywhere like they have in Las Vegas, the groundwork for recovery would be in place. As it stands, we have too much overhanging debt that isn't going to get repaid draining our resources and weakening our economy. When those in Washington think they can fix a problem, their solutions are generally worse than doing nothing at all. Perhaps gridlock will be a good thing?
Morgan Stanley views political will to fix housing as scarce
by JASON PHILYAW — Tuesday, November 23rd, 2010, 4:05 pm
Housing and housing finance present the largest risk to the overall economy, according to Morgan Stanley analysts, who said they were too optimistic last year when they predicted "only a modest recovery in housing" for 2010.
Analysts said there are many options available to fix the nation's "dysfunctional housing and mortgage markets, but the political will to deploy them is scarce."
The analysts suggest additional loan modifications or refinancings, or principal writedowns may help ease the problems facing the industry.
If that is the best that "analysts" can come up with, then I am thrilled that the political will to screw our country up further does not exist.
First, loan modifications are a proven failure. No loan modification program can or will be successful. The problem is not that borrowers cannot make the payments, it is that borrowers have too much debt. Modifying the terms of that debt does not make the real problem go away.
Second, principal writedowns are part of the answer, but this must be done through a foreclosure to avoid moral hazard. Remember, Foreclosure Is a Superior Form of Principal Reduction. If we start writing down principal through debt forgiveness, then borrowers will be strongly incentivized to over-borrow next time because they know that if they get in too much trouble either the bank or the government will bail them out.
Banks have tightened lending standards and there's a shadow inventory of some 8 million units that create a vicious circle, according to Morgan Stanley. And without substantial policy reform, the imbalance won't correct itself for years and home prices may fall another 10% before reaching bottom in 2012, the analysts said.
Most of the people who wrote about the housing bubble before it became commonly accepted fact pointed out the vicious circle of tightening credit and lower prices would go unabated until prices fell below rental parity and buyers had a new reason to participate in the market. Only the amend-extend-pretend policy of the banks coupled with widespread squatting has prevented this inevitable cycle from cleansing the market of its excess debt. The Morgan Stanley analyst is raising this specter as a bogeyman, when in reality, it is exactly what the market needs to correct itself.
Morgan Stanley also said the risk of mortgage putbacks is restricting the supply of credit, as banks are only lending to borrowers with pristine credit and proper housing equity.
If banks want to make money, they should only rent to borrowers with good credit and proper reserves. To suggest otherwise shows how totally clueless our lending industry has become. They are so conditioned to passing the risk off to others that they see any barrier to origination as being an impediment to progress and profit. Our lenders are truly lost.
Still, the analysts expect loan originators to see losses of $85 billion to $165 billion from the putbacks with large-cap banks bearing the burnt of the losses.
Analysts said policymakers should first focus on repairing housing by reducing the supply and demand imbalances and restore market functioning. Then reforms can be implemented "to assure longer-term financial and economic stability."
These "analysts" are complete idiots. They are putting the cart before the horse. For the market to reduce any imbalances between supply and demand, it must be restored to its natural functioning. It doesn't work the other way around. The whole reason we have such imbalances today is because the government is manipulating the market in many ways with the primary goal being to preserve excessive debt and keep prices unnaffordable to a new generation of buyers.
Washington is making the housing crisis even worse
Bad policy and a bad economy make it a terrible time to buy. Instead of pushing cheap credit, Uncle Sam must let the market lower prices.
By Patrick Killelea — November 18, 2010.jpg)
Our long national bender of house price inflation has finally ended. Now all that remains is for the government to get out of the way and let the housing market sober up completely. Unfortunately, Washington is still tempting Americans to have one more drink – "on the house."
Real value of a house
As I explain on my website, http://patrick.net, the value of a house depends entirely on what it would rent for. It doesn't depend on what you paid for it, or on how much you spent to build it. If you can save money every month by renting the same quality house in a nearby location, then it is foolish to buy at that asking price. The price is just too high.
Rents, in turn, depend on salaries. Try walking into a bank and asking for a loan to pay your rent. You know what the answer will be. So why is it that the bank will lend us vast amounts of money to take out a mortgage and take on expenses that will be much higher than rent for the same place?
Because banks are stupid. If banks were smart, they would never loan money under terms where the payment exceeds the potential rental income. Why is that? Because if they did that, they would have no risk of a loss of cashflow in the event of a foreclosure.
Think about it: if lenders would not have made loans were the payments greatly exceeded potential rental income, then even if 10% or more of borrowers decided to default, the bank could take the property back and rent it out for enough to cover the payment.
In fact, the whole amend-extend-pretend policy would be effective if the banks had kept their loan payment below rental parity. They would have foreclosed on the deadbeats and replaced them with renters who could make the "payments" while the bank searched for a new owner-occupant to buy the house and liberate their tied-up capital.
Because it is profitable to get people into debt. Those profits result in political pressure to pass laws encouraging mortgage debt. For everyone above the buyer on the food chain – from seller to real estate agent to bank to Congress, the White House, and the Federal Reserve – there is a strong interest in getting young and inexperienced families deeply into debt. Once in debt, new buyers, too, become part of the game – they need to find new housing victims if they want to eventually sell at a profit.
Thus we have the mortgage interest deduction, Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and other harmful government programs, all of which serve primarily to increase the amount of mortgage debt. Since most people don't do math very well and will take on as much mortgage debt as they can, this government facilitation simply results in higher house prices.
Higher prices negate any benefit to the buyer – but they do benefit people higher up the food chain. Those profits at the expense of the buyer get funneled into campaign contributions that keep the system in place, or make it even more pernicious.
It sounds like a hokey conspiracy theory, but Patrick's description of the mass collusion among the participants in the housing market is essentially correct..jpg)
At some point, the cost of owning shot right past the cost of renting. Owners were losing money, month after month, on a real cash flow basis relative to renting. But they didn't care because they felt rich from the implied increase in their house's value. They could even refinance at the greater valuation implied by "comps" – appraisals or sale prices of similar properties nearby – and pull money out to cover their monthly shortfall.
That worked until it didn't, and America woke up with a dreadful hangover, still ongoing. What's worse is that many powerful financial interests are determined to make sure that we never sober up.
Special interests working against us
Older sellers depend on young families’ getting themselves into debt. Less debt for the young means lower selling prices for the old.
Real estate agents, after years of blathering about how house prices only go up, are finally faced with the incontrovertible reality that house prices also go down. Sales volumes also go down when prices are finally recognized as being too high. The lack of turnover and lower prices directly hurt their commissions.
Banks blew all their depositors’ money on bad mortgage lending, amounts way out of line with salaries. This was fine for them as long as they could get mortgage-backed bond buyers to take the risk off their hands, but the bond buyers got wise, and they don’t want any more of that bad debt. In fact, they want to make the banks buy it back.
The Federal Reserve exists to protect the banks from responsibility for their own bad decisions, at the expense of everyone else, in the name of “financial stability.” So we have the Fed printing cash to buy up those bad mortgage bonds – which weakens everyone’s wealth by inflating the currency – to get the banks off the hook.
Ways to make it better
What should we do?
First, the press should stop characterizing higher house prices as better. Higher house prices are not an "improvement" and lower prices are not a "worsening" of the housing market. Higher house prices are simply inflation, and inflation is bad for buyers.
The president should say that lower housing prices are a wonderful thing for buyers, especially young families. He should point out that lower housing prices are true affordability. Increased mortgage debt is not affordability, just a trap for the unwary.
Why does this issue have no champion? Someone in government will stand up for nearly anything — even stupid ideas have advocates. Why is a government policy that rips off an entire generation of home buyers getting no attention?
Lending regulations should eliminate comps as meaningless. All lending should be based by law on what it would cost to rent the equivalent house. Fannie, Freddie, and FHA lending programs should be stopped immediately, not gradually. It is the hope of lower prices that causes people to delay purchasing. We want to get prices back down below the cost of renting as quickly as possible for the maximum buyer benefit.
People in the Midwest and South should not be forced via their tax dollars to guarantee $729,750 jumbo Fannie and Freddie mortgages for Californians when they cannot get such a guarantee for themselves. The injustice is galling.
Why do we have an increased subsidy in areas with high prices? Isn't the subsidy actually inflating prices? Why do Nebraska taxpayers subsidize California HELOC abusers?
Banks should be heavily fined for leaving foreclosed property empty and deteriorating. Foreclosures don't ruin neighborhoods – empty houses do. If the banks won't take care of their houses quickly, the title should be auctioned off to people who will occupy and take care of them. Yes, even if the auction lowers comps or forces the bank to take a loss.
No mortgage interest deduction
There should be no mortgage interest deduction. Encouraging debt has resulted in disaster. Instead, we should promote savings, and outright ownership without any debt at all, in every generation.
Current owners usually misunderstand their own interests. If they ever want to upgrade, they will benefit more from the falling price on a bigger place than they lose from the falling price on their current place. Owners who want to upgrade should be firmly on the side of lower prices.
There is a feeling of terror that if house prices were allowed to be set by the unmanipulated free market, all consumer spending would stop and a permanent deflation would take hold. That just wouldn't happen. Consumers will always spend on things they need, and deflation will naturally stop at the point where a house is once again cheaper to own than to rent.
The nonsense and fear about lower prices is crazy. Fix the Housing Market: Let Home Prices Fall.
Another pseudo-cashflow property
If you count the appreciation as earned income, Orange County has some great cashflow properties during price rallies. Of course, you can't count appreciation as cashflow because it isn't sustainable, and it takes debt to access it, but many came to believe that appreciation converted to income through mortgage equity withdrawal was a wise way to manage their properties. That's why they are losing them now.
- The owner of this property paid $243,000 on 12/18/1998. Their mortgage information is not available.
- On 11/20/1999 this owner got a HELOC for $36,000 and extracted his first positive cashflow… kind of.
- On 5/31/2001 he refinanced with a $231,000 first mortgage.
- On 4/16/2002 he obtained a $68,000 HELOC.
- On 1/23/2004 the got a HELOC for $100,000.
- On 2/6/2004 he refinanced with a $235,638 first mortgage.
- On 10/15/2004 he obtained a $150,00 HELOC.
- On 11/1/2006 he opened a $250,000 HELOC.
- On 3/12/2007 he refinanced with a $387,800 first mortgage.
-
On 10/10/2007 he obtained a $250,000 HELOC. If he withdrew this money, the property will be a short sale.
With the prospect of future ATM payments being slim, this owner defaulted on his first mortgage.
Foreclosure Record
Recording Date: 10/12/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 06/30/2010
Document Type: Notice of Default
Irvine Home Address … 63 DARTMOUTH 62 Irvine, CA 92612 
Resale Home Price … $430,000
Home Purchase Price … $243,000
Home Purchase Date …. 12/18/1998
Net Gain (Loss) ………. $161,200
Percent Change ………. 66.3%
Annual Appreciation … 4.8%
Cost of Ownership
————————————————-
$430,000 ………. Asking Price
$15,050 ………. 3.5% Down FHA Financing
4.55% …………… Mortgage Interest Rate
$414,950 ………. 30-Year Mortgage
$84,531 ………. Income Requirement
$2,115 ………. Monthly Mortgage Payment
$373 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$72 ………. Homeowners Insurance
$295 ………. Homeowners Association Fees
============================================
$2,854 ………. Monthly Cash Outlays
-$341 ………. Tax Savings (% of Interest and Property Tax)
-$541 ………. Equity Hidden in Payment
$26 ………. Lost Income to Down Payment (net of taxes)
$54 ………. Maintenance and Replacement Reserves
============================================
$2,051 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,300 ………. Furnishing and Move In @1%
$4,300 ………. Closing Costs @1%
$4,150 ………… Interest Points @1% of Loan
$15,050 ………. Down Payment
============================================
$27,800 ………. Total Cash Costs
$31,400 ………… Emergency Cash Reserves
============================================
$59,200 ………. Total Savings Needed
Property Details for 63 DARTMOUTH 62 Irvine, CA 92612
——————————————————————————
Beds: 3
Baths: 1 full 2 part baths
Home size: 1,524 sq ft
($282 / sq ft)
Lot Size: n/a
Year Built: 1981
Days on Market: 83
Listing Updated: 40507
MLS Number: P751647
Property Type: Condominium, Residential
Community: University Town Center
Tract: Cc
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This home is bright & cheerful and has many upgrades. The home offers 3 beds, 3 baths, vaulted ceilings, formal living room, fireplace, wooden floors, upgraded kitchen & baths and much more. Location offers the finest schools and shopping and easy access to freeways.
When you write: “If prices were allowed to crash everywhere like they have in Las Vegas, the groundwork for recovery would be in place.” you are missing the fact that prices did not rise in everywhere the way they did in Vegas.
This is and has always been one of the problems with the housing bubble. You talk about Fannie & the HMID, or the Federal Reserve which act nationally, but the problems with housing are very much concentrated in the sand states. None of the items I listed were necessary or sufficient conditions for the localized bubbles that we experienced, and removing them, while causing harm to the rest of the country’s functioning housing markets, will not necessarily inoculate the bubble-prone areas.
The problem is national. The sand states were simply the first pricks to blow up. Your argument is like saying 50 people have herpes but since the 3 folks at the southwest corner of the room developed the genital warts first, the remaining 47 people are perfectly healthy.
Nice logic.
If the other 46 will necessarily be like the big-4 sand-states, why weren’t they necessarily involved in the run-up in prices? Not everywhere was as unaffordable as SoCal/PHX/MIA in 2006/7, so it won’t see the same on the way down. I’d bet that my county will never hit the 11.1% mortgage default rate Maricopa county currently has (right now it’s at 3.7%).
Roughly 5 years into the bubble and you’re denying the geographic dependence???
That’s quite bold of you to go and cheer your local default rate and compare it to Maricopa. You do realize that much of what happened in AZ was Californians spreading their financial herpes to their neighbors. Californians were quite fond of their Arizona speculation properties during the boom. You think it is some kind of a coincidence that Phoenix and Las Vegas both busted and are close to California? Out of state speculators driving up prices to levels beyond what the local incomes would support?
California won the race to inflate the local bubble, creating lots of fake wealth to go and play with in other markets. Why do you think idiots in AZ were taking out crazy loans as out of state buyers were pouring in with wads of money? Are you unable to add one to one and make two?
And then you have the nerve to compare default rates between counties?
None of those herpetic Californians were buying investment homes in my neck of NC…my parents neck of FL, much more so.
Scroll down to another of my comments – harping on the impact that speculative 2nd, 3rd and higher home-‘buyers’ had on markets. In 2005 or 2006, 80% of condos in Miami were going to speculators – in your words, herpetic. That was not the same all across the country.
Your pov is what it is, but I saw that any sort of disease spreading from CA to other bubble areas took place consensually, and that there was plenty of local HELOC/bubble-sale money taken out to specuvest. You can’t blame the problem on out-of-staters.
Winstongator, I agree, the problem with federal involvment is that they enact federal policies to try to fix local problems that are different from city to city (or in the sand states). While a policy in one city (or area) might be exactly what it needs it could be terrible for another city (or area). However, can you elaborate a bit more on the rest of your points?
You wrote, “you are missing the fact that prices did not rise in everywhere the way they did in Vegas….but the problems with housing are very much concentrated in the sand states….None of the items I listed were necessary or sufficient conditions for the localized bubbles that we experienced, and removing them, while causing harm to the rest of the country’s functioning housing markets”
When IR writes, “if prices were allowed to crash everywhere,” I do not think that he believes that if the market is allowed to function without interference prices will crash in relatively healthy markets. Please elaborate on the potential harm.
I’m orginally from ND and the bubble had little effect on that area. When I visit and tell people about interest only and Neg am loans they look at me in disbelief for the most part. People were more responsbile there and the housing market is functioning fine.
Let’s just look at Fannie/Freddie – called a harmful gov’t program in the linked piece. If we took the GSEs out, how much lending would we have, and at what rate? Pulling out the financing for 90% of loans is not tweaking at the margins. I imagine that most in ND buying/refi’ing now have GSE loans. Why punish them to try to correct some CA markets?
There are other changes that should be made before the GSEs are dismantled or the Fed raises rates. If you look at the bubbliest markets, they just happened to be the markets with the highest level of speculative (2nd, 3rd, more) purchases. Many of those purchases had similar financing terms to owner-occupied homes. I’d like to see the GSE’s offer lower-cost financing for people getting responsible loans, making irresponsible loans more expensive.
As for deducting interest, I’ve written here before that it would have a bigger macro-impact to reassess corporations deduction of interest before looking at the HMID. Banks that are equity-financed are much more stable than those financed with debt. All corporations prefer debt because of the interest deduction.
I took the sentence “if prices were allowed to crash everywhere” simply to mean that the retreat in prices would not be limited artificially by any contraints, either directly geographic or whose impact had a strong geographic-specific intensity. So prices in ND would be allowed to “crash”, but that might only be 0.5%, whereas parts of Florida would see 40%.
Some sectors of FL have seen 80% declines (condopartments once selling for 250k going for 50k). Many parts of FL have seen 50% declines already. I don’t think there are many areas of FL being supported over rental parity. $44.5k condo for sale also offered for rent at $875/mo. It takes a lot of HOA/maint. fees to get up to $875/mo.
My point is: what are the “artificial constraints” keeping Irvine (or other market) prices 10-20% above ‘normal’ while other markets are either not above normal or are much closer?
Hello Winstongator. Isn’t one of IR’s points that prices are not falling because of HELOC abuse? Banks aren’t acting on foreclosures because that would turn the HELOCs on their books into losses instead of assets. Of course many of these HELOCs are dead loans and will never be repaid, but for banks to get that officially on their books is very damaging.
Since Irvine is an epicenter of bandit financing and HELOC abuse, that’s one of the factors that keep prices high, at least for now. If/when unpaid taxes on squatter houses become an unsupportable liability for banks, look to see the foreclosure process speed up, and prices to accelerate their downturn.
@norcal:
Epicenter?
I would really like to see some data that supports that. Again, just because IR profiles HELOC abuse does NOT mean the majority of Irvine’s properties are Ninja loans or ATMs.
I don’t even think IR believes that.
Again, just because IR profiles HELOC abuse does NOT mean the majority of Irvine’s properties are Ninja loans or ATMs.
Look at the HUGE sums of money that many of these folks have stuck everyone else with. It is astonishing even after 3 years. And many of them continue to squat without having made a payment in quite a long time.
But go ahead and pretend it’s no big deal.
@AZDave:
Ahh… you must be frustrated because now you’re pulling your “putting words in mouth” manuever.
I didn’t say “it’s no big deal”… but I don’t think Irvine is the “epicenter” either. Again… there are probably more responsible homeowners (and I do mean OWNERS because many have paid ALL CASH) in Irvine than most other cities.
Sorry if I’m bringing some contrarian (or rather truthful) perspective to this blog… but unlike many who are jumping to conclusions based on all the schadenfreude thrown around here, I’ve actually lived here for last 20+ years. Irvine is not the disaster you are looking for.
IR profiles Irvine HELOC abusers because he is Irvinerenter. I can point to numerous heloc abuses in my parents area of FL, and if you went to Miami-Dade county, you’d see even more egregious cases.
Miami-Dade – 22.4% 90+ days late, Orange 6.9%. I can’t tell you why, but those numbers have nothing to do with a bank sitting on a bad HELOC loan. Once you’re 3 payments late, you’re 3 payments late, and you go into these numbers.
The statistic that would be helpful to see is what were Irvine’s DTI’s in 06/07, and how has their employment situation changed. Universities have done better than some industries. BRCM had two money losing quarters this recession and is now on pace to earn $1B this year.
If you want to talk banditry, look at mortgage fraud numbers. I saw a nytimes article that showed the highest concentrations of fraud in SE and SW Fla, and those areas have gotten decimated in terms of foreclosures and price decreases. I cannot imagine Irvine is worse off than either of those places.
Some data:
http://www.fbi.gov/stats-services/publications/mortgage-fraud-2009
Check out the 30 day property flip numbers…
Looks like the median home, for the median chump Irvine family looking for the Irivne rat race… at rental parity. How boring. Annual appreciation of 4.8%, probably a good barometer for the real inflation that occured over the past decade.
Nope, it just means the same family has to work twice as hard for the same house. In other words, two income earners in 2010 work to pay for what the single income paid for in 1998. There has been no wage inflation. The only thing that has inflated are energy prices, tuition costs, medical costs, and real estate costs. People have not kept up by earning twice as much, they have done so by working twice as much. Welcome back to reality, PR. Hope you had a nice Thanksgiving back on the homeworld.
Thanks David, I hope all your thanksgiving wishes came true.
There has been no wage inflation, and Santa Claus is real.
You are right about the dual income trap, families should buy on only one income so the wife has the choice to stay home and raise the kids.
I am talking about wage inflation in the context of the middle class. I would agree that the top 10% have seen wage inflation… We know that these a$$holes working in unproductive sectors such as banking and “investment gaming” have done quite well for themselves gorging at the government troughwhile running their little Ponzi Schemes. Of course folks of such nobility and royalty are not buying such houses as featured today.
You are regularly cheerleading the shrinking of the middle class segment of society. You can’t have it both ways by saying that they have seen inflated incomes while all this wealth has been transferred to the top.
It’s more the top 30% who continue to see considerable wage inflation though it has been concentrated at the top.
I’m not cheerleading the destruction of the middle class, I’m just calling it like I see it. Premium neighborhoods of premium areas have been impacted accordingly.
If the things that make Irvine desirable have not changed in the last 10 years, schools, planed community, weather and proximity to jobs that would make Irvine a premium community for the last 10 years.
If the Irvine area is a premium area and premium areas are filled with people with this great wage inflation, how come we see so many foreclosures and Heloc abuse in Irvine on people that have bought in the last ten years?
Is it that the new 30% with great wage inflation replacing the old working class people that have had stagnant wages, that used to live in Irvine?
@christian:
What data are you basing this assumption on? Just because IR profiles a distressed property daily does not mean a majority (or “so many”) Irvine properties are a foreclosure or HELOC-ATM. Comparatively, Irvine is probably better off than many surrounding OC cities.
There are many equity owners in Irvine, much more than shorts or foreclosures.
We thought a lot about this before making a decision to go ahead buy a house in Irvine.
I guess you could say that we have signed up for the Irvine rat race. I was brought up in a dual income family so that certainly influenced my decision.
We thought a lot about this before making a decision to go ahead and buy a house in Irvine.
I guess you could say that we have signed up for the Irvine rat race. I was brought up in a dual income family so that certainly influenced my decision.
I do not think that the decision to buy or not to buy a home in Irvine has anything to do with being part of “the rat race.” Although for some, it may secure their fate as part of the rat race.
I think escaping from the rat race is more a function of lifestyle, priorities, savings, and ones ability to achieve financial freedom than whether some decides to buy or rent and where they decide to do it. There are plenty of renters that are a lot more a part of the rat race than many ownwer of homes in Irvine.
What I mean by rat race in Irvine is that the median person can strive to afford this median home. There is nothing wrong with this. Its not North Dakota and many here would say thank god to that. The dual income trap is another key part of the rat race of Irvine. For some mothers this may be desirable, but for many not having the choice to stay at home can lead to an unhappy life.
Thanks for the explination, however, I believe that this is true of every place. Society has become extremely materialistic and this is not only an Irvine problem, although it may be worse here than in other places.
Regardless, if one chooses a life that values material items over family, time, and the freedom that can be more easily achieved by not being materially focused it does not matter if one is in North Dakota or Irvine. There are plenty of people in North Dakota that are just as much in the rat race as those living in California, they are just a lot colder. Granted, there are more people in Irvine living in $500,000 homes on two incomes of circa 100k than there are in North Dakota, however, I disagree with the broad statement that purchasing in Irvine is a choice to enter the rat race.
I would even argue that that Irvine has a higher than average percentage of people that are not in the rat race, ie. do not need dual incomes to support their families. I may be wrong, however, I would be interest to see the statistics that prove otherwise.
You should disagree, it was a generalization. For every Irvinite stretching in to a $600K home on 36% DTI and dual income, there is a single income family easily buying a $600K home at 25% DTI. Again a generalization but hopefully you understand.
The dual income trap pervades the entire U.S., thanks to stagnation of real wages. Families that can afford to have one spouse stay home with kids (or go to work if the main breadwinner loses her job) are wealthier than most, and but have a cushion that EVERYONE used to have in the 1960s and 1970s. See Elizabeth Warren’s “Two-Income Trap.”
Yes, that Elizabeth Warren.
PR- Thanks for the clarification, I understand that you were generalizing. Naturally, you chose to generalize using Irvine since this is the Irvine Housing Blog?
Nevertheless, I think that Irvine could be replaced with pretty much any other city in the US and the same generalization would apply.
I understand your point, however, my point is that one’s choice to purchase or rent their shelter and where they choose to do this has very little to do with their ability or inability to escape the rat race. Of course, other factors regarding how much of ones income is spent on shelter, how much taxes are taken from ones income, how one chooses to invest, ones overall lifestyle all have a much greater impact.
I agree, and I aslo agree that most areas of the country have more people living pay check to check compared to Irvine. We are a very fortunate city, despite that fact that some poor HELOC abuser in financial ruin is exposed here once or twice a week.
243K is a fair price for this house.
When this house debtor bought this place, the economy was booming, college grads were touring the country, jet-setting from one company to the other for interviews during their senior year. Engineers were starting at 60K to 80K right out of school. Real estate was healthy. The stock market was soaring. The sky was the limit.
And look at where we are today. Energy prices are double, tuition prices are double, real estate is in a bust, engineers still start at 60K to 80K but the jobs are harder to find. General optimism is not as abundant.
And this bright and cheerful house with “many upgrades” sits there with a 430K price tag like a giant turd floating around in the punch bowl. As far as I am concerned, the cost of “upgrades” is the hidden price of keeping up the value with general wage inflation. If the owner really wants a Gold plated toilet seat and is willing to pay for it – good for him. It won’t be worth nearly as much on the used market anymore than putting chrome rims on aPinto.
Do the arithmetic. Something has to give – the next generation eventually has to buy these properties with real income and not the boomer bubble play money being shuffled around in the current market.
They are plenty of jobs in southern california that pay $84K a year. A young family could and will buy this and live in the Irvine dream.
Unfortunately it’s far more likely that the wife works so they can have a combined $130K income and buy the bigger house they deserve to live the Irvine rat race they have always fantasized.
This just means that foreclosure is the new way of life.
Folks lining up to play housing roulette. Place your bets here that both these folks will maintain a steady income for the next 30 years. If one of them loses a job or cannot work for a significant period of time they are toast.
I still suspect that many of these Irvine house debtors are playing this exact game even with the large down payments.
@AZDave:
Such pessimism. Do you know what 10% unemployment means? 90% employment. Would you play roulette where you get 9 of the 10 numbers? Most people would and are.
People buying homes with tighter credit restrictions nowadays have to pass the bank’s and their own litmus test. Sure, there are a percentage that that are at risk, but I would bet that the higher percentage are responsible and in stable careers and will be able to afford their nut and even move up.
If you have a good career, a promising future and make good money where do you buy? Santa Ana? Riverside? Probably a beach city or maybe a city that exhibits a little more price stability.
If there were more failures than successes in the last 5 years, Irvine’s prices would probably be much less. It’s not just geography… it’s demography.
Such pessimism. Do you know what 10% unemployment means?
Yes. It means 30% underemployment.
Would you play roulette where you get 9 of the 10 numbers?
Sure, if it were realistic to expect to get 9 out of the 10 numbers every month for 30 years.
If you have a good career, a promising future and make good money where do you buy?
I’m not saying where you should or should not buy. I still say Irvine is in a bubble. That may not matter to someone who is buying using vapor money that was bubbled out of a circa 90’s house purchase turned windfall enabled by a 2010 sucker FHA buyer.
I don’t believe that many of these Irvine buyers will pay off the house in this life. The down payments are impressive, but I am unable to suspend disbelief that the money originates from anything than bubble wealth sloshing around in most cases. Without the perpetual inflation of prices, they will not pay the house off. I do believe that the Government has us on track for an inflationary event though so it may not matter in the long run.
Irvine’s prices would probably be much less. It’s not just geography… it’s demography.
This is wishful thinking. I would be more comfortable accepting this if interest rates were at normal levels and government were not issuing 90% of mortgages. Irvine buyers may not be frequent FHA customers but if most buyers are moving up from a previous house then they are most certainly depending on the government to finance their buyer so they can move up.
@AZDave:
Hehe… I find it funny that you finally accepted that Irvine buyers put down more than 20% on their homes but now your new spin is it’s bubble money.
Since most of those 700+ *new* homes sold this year, were 20%+. You can’t really believe ALL of that is bubble money? Unless 700+ buyers sold during the bubble and were just renting until The Irvine Company put them on the market.
And BTW, the resales in Irvine this year… sorry to tell you… most are conventional 20%+ down or all-cash… similar to previous years.
I know it’s hard to accept… but Irvine isn’t as much a burden on the taxpayer/government as you want it to be. Maybe try Vegas or Riverside.
$243K would be a fair price if the condo wasn’t right across from UCI where plenty of Baby Boomers are willing to pay cash for a property so their kids don’t have to share a dorm room. Also, it’s not uncommon for rich Taiwanese and Korean executives to purchase condos like those for their high school students so that they can attend University High School. (The parents don’t even live with them).
Are there enough dorm rooms for all the students now? And do you have any statistics on unaccompanied minors living in Irvine? Actual figures would be very interesting, but unless you have access to Uni’s next-of-kin database I don’t see how you could support your statement.
There are plenty of on-campus options now (probably too many), but they’re expensive. Parents are still buying Jr. a condo for investment purposes and they don’t want to be throwing away $13,000 a year for dorm accommodations. Some parents don’t want Jr. sharing with negative influences and some buy condos and rent out the other rooms to students. Then there are the students who can’t afford on-campus housing so they rent off-campus sharing 4 to a room. I’m guessing that’s probably harder to do in an IAC apartment.
I don’t have any actual figures to support my “unaccompanied minor” statement, but when I was at Uni I knew of several students who were living with slightly older cousins. A 24-year-old would be the guardian of a 14-year-old. Maybe the situation has changed since then, but I doubt it. If anything there are probably more mainland Chinese compared to then.
Totally agree… At some point these properties have to be paid for with real incomes. What scares me most is what happens if we get into a place where rates jump to 7-8 or more on a 30yr fixed.
BD
It shouldn’t scare you at all unless you bought a house within the last 3 years with downpayment money that you slaved away for years to save.
Interest rates at 7 to 8 percent are desperately needed to lop off the remaining 15% to 30% at the bottom end and finally get the higher end moving toward an eventual correction of another 40% to 50%.
For most of the folks buying now, the coming losses will be mere paper losses. Money they had in real estate wealth that they did not work for but merely shuffled around from one property to the next as nterest rates kept falling and prices kept bubbling. The folks on the bottom end are the real suckers who are going to lose their 3.5% down payments and make payments on an underwater mortgage for some time.
You have it all figured out, Irvine should be scared.
I’m not so sure. The Government may get their wish and turn us all into billionaires at some point in the near future. Maybe Irvine will hold out until that happens and then it won’t matter anymore.
I agree with your thoughts / comments. I really do believe as you have said that we will see the high end come down anywhere 30%-50% from CURRENT prices.
The properties north of 1.5M ask sold for 6-700k a decade ago. I don’t kniw if they will ever be that cheap again but, the law of large numbers suggests that prices have to come down dramatically to find anyone that can afford a payment – even at 4.5%!
BD
It’s obvious to anyone who can understand simple arithmetic.
Do our leaders just all hold hands now and codify a law that makes 0% interest rates the law of the land for the rest of eternity? Why has our country been playing charades with these higher interest rates in the past when we could have just done 0% for “extended” periods of time since the Federal Reserve Act became law?
The lower end has come down significantly. Above that, people are just shuffling the paper wealth around with real estate middlemen getting a share at each step effectively exhausting a limited resource. Once the boomers are done shuffling their real estate profits around and the money dries up, who is going to make up the difference? Certainly not the next generation who comes out of college with enough debt to fill a mortgage on a house.
Just watch what happens in PR’s “premium” areas like Irvine when FHA financing dries up and folks suddenly cannot “move up” and the buyers have to come to the Irvine closing table with monies earned the hard way rather than proceeds from a circa 90’s house purchase that turned into a windfall thanks to bad financial policy by the nation’s banks.
One metric I use is called the “Rich Uncle Test”.
If you had a rich Uncle and he *gave* you
free and clear a higher end >>1mm$ property
in Irvine, could you afford it?
In other words, if you had just to pay for
property tax, Insurance, HOA, maintenance
and reserves, could you afford the property.?
In Irvine, I believe that carry costs exclusive
of any mortgage are about 3-4% of purchase
price/year.
Thus, a $1mm home requires 30-40K per year
of cash flow just to keep the doors open.
How many families in Irvine could actually
afford such an arrangement?
IMO, based on U.S census income data for Irvine
zip codes a surpisingly small number,
probably under 30%.
Conclusion: real prices have a long, long way
to fall to “affordable” levels.
Who knew the fate of Irvine is in the hands of the health of rich uncles and FHA loans. This place is certainly good for comic relief now and again.
PR believes that “in the future” Irvine buyers are just going to save up 300K rather than sell real estate at 300K over what they paid. This is where future Irvine down payments on 600K tract houses will come from. Talk about comic relief.
Sorry, AZ, but I don’t think the Fed has that kind of power. All they control is money supply and the rate at which banks borrow funds from each other overnight.
Sorry, AZ, but I don’t think the Fed has that kind of power.
The point was that they have shot their load. Do we all just expect 0% interest rates now for the rest of eternity? The government has a HUGE debt and people need low payments to keep buying overpriced real estate.
Hello All – It seems to me that Irvine is the center of the CA self-fulfilling process. People buy anyway they can because they BELIEVE that IS different. This will last until the surrounding communities and cities get far enough ahead in price declines that people buy there instead of Irvine. This will likely take years. Irvine is different and, probably deserves a premium.
That said, a premium means maybe 7-10% not 20 or 30%. You can pay for decades of private school with $100 or 200K in ‘premium’ on a $/sq ft. basis.
I don’t see a scenario where prices will be higher for housing in Irvine or most anywhere in OC for the next decade. Short of Irvinites building a perpetual motion and energy machine prices will grind lower. The best that can happen is flat prices over the next ten years as rates slowly rise back to normal. The worst case scenario is rapidly rising rates that cause a step down in pricing and then slow depreciation as rates rise rapidly and overshoot historical averages.
We are seeing some “dead cat bounces” now as suckers jump in thinking we are ready for a ‘turn around’ and can hardly wait to ride the train higher..or so they imagine.
Who are these large groups of Irvinites that make $250K a year?? Median per cap income in Irvine is about $40K and household is about $110K. How does these people buy $450K+ houses??
….just some thoughts.
BD
Quick question to all folks. I looked up properties for rent and I am getting killer rental deals like this one http://orangecounty.craigslist.org/apa/2059599447.html
$950 / 3br – 3 bd/2ba views over the Turtlerock area (Irvine)
I found several nice properties that are single family 3-bd homes for rent for under $1500. What do you folks think? Are these folks trying to get a sucker renter before bank forecloses?
Those prices do not sound legitimate.
OChomehunter- First, I have seen people that are in foreclosure offer large discounts to get their property leased quick and try to milk some last minute money out of it.
However, it is more likely is that it’s a complete scam and the poster is not even a loan owner. You will respond and they will be out of the country and need you to provide them with a bunch of info and a cashiers check. I’ve had listings magically appear for rent for far below market. I’ve had people call me telling me my listing is for rent and the owner is claiming to be in Europe and needs a $1500 cashiers check. Be very careful with Craigslist.
If a deal sounds too good to be true it probably is.
Thanks for the warning, Shevy. The number and variety of scams is very impressive – who says entrepreneurship is dead?
Thanks. There was another listing $900 / 4br – Single Family Home Four Rent (Lad era Ranch CA). I contacted the listing and following is what I got:
Hello,
I did get your response concerning the AD I posted on craigslist. The house is still available but presently I’m not around…… I did bid for a portion of petroleum land sometimes ago in West Africa
and fortunately I won the bidding so I have to move quickly down to
Africa to have my company set up because I will still have to rebid for
it in the next 10 years… I came over here with my wife, we both bought
the house when we got married. As soon as we settle down here I had a
thought of selling the house so I have to look for an agent, after
getting one, we got a deal but later my wife advised against that.. She
said we may not be able to win the bidding next time, in other to keep
our head when we return that we have to keep the house. I reasoned with
her and accepted her advise. So I contacted the agent back and
requested for my keys and documents.. Later we decided to have the
house rent out, we would have give the same agent this job also but the
truth of the matter is that the agent would want to handle it
professionally and the occupant may not be able to reason along with
him later. If you notice, you will discovered that the price we are
offering is far below standard price, this is enough for you to know
that we are not after the rental fee but the absolute care for the
property. I know there is no way I can be sure that you are the right
person to live in the house because we won’t be able to see physical
before sending you the keys and the documents to occupy the space…..
But I just had a feeling that anyone who knows what it takes to put
the kind of structure down should know that maintaining a building is
mandatory, so if you belief you can take good care of the house and
handle it like yours then I will be more than happy to let you rent the
house.
Please if you are ready now to occupy the house kindly provide the information below for record purpose
PLEASE TELL US ABOUT YOURSELF (Application Form)
Full Name:
Home Phone ( )
Date of Birth:
Other Phone ( )
Current Address:
Apt#:
City:
State:
Zip:
Reasons for Leaving:
Rent $:
Phone ( )
Are you married:
How many people will be living in the house:
How many people will be living in the house:
Do you have a pet:
Do you have a car:
Occupation:
Move In Date:
House Address:36 Reston Way, Ladera Ranch CA 92694
The DAMN listing is “Pendind Sale”. Scumbags!
No worries. They are getting more sophisticated, for one of my listings they must have pulled the tax records and were even using my clients name and created an email address myclientsname@hotmail.com
unreal.
Shevy
Irvine HO –
New spin? I had this same conversation with you a year ago. You are not suffering a case of Alzheimer’s are you? I hope not.
I have always questioned where the downs are coming from.
You can’t really believe ALL of that is bubble money?
Of course I can. I do not buy for one second that most of these 600K house purchases are first time house buyers.
It’s easy to scrounge up 300K when you buy a house in 1992 for 100K and sell it for 350K in 2009. You always scoff at this, I know. It’s much easier to go off into fantasy land and stroke yourself.
but Irvine isn’t as much a burden on the taxpayer/government as you want it to be.
Let’s stop all the subsidies and find out. Based upon what I have read here for the last 3 years, Irvine buyers have done a number on the taxpayer. I wonder how many Irvine HELOCS my taxes will help make good this year.
“I do not buy for one second that most of these 600K house purchases are first time house buyers.
“It’s easy to scrounge up 300K when you buy a house in 1992 for 100K and sell it for 350K in 2009. You always scoff at this, I know. It’s much easier to go off into fantasy land and stroke yourself.”
I just had to jump in here because you honestly don’t have a clue. I realize you’re the self-proclaimed “Expert on Irvine From Arizona,” but you really need to visit here sometime and stand in front of the model homes at Stonegate and Woodbury to see the young 20-something belly-bump couples buying these $600K, 1800sf attached houses…which are marketed to first-time buyers. Irvine is a high-end job center with the Southern California headquarters for Toyota, Mazda, Kia, Google and many others. In 1992 these buyers were in elementary school.
If I could post a kpop video on here I would.
Here ya go:
kpop for ya
:coolsmile:
From Arizona that video looks more like John Mellincamp and the said couple is 45 years old and living in a 1 BR they owned for 17 years, finally trading up to a house with their $300K in equity.
Your memory is worse than mine.
The original argument a year ago was that Irvine was taxing the system because of all the zero down loans everyone took out. But then I showed you that the data said otherwise… and that Irvine down average close to 40%… even now.
It took a while but you changed your tune, and now your “new spin” is that all those large downs are “bubble money” from equity sales. Where do you get that data? You STILL haven’t proven it. I don’t think it’s any more than any other cities with move-up buyers. There a quite a few buyers who are FIRST TIME buyers with high downs that are not sourced from previous real estate transactions. In fact, even IR said many of the new homes sold in the last year are NOT move-up buyers (because TIC wouldn’t take contingent buyers), so where did that money come from? Are you going to disagree with your homie?
Do you want to bet some hard cash that Irvine has “done the number on the taxpayer” more than any other city? I wonder how many PHX HELOCS I’m paying for.
And it’s okay to admit that you can’t be an expert on Irvine based on a single blog you like to show your Paint skills in. You may be a smart guy… but you don’t live here — stick to your general opinions… you don’t know as much about Irvine as you think you do. Or start commenting on parenting again… yet another topic you seem to be an expert in.
I don’t know what made me venture over here to read this blog after so long. But IHO’s post made me happy I did. Patrick Star and Eugene Krabs say thank you as well.
“One benefit of gridlock in Washington is that our government will be hampered in its ability to meddle in the housing market.”
Now if we can only get FASB to stop meddling in corporations’ (ahem…..banks’) account reporting by removing FASB 157 :-p wink*
“removing FASB 157”
Let me rephrase that: “restoring mark-to-market accounting”.
Building on teeny tiny lots in Japan
http://www.businessweek.com/globalbiz/content/mar2007/gb20070313_145902.htm