The liquidation of bank REO is pushing prices lower. Prices are extraordinarily affordable in Las Vegas as the market there overshoots to the downside. How does that compare to Irvine?
Irvine Home Address … 556 ALBACATE St Henderson, NV 89015
Resale Home Price …… $65,000
To anyone drinking the morning away
The afternoon will prove a mistake
They never will get it right
Now they've got it so low
Ocean Colour Scene — So Low
How low will prices go in Las Vegas? Affordability is no longer a problem, so now it comes down to supply and demand. On the supply side, the behavior of lenders is not helping their own cause. As they continue to release properties to the market for much less than recent comps, the perpetuate the decline that is wiping them out.
Today's featured property is a recent closing of an REO resale in Las Vegas. I discovered this neighborhood while looking at another auction property nearby. The property of interest is in a cluster product neighborhood in a nice part of Henderson, Nevada. All the properties were built in 2005 and sold new in the mid 200s.
We all know prices are falling throughout Las Vegas, but when I saw the comps for this property, I couldn't believe my eyes.
The list of comparables below are all in the cluster neighborhood, and they are arranged in decending order of closing dates. Take a careful look at the sales price in the column second from the right.
If I had looked at these comps last November, I would have estimated the resale value at between $105,000 and $110,000. Further, I would have likely set an initial asking prices of about $114,000 without much fear of a low appraisal forcing me to lower my price to an FHA buyer.
What would possess an asset manager at a bank to let properties go in the mid 60s? There are limited possibilities:
Capitulation may be motivating asset managers to take any deal presented to them. If they have a caseload of thousands, they care less about maximizing recovery and more about processing files. The asset manager could also be incompetent.
Fannie Mae has the Homepath program where they allow owner occupants to bid on properties and sell them at a reduced price. I understand their desire to put owner-occupants back into homes, but when they let them go for 40% under comps, they merely take down the values throughout the neighborhood and dramatically increase the pain for other owners and sellers in the area.
Another possibility is fraud. The listing agent could have submitted comps from properties in another neighborhood to the lender to justify a $65,000 selling price. The lender may have approved this sale without realizing there were model-match properties in the same neighborhood selling for much, much more.
This property was quickly listed on the MLS, but the seller probably realized they were not going to be able to sell the property as it had already been sold twice in the last year. Neither the GSEs or FHA will insure a loan on a property sold three times in a year. Further, if it was purchased through an owner-occupant deal with Homepath, the owner also faced resale restrictions because the GSEs don't want to sell to flippers.
$40,000 in value gone in three months
How would you like to be the next-door neighbor at 555 Albacate St. who paid $105,000 three months before the model-match at 556 Albacate St was sold for $65,000?
House Address … 555 ALBACATE St Henderson, NV 89015 
Resale House Price …… $105,000
House Purchase Price … $253,900
House Purchase Date …. 2/28/2005
Net Gain (Loss) ………. ($155,200)
Percent Change ………. -61.1%
Annual Appreciation … -13.9%
Cost of House Ownership
————————————————-
$105,000 ………. Asking Price
$3,675 ………. 3.5% Down FHA Financing
4.56% …………… Mortgage Interest Rate
$101,325 ………. 30-Year Mortgage
$22,158 ………. Income Requirement
$517 ………. Monthly Mortgage Payment
$91 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$22 ………. Homeowners Insurance (@ 0.25%)
$117 ………. Private Mortgage Insurance
$41 ………. Homeowners Association Fees
============================================
$787 ………. Monthly Cash Outlays
$0 ………. Tax Savings (% of Interest and Property Tax)
-$132 ………. Equity Hidden in Payment (Amortization)
$6 ………. Lost Income to Down Payment (net of taxes)
$33 ………. Maintenance and Replacement Reserves
============================================
$695 ………. Monthly Cost of Ownership
——————————————————————————
GREAT 3 BEDROOM AND 2 AND HALF BATH; WITH CORIAN COUNTERTOP AND UPGRADED MAPLE CABINETS
Based on the cost of ownership and comps to date, the buyer of the above property must have felt they got a good deal last October. It was. At least until the identical property below sold for $40,000 less.
House Address … 556 ALBACATE St Henderson, NV 89015
Resale House Price …… $65,000
House Purchase Price … $268,656
House Purchase Date …. 1/4/2005
Net Gain (Loss) ………. ($207,556)
Percent Change ………. -77.3%
Annual Appreciation … -21.2%
Cost of House Ownership
————————————————-
$65,000 ………. Sale Price
$2,275 ………. 3.5% Down FHA Financing
4.56% …………… Mortgage Interest Rate
$62,725 ………. 30-Year Mortgage
$13,717 ………. Income Requirement
$320 ………. Monthly Mortgage Payment
$56 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$14 ………. Homeowners Insurance (@ 0.25%)
$72 ………. Private Mortgage Insurance
$41 ………. Homeowners Association Fees
============================================
$503 ………. Monthly Cash Outlays
$0 ………. Tax Savings (% of Interest and Property Tax)
-$82 ………. Equity Hidden in Payment (Amortization)
$4 ………. Lost Income to Down Payment (net of taxes)
$28 ………. Maintenance and Replacement Reserves
============================================
$453 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$0,650 ………. Furnishing and Move In @1%
$0,650 ………. Closing Costs @1%
$0,627 ………… Interest Points @1% of Loan
$2,275 ………. Down Payment
============================================
$4,202 ………. Total Cash Costs
$11,100 ………… Emergency Cash Reserves
============================================
$15,302 ………. Total Savings Needed
Property Details for 556 ALBACATE St Henderson, NV 89015
——————————————————————————
Beds: 3
Baths: 2
Sq. Ft.: 1354
$048/SF
Property Type: Single Family Residential, Detached
Year Built: 2005
County: Clark
MLS#: 1071785
Source: GLVAR
Status: Closed
——————————————————————————
Great 3 Bedroom 2 1/2 Bath home with a 2 Car Garage and a nice back yard.
Affordability is the best ever in Las Vegas
Take a look at the cost of ownership and the income requirement for this house. The monthly cash outlays and total cost of ownership are lower than the cheapest rental in all of Las Vegas. Even 1 bedroom apartments in most complexes rent for more than this property costs to own.
Prices are trading at their 1995 levels in Las Vegas, and interest rates are south of 5%. Even back in 1995 when prices were at the same level, interest rates were north of 8%. The cost of home ownership has never been less expensive in Las Vegas than it is today — ever.
Lenders wonder why buyers are sitting on the sidelines, but with liquidation behavior like this and the future REO inventory ballooning, buyers should be worried. This could happen anywhere at any time — including Irvine.
Irvine Comparables
People in Irvine, California, make about 50% more than as workers in Henderson, Nevada. Therefore, it is logical to assume house prices in Irvine for comparable properties should be roughly 50% higher than what people are paying in Henderson. The historic relationship between Orange County and Clark County where Irvine and Henderson are respectively located is shown below.
So what are Irvine comps asking? .jpg)
$439,900 — 32 Alevera St., 2/2 1,050 SF
$449,000 — 33 Alevera St. 2/2 1,200 SF
$519,900 — 40 Alevera St. 3/2.5 1,500 SF
$525,000 — 8 Sonata St. 3/2.5 1,300 SF
The four properties above are all located in a cluster community in Oak Creek. The properties in Irvine are older, most are smaller than the Las Vegas properties, and two of them have one less bedroom.
The least expensive of these properties if 4 times as expensive as the $105,000 property, and the most expensive comparable is nearly 9 times more expensive than the $65,000 comparable.
Does that seem right to you?
Which is a better investment? 
Which is a better place to invest, Irvine or Las Vegas? I am putting my money where my mouth is and investing in Las Vegas. I believe the historic relationship between house prices in the two cities will be restored over time, probably through continued erosion of pricing in Irvine and a rebound in pricing in Las Vegas. Plus, while waiting for prices to revert to the mean, the cashflow in Las Vegas is outstanding while the cashflow in Irvine is breakeven at best.
There is no reason to believe the premium in Irvine doubled in 2009 for any reason other than the housing bubble has not deflated here and it has overshot to the downside in Las Vegas. Despite problems with unemployment, the relationship between wages in the two cities has not changed, and although most readers of this blog find Irvine a more desireable place to live (me included), nothing has made Irvine twice as desirable as it was for the prior 20 years.
Take where you would want to live out of the equation, and ask yourself where you think your investment — combined cashflow and appreciation — has greater upside potential over the next 10 years, Las Vegas or Irvine?
IR–You’ve often stated that rental prices form a bottom for home prices. Given your experience in LV, do you still think that is true?
Las Vegas will be the textbook example of what can happen when markets overshoot to the downside due to foreclosures and excess supply. At some point rental cashflow will attract enough investors to stabilize prices. Prices won’t fall to zero. Right now in Las Vegas, the prices are certainly low enough to attract cashflow investors, but there is so much inventory that prices continue to head lower.
I look at this as an opportunity. I estimate there is at least a three year window to pick up properties at prices where the cashflow is strongly positive and providing returns far in excess of other investments. The rebound appreciation to follow will be a bonus that will allow me to exit my positions if I want to. In all likelihood, I will hold those properties for the long term because I like the stability of rental income for my own retirement.
i see the same thing in the high-end palo alto (san francisco bay area) market compared to the lower end areas.
PA prices haven’t dropped. while low end areas like solano have cratered.
the median-price gap between low-end and high-end in the bay area is the largest it’s ever been.
Yep, but according to Irvine Renter there is nothing that could possible explain and justify that growing gap…. Maybe there is something more important going on separating the upper quarter and the lower quarter? Hmmmmm maybe just maybe, now that assets and incomes drive prices and liar loans are a thing of the past. Premium Pal Alto is set to crash any day now Las Vegas style, it’s going to be devastating… Yeah right please don’t hold your breath for that
“Yep, but according to Irvine Renter there is nothing that could possible explain and justify that growing gap”
You are using straw man arguments, exaggerations, and putting words in my mouth I didn’t say. It’s a habit of yours I find particularly annoying. You pick arguments you can win rather than deal with reality.
The growing gap has nothing to do with anything you have put forth. It’s caused by residual kool aid intoxication of foolish buyers like yourself and the withholding of inventory from nicer areas by banks hoping to avoid Las Vegas in high-end markets.
The gap will close through a combination of lower prices at the high end and rebound appreciation at the low end caused as the substitution effect plays out.
My guess is that he thinks he is being clever, but is not smart enough to realize that others are laughing at him, not with him.
The highlighted property, and hypothetical situation you describe, definitely help illustrate the race to the bottom I’ve been expecting between 2011-2013(?) and talking up lately on here. In my mind there is no doubt in almost all areas and price ranges will experience this phenomenon, as long as the banks allow defaults to hit the market in a timely manner. and if they don’t?? Well that’s really to predict. But it doesn’t necessarily seem good.
Palo Alto is an outlier in the sense of a very small town with few houses close to the Stanford University campus.
Mainly VCs and wannabes buy their now, not workers.
Ironically, half of it lies in a flood plain, so not a good deal for half of the residents, as they found out in 1998.
Maybe the Irvine gap has grown from it’s long term ratio because of shows like Real Housewives.
Frankly, I didn’t realize how much better the fake tits are in Irvine from the rest of the country before watching that show. Now that I know that, I can TOTALLY see paying $400 a square foot in Irvine.
FCB’s are flocking to Irvine now because the show has made it to overseas syndication.
3,000 new homes going up in OC:
http://lansner.ocregister.com/2011/05/26/3000-new-homes-coming-to-o-c/110599/
“People in Irvine, California, make about 50% more than as workers in Henderson, Nevada. Therefore, it is logical to assume house prices in Irvine for comparable properties should be roughly 50% higher than what people are paying in Henderson.”
IR, I love your writing and have been enjoying it for a long time. But I really don’t understand why you continue to emphasize income numbers in your reasoning that Irvine prices are too high. To me this seems like an obviously fallacious argument. Different areas are going to demand different price premiums regardless of income. If everyone in the US had exactly the same income, housing would still cost more in NYC than it does in Omaha. There’s a correlation between incomes and housing prices, and local incomes do place an upper bound on how prices can sustainably go, but that doesn’t come close to explaining the prices differentials between different areas. Some places are going to be able to entice people to shell out a higher percentage of their income on housing than others. This was true before the bubble and will continue to be true after.
As you have alluded to in other posts, the real evidence that Irvine prices have not completely recovered from the bubble is in the relationship between prices and rents.
I emphasize the price-to-income relationship for a number of reasons.
1. The relationship between income and rent is quite stable and rarely deviates more than a few percent up or down. The relationship between price and rent generally determines the price point where renters are motivated to buy. Therefore, the relationship between price and income, though influenced by other factors, is also a good indicator of where prices will bottom. Due to sub-5% interest rates, the price-to-income ratio will likely bottom at a higher level than it otherwise would.
2. As you noted, the price to income ratio establishes an upper boundary where buyers cannot push prices any higher. Not every area of the country maxes out their DTI ratio, so some areas of the country have relatively more affordable housing than others with or without a bubble. As the chart in the post demonstrates, the ratio of prices in Clark County and Orange County was relatively stable for 20 years, and people in Orange County demonstrably spend a higher percentage of their incomes on properties to maintain a ratio of 2 when incomes would suggest a ratio of 1.5 is more appropriate. I’m not suggesting the ratio will fall to 1.5, but I do believe it will not maintain its current 3.75.
3. The continually eroding asking prices in Irvine and the low rate of sales strongly suggests that prices are still to high relative to incomes. If they weren’t people would be maxing out their DTIs, buying properties, and supporting prices. That isn’t what’s happening. It also suggests that when borrowing costs increase, as they will when the conforming limit drops and interest rates rise, the pressure on pricing will continue to push prices lower. Those factors will not impact markets like Las Vegas where most sales are under the conforming limit, and affordability is so good that rising interest rates will not make prices too high for local incomes.
Median household incomes are interesting, but standard deviation tells a more in informed story.
There is a comparative over-supply of rental units in Irvine that drags on median household income.
Is this a recent phenomenon, or is it something that shows up in other statistics?
The price-to-income ratio was 4 in Irvine in 1997. It is about 6 today. Did the ratio of apartments to homes change over the last 14 years? Do we have 50% more renters and no more owner-occupants to explain why the price-to-income or price-to-rent ratio is elevated?
I don’t have the numbers, but anecdotally, yes.
It is far too simplistic to take one statistic and draw the conclusions you are drawing.
I have every belief that a broader correction is coming to Irvine, but a premium will remain that will not completely align with your theory.
For one, I believe that higher income owners are displacing the lower income owners as the latter sells to the former. Since 1997, a ton more employment has found its way to Irvine (hell, Broadcom was hardly a glimmer in Samueli’s eye back then).
And secondly, those that are waiting or otherwise can’t afford it are lining IAC’s pockets handsomely.
That creates a larger-than-normal gap between one class of Irvine dweller and the other, eerily similar to the westside.
The standard deviation should tell this story.
Again, a correction is (over)due but it needs context.
For one, I believe that higher income owners are displacing the lower income owners as the latter sells to the former.
OK.
But where are the hard stats to backup such an argument?
check out:
http://www.melissadata.com/lookups/TaxZip.asp?Zip=92604&Submit=Submit
Average Adjusted Gross incomes for zip 92604.
Income Tax Data for ZIP Code 92604
IRVINE, California
Tax Year -> 2004 2005 2006 2007
$66,366 $69,472 $74,502 $72,230
BTW.
I have lived in Irvine for 32 years at same
location in Woodbridge. Real Estate turnover is extremely low.
Its these “lower income” folks that you refer to that are staying put. Why move? To where? To spend more money on overpriced real estate?
So who, when and where in Irvine are all these mythical rich people buying homes?
The “hard stats” would show up in the standard deviation of the income stats many on this board quote with religious fervor.
Lower income folks staying put in their homes neither proves nor disproves my theory. We don’t know the true price until we have a transaction.
Fifteen, 20, 30 years ago, a middle class working family could afford a SFD house in Irvine. That is less the case today (sort of depends on what kind of income you think makes one “middle class”). I’m sure you agree that most of your neighbors could not afford their homes if they had to buy them at today’s prices. So, they may not sell often, but when they do sell, it is almost certain that the buyer will have a higher income than the seller.
That, I think, is what the comment you highlighted means. I for one think it has merit. The income numbers you cited (a) show a generally increasing trend (with a decline corresponding to the recession), (b) only show four years, and (c) include renters. I’m not sure what you were trying to prove.
@iahotm
What would provide very compelling evidence in favor of your theory would be stats that demonstrate rents for Irvine homes, and in particular high-end Irvine homes, have increased at a much higher rate than the rest of OC/SoCal over the last decade. Without such evidence, it seems more reasonable to me that lingering effects of the housing bubble are a bigger factor.
Here again, there is a drag on rental rates due to IAC.
For example, compare Irvine with Burbank.
The median household income in Irvine is $85k vs $67k in Burbank.
Now compare what $3,000 a month gets you in terms of rentals. From experience, you can get a nice ~2000 sf 4br place in Woodbury in Irvine at that price.
Yet $3,000 a month in Burbank gets you a 1400sf, 3br place with a tiny yard, no HOA amenities, etc.
Why? There’s simply a very tight supply of rentals. And the apartments in Burbank are downright nasty. Landlords charge a premium, and there are enough folks who want to shorten their commute.
Fact is, IAC puts out a damn good, consistent product for a reasonable price. The unique benefits of having a fungible contract to other properties is also a draw. I believe there is a very strong substitution effect in Irvine rentals (mainly due to the behemoth that is IAC) that impacts all the way to the high end.
Again, I believe there is a correction in play, but being ignorant of the nuances of the Irvine housing market sortof belies the point of having a hyper-local blog.
I think you can find data of that sort here, but it doesn’t seem to have any historical data:
http://www.incometaxlist.com/irvine-income-irvine-ca-92604.htm
The income distribution for 92604 is not very different from the income distribution for 93003 where prices have corrected by 40%
http://www.incometaxlist.com/ventura-income-ventura-ca-93003.htm
The site doesn’t exactly smack of legitimacy.
But assuming the data is accurate,
What is the source?
Which year is represented?
Ahh, it all makes sense now — click on “About IncomeTaxList”
*smirk*
I got the link from here:
http://taxprof.typepad.com/taxprof_blog/2009/02/income-tax-data-by-zip-code.html
I don’t see any big issues with credibility, and presumably comparable data is for the same year. I know, sometimes, our biases get us into infinite loops of preconceived notions.
So what year is it from?
I the blog is dated 2009, then is it tax year 2008?
No bias, just legit questions. Data absent context is meaningless.
My guess would be 2007, since I am not aware of IRS having released zip code data beyond that year.
It’s hard to draw conclusions without the trend, much less the year !
Personally, I think the differences could be less due to income and more due to differences in savings. A trend history of the demographic composition could perhaps explain the mystery that I fail to understand – why OC tracked California’s up and down cycles previously but not beyond a certain point this time around. i.e., multiyear data for that presented here
http://www.movoto.com/neighborhood/ca/irvine/92604.htm
and here
http://www.movoto.com/neighborhood/ca/ventura/93003.htm
Again, what is the year and source of the data?
Secondly, if there is a disproportionate ratio of rental units + condo properties : SFR properties, would that not skew the median household income for a given area?
And why the comparisons to that zip code? Not sure of the relevance ?
From your same source; note the mix of households that earn over $150k in 92620, which has more newer homes than ye olde 92604:
http://www.movoto.com/neighborhood/ca/irvine/92620.htm
Households earning 150K+ number 24%.
And 92602 is near 30% for the highest bracket ($150k+):
http://www.movoto.com/neighborhood/ca/irvine/92602.htm
Again, there is no context for the year this data was collected, but when compared with the 5.5% share for the same income group in your 93003 baseline, the disparity is massive.
This isn’t about savings; it’s about a massive stratification of earning power in Irvine.
One group rents from IAC (or bought their home well over a decade ago); the other group bought in the past 10 years. At least, that’s my Grand Unified Theory of Irvine Home Prices (GUTIHP).
When there is an oversupply of rental units, it is very easy to misinterpret median income data and equivalent rental units as a basis for determination of value.
Final thought:
TIC was once an agriculture company. It transitioned to a developer when the master plan was drafted in the middle of last century. Bren became obsessed some years ago with the mission to make TIC exist “in perpetuity.” Only in the last decade did it truly begin the transition to becoming an operating company. That transition is still underway as the final tracts are built and sold off the Ranch. In the interim, TIC has aggressively grown its operating business – residential and commercial – to achieve the “perpetuity” goal.
Thus the 50+ complexes in Irvine alone, many of which didn’t exist just 10 years ago.
For me, the fact that the CAR affordability curve for OC lines up with that for CA over a 30-year period until 2008.04 and is not shifted downward (towards lower affordability) relative to CA even at the peak in 2006/2007 as in the previous cycles suggests “holding strength”, not “buying strength”.
Exactly right, but that makes too much sense.
A back of the envelope cacluation would tell you there is maybe 0.3 Irvine single family homes per Irvine household. Compare that to Henderson, NV where there are empty houses decorating the desert landscape.
When you look at the SFR neighborhoods, the families on the margin are putting down $200k+ cash with very high incomes.
You can only conclude one thing from Irvine Renters median income quote and that is rents in Irvine are going to be a lot higher than rents in Las Vegas. Wow that is ground breaking.
Great point PR,
It’s basic Supply/Demand.
For Vegas it’s oversupply + lack of demand = dirt cheap prices.
In Irvine is the exact opposite, tight supply + strong demand = $$$ prices.
“It’s basic Supply/Demand.”
While technically true, this statement isn’t very useful. Price is always a function of price and demand. That’s not an interesting observation. What’s much more useful is looking at how supply and demand are likely to shift in the future.
In 2006 demand for Irvine homes was much higher than it is now. Those who identified the housing bubble were able to successfully predict that demand would significantly decline over the next few years. Now that was useful.
Demand was strong prior to 2006 and 5 years after continues to persist at a high level.
The fear of falling home values or foreclosures have not put a damper on the demand.
All the new supply that’s been rolled out at a premium gets absorbed.
The fact remains that while other areas like Vegas got crushed, Irvine and it’s premium areas in particular continue to outperform.
How’s that for “useful”, hope you approve
Tent, I feel like we’re still asking the wrong questions…
Let’s imagine someone from early 2006 who isn’t sure whether its a good time to buy in Irvine or not. They work through your checklist.
“Was demand strong for the last several years? Yes.”
Check!
“Have fear of falling values put a damper on demand. No.”
Check!
“Has newly built supply been absorbed at rising prices. Yes.”
Check!
“Are prices still rising, even though they’ve begun to fall elsewhere? Yes.”
Check!
There are countless examples of people who bought in Irvine around that time and have since lost hundreds of thousands in equity. Your reasoning would have done nothing to clue them in on the fact they were about to make a mistake.
“Countless examples”
Right. We sold out of Tustin Ranch in late 2007. The home prices in that nabe aren’t all that different than they were back then. And the projections from this forum (including me) were an imminent correction.
We sold in the low 8’s and from my perch, it looks like the place is prolly worth somewhere in the high 7’s, ‘smuch as I’d like to believe it’s worth much less, the few sales I’ve seen in the past couple months tell a different story. We’re talking 50, maybe 60k of lost equity over 3.5 years. That’s about breakeven with the tax benefit over the same period, and about 13% of the buyer’s downpayment.
You can’t tell me you thought the correction was going to be this gradual, can you?
“You can’t tell me you thought the correction was going to be this gradual, can you?”
I will certainly admit I didn’t think it would be this gradual, but evidence of a gradual decline is not evidence that a further decline is not going to occur.
Agree.
Yet your rationale for the extent of the correction remains the same (median incomes and equivalent rentals).
It’s time to explore some alternate means of determining the fundamental value of the stucco boxes that is sensitive to the nuances of the Irvine market.
Those nuances being IAC and all that it entails, and the demographics of who is drawn to Irvine – i.e. what gives it appeal to higher income earners.
To me, that story *should* be told based on the standard deviation/spread of household incomes — perhaps tabulated across varying housing types (rental vs. ownership; SFR vs. multi-family), trended over time.
Dunno if that data is readily available, but it would prove/disprove my Grand Unified Theory of Irvine Housing Prices.
“We sold out of Tustin Ranch in late 2007. The home prices in that nabe aren’t all that different than they were back then. And the projections from this forum (including me) were an imminent correction.”
Yep, most here like to ignore reality and pretend things happened differently. Congratulations on being one of the few to accept reality. I hope you ultimately get the price decline that makes it all worth while.
“We’re talking 50, maybe 60k of lost equity over 3.5 years.”
Your anecdote is not at all representative of how much prices have declined since the peak. The average Irvine home has lost a lot more than 6-7% of it’s value since 2006. I mean come on… the condo profiled here yesterday lost 40%, but you don’t hear anyone claiming that that is representative. Can we all please agree to not use cherry-picked examples to talk past each other?
Meanwhile the buyer that picked up the home in 2009 at a discount from the 2006 buyer deserves no credit because further precipitous declines are around the corner.
Ten, that pricing decline, check that – crash – is imminent now more than ever… At a whopping 4 months inventory.
They are soooooo screwed, shoulda bought in Vegas back in ’09.
Cherry picked? Well, it was my own experience – not culled from a PSF sort in Redfin, but OK.
Unfortunately, for desirable SFRs, it is representative.
For all the short sales & REOs out there, that’s the unfortunate truth.
We earn a pretty decent living, more than 2x the “median household income” in Irvine, yet the family that bought our place brought a pile of cash to the table with earning power that trumped ours at least 2x.
I suspect this sort of displacement is happening on the margins, but simultaneously, IAC is standing up more and more rental units. So for every nouveau riche that rolls into town, there’s another IAC sucka willing to line Bren’s pocket with $2150 per month.
You can’t look at data culled from the latter and solve for the housing price of the former.
It would be highly constructive to abandon the “median household income” nonsense as a means to determining the value of Irvine dirt & stucco boxes.
Margin, you may good points and reflect the reality of the irvine market.
There are certain urban markets in the US where you can not accurately use median income to reflect price. This true in NYC, Chi, SF, etc
Irvine is such suburban blah. It’s not as prime as the aforementioned areas but it does share in part some of the attributes including a high density of condos/apartments. And rents for those simple apartments are high, not as high as the more premium US cities. There is no question that the continual build out by TIC and the fact that 70% of irvine housing is condos and apartments impacts the median income relationships. It’s sad that Irvine is suburban blah but still has the very high condo/apartment attribute which disconnects housing prices. It is nice to live in an area with very high demand and a prosperous future.
why should prices be linear to incomes?
OC residents may make 50% more, but I am willing to bet that after “fixed” costs such as food, gas, etc (which are not that different from OC to LV), the OC resident has alot more income to send on housing in general.
They are (maybe foolishly) spending that additional income on housing but just because they make 50% more, doesn’t mean that housing should be 50% higher. that is suspect ratio analysis.
Yeah, I almost questioned the same thing.
Isn’t there also a ratio issue? e.g. Henderson households earn $50k and Irvine households $100k; but if there are 2+ houses for every Henderson family, and only 1 house for every Irvine family, does’t that explain some of the deviation in house prices?
There is definitely not 1 house for every Irvine family.
Irvine is mostly condos and apartments. $265K one bedrooms LOL
But of course we all know this has nothing to do with the gap. And denitely don’t point out that single family home neighborhoods have incomes ranging anywhere from $180,000 and up with new buyers earning more than people who have lived in the single family neighborhood for 15+ years. And yes we all know that energy, clothes, and food are 50% cheaper in Las Vegas – duh
Las Vegas will out perform premium Pal Alto – no doubt.
“if there are 2+ houses for every Henderson family, and only 1 house for every Irvine family, does’t that explain some of the deviation in house prices?”
There is certainly a supply and demand imbalance creating the price disparity we see today. It isn’t that there are empty homes in Henderson and full occupancy in Irvine. Henderson has a depleted buyer pool because most of the residents either can’t sell their houses or they just lost their houses and can’t qualify for a mortgage. The owner-occupant demand is low, but the rental demand is high which makes it a great investment market. Henderson has sales rates exceeding the peak of the housing bubble which is a sign of market clearing and a market nearing the bottom.
In Irvine, the properties are being withheld from the market, so although demand is very low (20% off by historic measures), the supply has been successfully limited to date by lenders who control most of the properties. The tenuous balance between supply and demand is holding prices up, but only as long as lenders continue to hold onto houses that are either empty or occupied by delinquent mortgage squatters. Low demand and falling prices are not the signs of a healing market but rather a sign that more falling prices are on the way.
There’s really no debate is there? Everyone knows the blue collar Las Vegas jobs will start to see higher salary increases than the premium Pal Alto VC positions. They are long over due, the tide is about to change as premium Pal Alto crashes and Las Vegas receives what it deserves. You’ve got a winner here, great pick.
IrvineRenter: “How low will prices go in Las Vegas? Affordability is no longer a problem …”
Unemployment is the problem, and there is fifty-fifty chance of another recession.
Second recession or no, there is no guarantee that Vegas will ever recover economically–certainly not anytime soon, but perhaps not for several decades. I wouldn’t expect to make any money flipping houses in Vegas, that’s for sure.
I also think that another factor in establishing future sfd costs would lie in the availability of homes that are desirable for families that earn higher incomes.
For instance, although I am not too familiar with Las Vegas, my assumption is that Henderson is one of the only cities in the area that has “acceptable” housing for those who are within the top 15% of earners in the country (above approximately $115K per year). Although Irvine is a nice city, I would rather purchase in Newport, Huntington or Laguna. My family’s income falls within the range of the top 15% of income.
Although there are not many houses available for sale within the city of Irvine, potential upper-middle and above wage earners have more choices in Orange County than Irvine. The same most likely cannot be said about Las Vegas.
Irvine offers a shorter commute time and (the perception of) better schools with newer housing in a PUD. That hits the sweet spot for mid-upper level management/execs with families.
Laguna, Newport, Huntington ? Notsomuch. More coastal breeze, less of one of the other qualities.
With the 73 it takes me about the same or even less time from Aliso Viejo or Laguna Niguel to get to the office buildings around John Wayne as it takes someone from Woodbury or Portola (approx 15 min.). Portola is very close to the mountains and feels more like Inland Empire than Orange County; Aliso and Laguna are much closer to the beach (proximity to the water commands a premium). Other than the obsession with a 10/10 instead of a 9/10 school (if you raise your kids the right way they have the same chances to get to a top college whether they come from a 9/10 or 10/10 school). This Irvine obsession is beyond me. Sooner or later prices will adjust to the levels of HB or Aliso (which are maybe ~15% lower) for the reasons mentioned above. Also, the fact that Irvine is becoming less and less diverse is not really attractive.
Agree with most of your comments.
As prices in Irvine drop, they’ll still retain a premium over Aliso.
It’s utterly ridiculous, especially given Aliso’s proximity to the beach vs. some of the hotsville parts of Irvine like Orchard Village.
I would INVEST in Las Vegas. I would BUY A HOME in Irvine.
Yes. Me too.
What is going to get Irvine is the substitution effect. Look at what you can get for 650k in MV, RSM, AV, and compare that to what you can get in Irvine for 800k.
A little longer commute, a slightly worse, but high quality school will be worth the $1000 saved in housing expense per month…..
It should have already happened.
Look, this is watching paint dry until Uncle Sam gradually but assuredly exits the residential financing business.
Once that happens (and it will, to one extent or another) all bets are off and the whole enchilada is up for grabs.
In the mean time, keep doing a “shadow inventory” dance.
So you think paying nearing a million dollars for a 2900 SQ Ft home in Stonegate would be a good deal when you have to pay for all landscaping, window treatments, and before you even touch the mortgage, you are paying $2000 in RE taxes, Mello Roos, HOA and Insurance per month….
Someone with 20% down would need an income of roughly 275k per year to own…
How much do you think you will make in a few years on that property knowing interest rates are highly likely to be significanyly higher?
Two words: Hell no
But, I believe you are thinking along the right terms: “What is the profile of the person who would buy this home?”
3000sf, in relative Irvine terms, is a large home. I’m guessing that’s in the 90th percentile based on scale.
Without question, mello-roos and HOA should drag the value.
Let the payment solve for value based on a 200k+ household, 20% down and hyper-low interest rates.
Wrong, wrong, wrong. Thinking “quick buck” in housing is exactly what fed the bubble, with the banks providing the destructive financing vehicle to make it all happen (with the unknowing taxpayer shouldering the losses).
an 800k loan is above the 729k expanded conforming limit so you will not be getting the best rate…. Even at 5.25% rate, your HER is going to be around 30 which is a lenders do not want to exceed for non conforming loans in this day and age.
Someone at 240k income per year could get approved (but be mortgage poor and therefore stupid). There is no way a 200k household income would get approved in this situation….
As far as the “quick buck” scenario is concerned, I agree that quick appreciation expectations fueled the bubble. Anyone who buys a home today who thinks they will make money selling the home in less than 5 years (after closing costs) is delusional
So based on all that… what should the place sell for given a sub-30% DTI for a $240k household?
If your question is, what do I think of the Highest priced home currently offered is worth, then my answer 725k-750k, because it will easily cost 50-75k to add upgrades, outfit it, and landscape the homes. Plus having the backyard fence 10 ft from the house is crap. for that price point
If I was a realtor, I would show a client the nearly $1M home in Stonegate, drive 8-10 minutes to Foothill Ranch, and show some very nice 750k homes, with nice views, lower Mello Roos and see if the buyer thinks the Irvine home is worth the extra 1800 – 2000 per month. Hence the substitution comment earlier….
I won’t completely disagree with the value assessment, though the ‘upgrades’ part is pretty much moot. Your rationale is circa 2005 – you don’t give a seller extra money for upgrades and a fancy yard, so you can’t exactly discount for not having them. See the problem?
Regarding the substitution effect, Irvine (and others, like Brea) have enjoyed a premium over adjacent areas for decades. It’s already priced in because that factor has always been there, at every cycle and every point in the cycle.
And since the last few cycles, Irvine industry has grown; people pay for shorter commutes. Gas sucks, and so does opportunity cost. Factor in the schools and other intangibles, and you got’cher premium. It’s stuccobox bullshit.
Irvine will follow the path of Naperville, IL
For those not aware, Naperville is Chicago’s version of Irvine. It has always enjoyed a premium over neighboring suburbs for the same quality of home. Has great schools, large corporate presence, well planned community (sound familiar). However, in the past year, homes in Naperville have taken a much larger drop compared to other towns in DuPage County.
Key Reason – too much supply and people are flocking to those neighboring towns because they can get the same home for 75k – 100k less while giving up very little….
It depends on your priorities. When looking at homes to buy we looked at Aliso Viejo, MV, and other south county cities and ended up buying in Turtle Rock in Irvine. Our budget was 800K which would have meant a SFR in a south county city but we decided a smaller fixer townhome in TR for the same price fit our priorities better. It was the intangibles- quality of life priorities. We can bike to work if we wanted to and TR is beautiful.
Income is absolutely relevant for those buyers who are financing the purchase as it is core to the DTI qualification
For all you needing an example.
100k in income wanting to buy a 650k house with 100k down may not even qualify – see below:
With PMI, RE taxes, HOA, Insurance and Mello Roos (potentially) they could have an HER from 40-45
If they had no other debt, a lender MAY make this loan, if they had any debt (Car, credit card, etc.) their DTI could easily get above 50% and considering most Californians take home ~65% of their gross income, this familiy would only have 1000 – 1500 to apply to all other expenses per month.
Application Denied
100k households aren’t buying nice SFRs in Irvine – they:
1) Bought many years ago, when Strawberry Farms actually had strawberries, Los Naranjos was surrounded by orange groves and before Henry Nicholas discovered cocaine
2) Are visiting a TIC Leasing Center, jockeying for the ground-floor unit near the clubhouse
3) Stalking a condo with a direct attached garage or 4) Wistfully dreaming
5) Renting a low-to-mid tier SFR
I would not classify a 650K SFR in Irvine as “Nice” – Maybe “tired”, “crappy”, or “right next to a freeway”
While I am ranting on neighborhoods – How can someone pay ANY money for many of the homes in Oak Creek knowing The 5 is as close as 2 blocks away?
Air Quality, Freeway noise anyone?
not to mention 405…is there mello roos here? while i am at, is there any proof that communities with mello roos are better managed than ones that do no? are the price of the houses with mello roos cheaper than those that do no? given how expensive it is and how long it last, does anyone have any empirical evidence? so why would anyone want to live in a place with mello roos?
Really? A quick search says otherwise.
Here’s a decent random one.
It all happens on the margin,
I appreciate your bullish sentiments and carefully reasoned arguments. Astute observers like yourself keep all of us on our toes and prevents this forum from becoming an echo chamber. Your comments force me to examine my own arguments and contentions concerning future prices.
In debate, one can only rise to the level of one’s opponent. I enjoy a good adversary (or foil if you prefer). I look forward to your future commentary.
the question in my mind is why are banks unloading in Vegas and not in OC? Because the value is so low in Vegas that dumping it doesnt cause as much damage? ie 10% of 100k vs 10% of 400k? obviously it depends on the number of properties they own. guess the decision to liquidate is a local bank decision?
also given how slow the fall in prices is in Irvine, you really wonder what’s going on? Has one noticed that some of the listed prices recently has increased, because of all this spring buying demand? what’s up with that?
I have noticed that too. I like my current place but we had kids since we bought 7 years ago and would like to sell and get a bigger place so I have been looking at the listings and noticed that prices have actually gone up in the Turtle Rock and Turtle Ridge area from last year to this year. Can’t figure out why.
Interesting observations from some of the folks who commented on this blog.
IrvineRenter,
Long time fan and lurker. Rarely comment but always read.
I think LV is a great place to invest as well.
My concern is that with so many investors buying and renting out properties, rents might fall considerably killing off the cashflow.
What do you think?