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Irvine Home Address … 30 ROCKROSE Way Irvine, CA 92612
Resale Home Price …… $475,000
And so I cry sometimes when I'm lying in bed
Just to get it all out, what's in my head
And I, I'm feeling a little peculiar
And so I wake in the morning and I step
Outside and I take deep breath
And I get real high
And I scream to the top of my lungs
What's goin' on?
4 Non Blondes — What's Up
Throughout my posts on the IHB, I make references to what I believe is happening in our local housing market. The IHB serves as a valuable market resource to people considering buying Irvine and Orange County real estate. The message for the first nearly 5 years has been simple: don't buy a home yet. Over the last couple of years as the plethora of market props have been removed, the message has evolved to the more nuanced advice: buy below rental parity if you have a long holding time. That advice will remain our mantra over the next few years until conditions in the market change.
Why are you afraid to buy?
If you have been reading the IHB regularly, you have a rational fear to buy local real estate. Prices are falling. Prices will continue to fall for a while.
People who buy today might be trapped underwater and unable to sell their homes without taking a significant loss. Further today's buyers may miss the opportunity to buy later at a lower price. These are not foolish fears, they are legitimate reasons to delay the purchase of a home anywhere in Orange County.
Why will prices keep falling?
There are five primary factors which will impact the balance of supply and demand in our local market:
- High mortgage delinquency rates translates to a large shadow inventory (supply).
- Large REO inventory of lender owned properties withheld from the market (supply).
- High unemployment has diminished the buyer pool (demand).
- Weak California economy has diminished employment and wage growth (demand).
- Higher future interest rates will lower aggregate loan balances (demand).
Each of the above factors will contribute to either increased supply or reduced demand. The existence of these factors is not conjecture. They are very real. The way each of them impacts the market is uncertain, but each of them will serve to pressure prices lower over the next several years.
What will cause prices to eventually go up?
Kool aid and the memories of the rewards of the housing bubble are part of our culture. There will always be plenty of desire for California real estate. Even as prices have fallen steadily for the last 5 years, hope springs eternal, every buyer believes they are buying at the bottom, and most believe unlimited wealth and HELOC spending money is just around the corner.
There are several factors beyond kool aid intoxication which will serve to reverse the fall of prices and cause real estate prices to rise again:
- Current interest rates are very low.
- Payment affordability is relatively high.
- The economy and the employment situation will improve.
- Supply pressures will abate.
Even neighborhoods which have not historically traded below rental parity are trading below their historic level of payment affordability. On a payment basis, prices in many neighborhoods are similar to what they were in the late 90s and early 00s before the bubble mania took over.
The California economy has been sputtering as it weans itself off the Ponzi borrowing money of the 00s. The transition has been difficult and painful which is why the economy is still so weak. A significant portion of the false demand of the 00s will never return.
When the economy and employment finally picks up, wages will increase, and new households will form. The higher wages will increase the amounts borrowed, and the new households will increase the numbers of loans demanded. Both factors are essential to a housing market recovery.
At some point, the overhead supply of shadow inventory and visible REO inventory will be liquidated. This will likely take several years as lenders sell into any price rallies to recover their capital. There are many ways this could play out.
Lenders hope consistently rising prices will allow them to sell their inventory for the prices they want, and this liquidation will be easily absorbed by the market. I think that scenario is wishful thinking by lenders. The inventories are simply too large for it to work out that way. If lenders can hold their REO indefinitely, they can meter out this inventory over the next decade or more, but I doubt all the banks will be that patient.
As some lenders hasten their liquidations (like the GSEs are now), the resulting sales will push prices lower. As lenders capitulate one-by-one, the collapsing cartel causes brief seasonal rallies followed by deep seasonal drops. This yearly cycle will see consistent year-over-year declines similar to what has occurred in 2011. I believe this is the most likely scenario.
Declines in the liquidation phase of a bubble are not as steep as the first phase when the credit crunch forces lenders to abruptly decrease loan balances, but as was demonstrated in Japan, the liquidation phase results in slow but steady declines in prices until the inventory is purged from the system. Let's hope our liquidation phase is not as protracted as Japan's.
What will the bottom look like?
The double dip will be the final decline, and I don't believe it will be that severe (expect perhaps at the high end). That being said, the bottom will be difficult to time. First, it's impossible to predict what foolish policies may emanate from Washington. With our current state of gridlock, I have some hope that nothing substantive will emerge from the bowels of government. Any government policy would likely have the effect of delaying the market bottom.
Housing markets nearly always exhibit a seasonal pattern of spring rallies and fall pullbacks with the low for the year in early January. This seasonal pattern will continue, but the spring rallies will be weaker, and the fall pullbacks will be more pronounced. The inventory is often reduced in fall in winter, but the sellers who remain are usually more motivated as many of them missed the prime selling season.
Due to the overhanging inventory, this seasonal pattern with a slightly lower bias will persist for 3 to 5 years. The two or three years following will show the same pattern but with a slightly upward bias. The bottom will form slowly for the reasons listed previously: inventory overhand, rising interest rates, persistent unemployment, and prudent lending standards.
Buyers should not feel a sense of urgency from the fear of being priced out. The window of opportunity will be open for years to buy during this liquidation-bottoming phase.
Get the latest news on the Irvine and OC housing markets
On the second Monday of each month, I will deliver a presentation on the current state of the housing market. Monday September 12, 2011, will be the first of these presentations.
Presentation nights will be busy for me, but we want them to be entertaining and informative for you. The proceedings will start at 5:00 with a registration happy hour. If you want to come out to meet Shevy and I informally and talk real estate or simply meet with other IHB readers, you are invited to show up at 5:00 and have a drink with us.
At 6:00 I will gather everyone together in the Brewmaster room at the back of JT Schmids for the presentation on the OC housing markets. It will be an expanded version of the post above plus the most recent monthly data from August. Each month, the presentation will have the latest monthly data, so even if you have seen the presentation once, it will always be fresh.
Later that evening, I will be giving a presentation on investing in cashflow properties in Las Vegas. More on that in an upcoming post.
Everyone is invited to come up for the happy hour, the OC housing market presentation, and the cashflow property presentation. You may come and go as you please selecting only those events you wish to see.
On August 24th, the first-time homebuyer presentation was attended by 29 interested readers. One of the attendees had this to say in the comments:
Astute Observation by Pascal
I just attended this, though I’m already familiar with the home buying process.
It was great, and I highly encourage anyone who was reluctant to go this time for whatever reason, to attend the next one.
And there will be free cookies.
Actually, there will be free drinks and appetizers this time around. I hope to see you on September 12.
Cleaning up after the Ponzis
The next few years in local real estate will be cleaning up the mess created by lax lending standards and the Ponzis who took advantage of it. Today's featured REO is a typical example of the properties which will make up a third or more of our resale market for the foreseeable future.
- The previous owners paid $270,000 on 4/12/2000. They used a $242,730 first mortgage and a $27,270 first mortgage. About a year and a half later, they began periodic mortgage withdrawals to supplement their income.
- On 1/23/2002 they refinanced with a $257,000 first mortgage.
- On 7/23/2003 they refinanced with a $259,000 first mortgage.
- On 1/12/2004 they obtained a $180,000 HELOC.
- On 5/27/2005 they got a $242,000 HELOC.
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On 9/24/2008 the wife obtains a $444,500 first mortgage and a $40,000 HELOC in her name.
- She quit paying in late 2009 and was foreclosed on in November of 2010.
Foreclosure Record
Recording Date: 07/07/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 04/02/2010
Document Type: Notice of Default
For each one of these we see, there are dozens hiding on lender balance sheets and in shadow inventory. These properties must eventually be liquidated, and as they are, any meaningful appreciation will be elusive.
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This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 30 ROCKROSE Way Irvine, CA 92612
Resale House Price …… $475,000 
Beds: 4
Baths: 2
Sq. Ft.: 2130
$223/SF
Property Type: Residential, Single Family
Style: Two Level, Traditional
Year Built: 1966
Community: University Park
County: Orange
MLS#: P788492
Source: SoCalMLS
Status: Active
On Redfin: 48 days
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GREAT IRVINE HOME. FLOOR PLAN IS OPEN AND SPACIOUS AND HAS SO MUCH TO OFFER. MASTER RETREAT. MIRRORED CLOSE DOORS. FABULOUS KITCHEN WITH TILED COUNTERTOPS AND BACKSPLASH. RECESSED LIGHTS. 2 CAR ATTACHED GARAGE. PRIVATE BACKYARD. LOTS OF STORAGE SPACE. THIS IS A MUST SEE.
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Proprietary IHB commentary and analysis 
Resale Home Price …… $475,000
House Purchase Price … $270,000
House Purchase Date …. 4/12/2000
Net Gain (Loss) ………. $176,500
Percent Change ………. 65.4%
Annual Appreciation … 4.9%
Cost of Home Ownership
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$475,000 ………. Asking Price
$16,625 ………. 3.5% Down FHA Financing
4.19% …………… Mortgage Interest Rate
$458,375 ………. 30-Year Mortgage
$133,611 ………. Income Requirement
$2,239 ………. Monthly Mortgage Payment
$412 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$99 ………. Homeowners Insurance (@ 0.25%)
$527 ………. Private Mortgage Insurance
$175 ………. Homeowners Association Fees
============================================
$3,452 ………. Monthly Cash Outlays
-$352 ………. Tax Savings (% of Interest and Property Tax)
-$638 ………. Equity Hidden in Payment (Amortization)
$25 ………. Lost Income to Down Payment (net of taxes)
$79 ………. Maintenance and Replacement Reserves
============================================
$2,565 ………. Monthly Cost of Ownership
Cash Acquisition Demands
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$4,750 ………. Furnishing and Move In @1%
$4,750 ………. Closing Costs @1%
$4,584 ………… Interest Points @1% of Loan
$16,625 ………. Down Payment
============================================
$30,709 ………. Total Cash Costs
$39,300 ………… Emergency Cash Reserves
============================================
$70,009 ………. Total Savings Needed
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For a 15 year mortgage, 6%, roughly $33k/yr would have been going into home payments. Around $300k over the 9 years they made payments. Equity extraction was $240k. Net into the home was $90k over 10 years. $9k/yr. $750/mo. This is probably not even a worst case, as it was only 75% increase from initial sale price to final loan. Miami saw a 175% increase in their Case-Shiller index. Imagine $500k of equity extraction. The home that should have cost the owner $330k over 10 years produced a NET $170k income above the free living. A lot of people lived like this and it is a huge change.
I would imagine that prudent borrowers that have lowered their interest rates, maybe from a 6% 30yr to a 3.5% 15 yr, could be saving $12.5k/yr on a $500k loan. Do you think they’re spending that, or saving it? How does it compare to the $50k 10% appreciation could give a homeowner? If that got tapped, it got spent. Lower interest rates don’t translate into consumer spending as quickly as extremely loose lending standards.
When will the market hit bottom and the boom time return for homes/apartments so I, me, I can be wealthy? That’s the essence of the question from investors and homeowners. Touched often before on IHB, two factors are left out of this analysis that trace to the Fed. First the fed and the treasury are purposely inflating our money supply 5-15% per year, depending on the methodology used. Inflation is what drives people to hard assets (thus bubbles), and housing is the one large hard asset “little” people can buy, joining along with speculators and developers. Thus the upturn will hit very fast; it was supposed to already have happened, to save the banks and turn around their bad mortgage losses and make people and speculators clamor to buy everything in the shadow inventory. Don’t sell this galloping inflation factor short as the single most potent weapon of the banks and their captive government. Second, the US has millions a year added to the population; that should have by now, but will still in the opinions of the same old boy economists/bankers, cause tightening housing for two reasons. The first is simple supply, the second is race/economics. White people and asians buy homes largely in newer, self-segregated race/economic neighborhoods and move out if they can, and as soon as they can, if racial composition changes, or economic sometimes (we refer to this as “the schools” but it is much more race, than economic self-stratification). That these factors haven’t worked so far, is ignored and still expected to work! It is ingrained, institutional arrogance of the Fed and lenders that these forces would guarantee their slipshod looting of fast money would never fail, failure biting into their wealth and bonus pools, and they still seem to believe these will work, to this day. (thus “helicopter” Ben bernanke, Mr. inflation). That’s why there’s no real jobs program other than “fix housing by socializing the loss”. Paying thrifty savers a decent rate versus saving the banks? That’s an easy call for a Banker, isn’t it?
You forgot to mention that house prices in Irvine have increased 100-200% for the last 10 years. The featured property is 100% more expensive.
If the inflation rate is 5%, it’ll take 20-40 years to justify the house price increases.
Lawler: Census 2010: Homeownership Rates by Selected Age Groups
http://www.calculatedriskblog.com/2011/08/lawler-census-2010-homeownership-rates.html
IR: “When the economy and employment finally picks up, wages will increase, ”
How many astute observers here really believe that wages will increase for workers outside of the top 5%?
It won’t happen any time soon, but eventually the relentless push of the federal reserve printing money and the purging of debt will create demand which in turn will create employment and wage growth.
Actually, mega-inflation causes unemployment to enlarge; rates go up to reflect inflation and that decreases profits. Stagflation results if rates go to 17% again. The Fed can only force low rates for so long, then they have used up that weapon/tool; UNLESS they unemploy everyone at the bottom of the social scale (largely renters, minorities, somewhat). That’s why, again, there isn’t the slightest real interest in a true jobs program, tight labor brings inflation that can’t be countered easily.
Tight labor markets with a side effect of inflation is a feature not a bug – nearly everyone would agree to that.
Interesting article in OC Register 9/2 on “why Homebuilding market is stagnent”….blame is all put on the number of foreclosures….as if that is the only factor. How about this?…..Those few new homes that have come to market have not been at much, if any, reduced prices!!! Builders don’t do a great deal of market research before putting product out there in the market. So, by and large, they are pricing product off whatever they paid for the land….probably 2006 prices, at the height of the bubble when land prices were soaring! The only difference in consumer price between a house built in Irvine and one built in Chula Vista is the cost of the land. The sticks and bricks will costs nearly the same. So, if builders want successful projects, they (like the banks) need a visit to the barber shop.
Wages will increase to the extent that general inflation kicks-in. Once inflation comes, however, you will see higher rates. I don’t expect either within the next few years, and neither does the Fed who targeted mid-2013 for the end of their accommodating policies.
Don’t feel pressured to buy by a fear of rising rates. The Fed effectively controls long-term rates and has de-facto pledged to keep them low until mid-2013.
Agreed.
I think that was one of the incorrect calls about this particular bubble, that the inevitable rising rates would attribute to a spectacular burst and prices would plummet.
Anyone in a “decent” OARM is probably paying less than a fixed or X/1 rate right now.
The prospect of rising rates today isn’t as scary as before, from 7% to 9-10% maybe, but from 4% to 6-7%? People used to brag about 6% interest rates.
Still plenty of cool-aid which tells me that it’s unlikely that we are close the bottom in some areas of OC. I just saw a deal close that had been on the market for almost 200 days. We’d been negotiating it and had a counter offer from the seller for $100,000 less than what the buyer that closed on it paid. What makes it even worse is that the seller was also doing a large carry back for our counter, I figure with no carry back he would have likely taken circa $200,000 less than what it closed for. Particularely because the buyer closed so quick, it must have been cash.
The seller was motivated; it had been on the market for nearly 200 days, if the buyer/ buyers agent showed any patience or retrain they would have saved $100,000+.I wonder what the buyer(s) that closed would think if he saw the comps we showed our client or the counter the seller had given us just three weeks ago?
One of the things that I found most interesting during the bubble was that overall percent equity in US homes was falling, even as the value of those homes were rising. People were extracting equity at a rate faster than the values were increasing! I think we will see something of a reverse. I ran some numbers on a colleague’s for-rent home, with a 15yr @ 3.5% being something like $2700 total payment, but a cost-of-ownership of $1444. The $2700 @ 25% DTI translates to roughly $150k/yr. What really lowers the cost-of-ownership is the forced savings of $1333/mo. Annually that works out to $16k/yr. So the forced savings of a 15 yr mortgage is over 10% of the 25% DTI, 15yr-frm potential buyer.
Where do you find a place for under $400,000 and that would rent for $2700? For $2700, is that including tax, insurance and upkeep?
If Irvine was that price, I would buy today.
Stocks are much more effected by short-term interest rates than houses. The house lack liquidity due to the low turn-over, high selling cost, high buy cost ….
The listing description from the MLS forgot to mention that this house is “freeway-close!”. And I mean really, REALLY freeway-close.
Breathe deeply!
-Darth