These are some interesting numbers…
| Median sale price | Sales volume | |||
| ZIPcode | Prev. 4 weeks | change from ‘06 | Prev. 4 weeks | change from‘06 |
| 92602 | $658,500 | -27.3% | 9 | -81.3% |
| 92603 | $737,000 | -17.9% | 22 | -40.5% |
| 92604 | $583,000 | -10.2% | 16 | 0.0% |
| 92606 | $871,750 | 19.1% | 8 | -72.4% |
| 92612 | $472,000 | -22.0% | 24 | 4.3% |
| 92614 | $575,000 | -3.2% | 13 | -18.8% |
| 92618 | $682,500 | 15.7% | 20 | 53.8% |
| 92620 | $757,500 | 5.9% | 16 | -79.2% |
I am going to make a bold prediction: sales will improve in 92602, 92606 and 92620. After an 80% decline in sales, some improvement is nearly certain. Then again, sales could drop off to zero if sellers don’t reduce their prices more…
Just in case you wanted to see just how crazy everyone got with interest-only and negative amortization loans.
And what these loans did to valuations…
Gosh, in zip 02 the median dropped 27% and yet sales dropped of 81%!!
High concentration of IHB readers there? I’ve never been to Irvine, but that does seem amazing.
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Irvine Renter,
The interest only / neg. am. bar chart is insane.
Thankfully that is over.
However, do you think that people with greater than 700 credit scores will continue to have access to at least interest only products?
The reason I ask this is because this could shift the baseline price to income ratio in the OC….. weighting it a little higher than the historic baseline.
I think nearly all the pay option ARMs (neg am loans) made over the last year or two will fail to perform because there tends to be only two types of borrowers who utilize these loans: investment property purchasers and borrowers stretching to reach a property they cannot reasonably afford.
However, interest only loans are used by all types of borrowers for many reasons. Many will fail that were made over the past two years, but I don’t think it will be anywhere near the devastation neg am loans are facing.
Great info!
Doesn’t 92620 show a 6% price increase over last year – yet the zip code has -80% sales volume? Is this everything, resales and new? I’d love to know how new home builders interpret this as they release phase after phase…
I’m not sure what there is to improve the volume… jumbo credit is still tight (the premium is nearly 1% now)… it seems that the year over year won’t catch-up until we see (1) significant price reductions or (2) we catch-up with the place in time from last year when the credit market seized up….
Argh, I’m foreseeing headlines next year about the great resurgance in Housing. Sales up 100%! Prices climb 3%!
It’ll be a bull trap on the down slide. The numbers are so bad that minor improvements look stellar, people stop fence sittin and get crushed.
I’m in 602, that is West Irvine. 602 has been killed by REOs between the 25th and 50th percentiles of median. Prices are dropping quickly because places are actually getting sold, at least in my part of West Irvine. Nothing large is moving, but a good number of $500-700K units have sold in recent months.
That is exactly what I see too. Lawrence Yun and company will be calling the bottom, etc.
There has been some similar hyperbole on the foreclosure statistics. A few years ago when foreclosures were at historic lows, any increase was going to look huge on a percentage basis.
When sales volumes get very low, median figures become unstable because a few sales can shift the numbers dramatically. If you look back through similar posts, you can see $500K fluctuations in the median in 92603.
These products may continue to be made available to high FICO score borrowers, but that doesn’t mean these people will use them or that their use will create a higher bottom.
https://www.irvinehousingblog.com/2007/03/01/financially-conservative-home-financing/
Interest-only loans are risky and unstable. For the few dollars you save, you have the risk of payment shock and credit availability when you must refinance. Personally, I would not take out an interest-only loan.
Historically, interest-only loans used to be how all homes were financed. The default rates were so high during the Great Depression that the 30-year fixed amortizing mortgage was developed and widely implemented after WWII. This was the last stable innovation in the lending industry. Every time the interest-only loan is brought back — usually during times of low affordability — it is followed by a period of high default rates and the curtailment of interest-only products.
Interest-only loans look like a good deal when the market is hot, default rates are low, and prices are rising. These loans are a disaster when the market inevitably changes. In fact, the use of these loans, just like the problems we are witnessing with negative amortization loans, creates the market instability which leads to its downfall.
Am I the only one that gets a smile when looking at these numbers?
I can’t wait for the OC register headlines. “Home Sales drop by 80%”. Day after day, year after year, I’d read their marketplace or front page headlines and feel like I got punched in the gut to see home prices skyrocket 10X faster than my W2 income.
Someday, maybe someday, perhaps, I can finally buy…until then, keep posting IR! You keep guys like me from running a muck and shooting up the place.
My take:
Interest-only: Basically leasing, but if you have a steady income, in some situations it may be an option.
Negative-Option ARMS: Extremely risky. During times of historically low interest rates-
INSANE!
I agree with you that interest only are a bad idea for most people; but that does not change the fact that people with high credit scores will have access and still use these products. Whether or not these fail long term for some of these people is kind of immaterial, these products and their availability impact the shape of the bottom.
Are there a couple of knife-catchers in 92618?
I kind of doubt it. ARMs are not good risks when the value of the asset is depreciating. The banks are smart enough to know that people will not pay a baloon payment when their house is worth half what they paid for it.
Now that the house price party is over, I think this will pretty much be the end of the “creative financing” era.
I’m with IR that we will see a return to the 20% down followed by fixed rate.
My point is that even if only 10% of homes are purchased on interest only arms, that still impacts the bottom.
I am 100% for fundamental financing. But I need to be realistic.
The corollary to this IO / neg. am chart is that approximately 75% of purchases made during the run-up were made on more traditional financing.
I actually find this fact more interesting.
Affordability arguments would suggest a lot more than 25% of homes were purchased on IO / neg. am. financing.
There are still a lot of ignorant people out there who have no clue what is going on. All they know is what they see in passing on CNN. You would think that at this point every homeowner in America would have at least done an hours-worth of homework on the housing bubble. Maybe done a fact-check here and there.
At this point if you believe one word that comes from NAR (A clear example of an organization with a huge conflict of interest) then you deserve to lose your money.
It’s not going to change the fact that people still can’t afford houses. No matter how the play with the numbers, no matter how they spin the data.
People still cannot afford houses without “creative financing”. Prices will keep dropping until people can afford them uses traditional methods. Anyone who listens to the hype and jumps in before that is just a fool.
“The corollary to this IO / neg. am chart is that approximately 75% of purchases made during the run-up were made on more traditional financing.”
It says nothing of the kind. It doesn’t even say 25% of home sales. It says 25% of originations. That’s all loans, refi’s included.
No_Such_Reality, fair enough. Still my point is that affordability arguments would suggest a higher number than 25%…. no?
I think you are mistaken that approximately 75% of borrowers obtained “traditional” loans. The 25% figure represents interest only/negative amortization loans. It does not include no-doc, teaser rate arms, etc.
My understanding is that creative financing represented over 70% of all loan in California at one point.
“Affordability arguments would suggest a lot more than 25% of homes were purchased on IO / neg. am. financing.”
I believe these are national numbers. California buyers were much bigger users of these loans than buyers in many other parts of the country.
Calvin,
You are right, It would be helpful to see more creative financing data with teaser rate information.
My point remains: even if only 10% of purchases in the next 3 years are made with interest only loans, that impacts the shape of the bottom. (it delays the timing of the bottom and makes the bottom higher in real terms, i.e. inflation exlcuded)
sorry i meant nominal not real
Ken, I asssumed all the data in the post was California…. if not then it does not apply.
When I refinanced a little over a year ago with a 30-year fixed rate but 10-year interest only loan I was doing it for retirement planning. Right now I’m in what will probably be my peak earning years, so each month I pay my interest only payment plus a principal payment several times what it would have been with a traditional loan.
When the monthly payment fixes (the interest rate is already fixed) at the end of 10 years I will have much smaller payments going into retirement than if I had just taken a straight 30 year fixed now.
Yeah that makes sense Greenspan, let’s just hand out money to defaulting buyers.
“He warned against any sort of government bailout plan for homeowners that interfered with the normal functioning of markets for home prices or interest rates, saying it would “drag this process out indefinitely.” Offering cash to stricken homeowners instead would cause less long-term damage, he said.”
http://news.yahoo.com/s/nm/20071216/bs_nm/usa_economy_greenspan_dc_1;_ylt=Ake1VDoPozJv6ea1_c6Dmw4E1vAI
Unfortunately, California is much worse. In 2006, 80% of originations were IO or Neg Am.
The exhibit is interest only and negative amortization. It does not include garden variety ARMs. Right?
IR, great blog, can’t stop reading, it’s like watching a forrest fire in slow-motion.
The charts of the last two days remind me of stock-market analysis with a screaming sell sign written all over it. If my broker showed me similar analysis of say GM, I would dump it in a second. That’s what’s so facinating about this bubble, seeing people try to fight fundamentals.
I just don’t see how were going to avoid a recession.
Yep…. one sale in Bonita Canyon can really shift the whole thing… ditto with a couple of condo sales…
I wonder how we’re going to avoid a depression.
Interest-only loan is good for folks who live below their means (I’m being one of them). I had a interest-only loan back in ’05 with 350k on a 650k property (imaging the down payment) and I immediately dumped $150k after selling my 618 property back in ’05 and put the rest in high-yield bond fund. The payment on 200k interest only loan was a mere $854/mo. With 6 figure income and living with an expense equaling to CA median income family, I was saving like crazy (let’s just say if my car crashed, I can get a new one easily…not that I wish that upon me).
Now, as a happy renter, I can tell you that if you earn like an American and live like an Asian, trust me, you’ll be well-off a few decades from now.
Unfortunately, tell that to those (flippers?) that earn like an Asian and live like an American.
I don’t foresee a bottom next year. As a matter of fact, one thing you left out is the *inflation* factor. With last week’s CPI reading showing a higher number than expected, family expense will increase. With ARMs resetting next year and increase in essential expenses, you’ll see delinquencies piling up.
Remember, one REO can have a greater effect on a block than you think.
“However, do you think that people with greater than 700 credit scores will continue to have access to at least interest only products?”
The people with greater than 700 ficos don’t care if they access to interest only products. They will buy with 20% to 100% down and get a 30year fixed regularly amortizing loan if they need a loan at all. That is how they attained higher than 700 fico scores.
well there you go….. Armageddon…..
Awgee; personally I’m a 20% kind of guy…. but I know plenty of wealthy individuals who have done quite well with Interest Only products.
Does anyone else get irritated when they read analysis of the bailout plan as to whether or not it will be ‘enough’ to keep the country out of recession… since when is the economy and real estate not supposed to be cyclical ? Trying to keep the economy (and RE) from going into a down cycle is what got us into this mess (Sorry, Greenspan). I’ve been saying (to anyone who would listen) for at least 3 years, “the higher the RE market goes, the more it’s going to fall, and the worse the pain will be for the economy”. So now, do we want painful torture or do we want to take the pain brute force ? Let the chips fall, and realize a lot of people / companies will be in financial pain for a while; that’s life. Even though I’m a homeowner, I look at this as an opportunity to move up to a home of my dreams in a few years if prices come 30 – 40% of their peak in my town and make my current home a rental…I know of several people who have similar aspirations. I think those that are fiscally conservative and eager to buy homes once we ‘feel’ like the bottom is in sight are getting P-O’d that the government is trying to put the brakes on the RE down slide. Every step by the government to avoid a recession just delays/slows the inevitable decrease in home prices…I am an average Joe – am I wrong here ? And would a bailout be happening if we didn’t have a presidential election coming up ?
I think a lot of people feel the same way. Trying to ‘soften’ the blow so to speak has too many downsides.
A key problem I see is that it does not allow people to learn valuable life lessons. When a child does something clearly wrong at school (e.g. skips homework assignments) and gets detention, what does a good parent do? They support the punishment so the child learns their lesson and modifies their behavior. If a parent fights the school for an extension to turn the homework in late, the child does not learn and the behavior will likely continue.
Bailing out borrowers who did not take the time to read their loan docs and bit off way more than they could chew is wrong. Borrowers will not learn their lesson nor will those on the sideline watching. Everyone will learn to expect a bailout next time there is a mess like this.
neg am loans for the most part were used on refi’s NOT purchases. 90% to 100% purchases were done with IO loans.
We have 2 major problems. People that bought inflated homes with little or no down payment regardless of the loan type, and people that refinanced with option arms or interest only arms.
I think “softening the blow” is human nature. I agree that allowing for a catastrophic correction would probably get us back on track quicker. Wishing for this is similar to homedebtors and their wishing price…. it ain’t going to happen…. The powers that be would rather this draw out for a long period of time. Our Government and Bernanke are going to flip on the inflation switch.
Yes we’d still have the bailout. This is all about minimizing the losses of the lending institutions and debt holders. It has nothing to do with helping distressed home-owners. Read this:
http://piggington.com/guest_commentary_ramsey_on_the_big_mortgage_bailout
Real Estate Listings/property listings for free http://www.ihomedb.com
For anyone that’s been following this for more than a month, it’s been quite clear that IOs and NEIs (I just made that up – “not even interest”) made up a big majority of loans since 2004. It’s been reported in the papers a number of times (used to be banged on by Lansner at OC Register). Numbers reported have been 70-80%.
In addition, California-wide, subprime loans made up 30-35% of originations in the last few years.
Another statistic: in OC, the average combined LTV for purchase loans has been about 95% (5% avg. DP) up to at least 2005 (and I suspect 2006 as well). That’s what’s so ridiculous to me. Here’s why: There’s a realtor I often see at a coffee shop over the last few years. In mid-2004 we had a discussion, in which I stated that I felt home prices were unsustainable (this was long before I was aware of housing-related blogs) from an affordability standpoint. He claimed that they were not unsustainable (of course!) because the people buying were simply moving equity from one house to another. He said people could afford current prices because most people just had to transfer their wealth from one house to the next. It didn’t matter at all that anyone coming in from elsewhere couldn’t afford the houses or that people die, get divorced, retire, etc. Nor did it matter that there has been quite a run of home building, condo building, and apartment conversions into condos. At the time I didn’t think of it, but the cash-out refi was another reason his theory didn’t work.
The point being is I told him later he was full of shite because the average down payment on purchases wasn’t even 5%. If his theory was correct, down payments (money profits from previous sales) would have been much bigger than 5%.
Reality is not dependent on a realtor agreeing with it, or some beady eyed media whore like Gary Watts agreeing with it. There comes a point in your life when you know what you are talking about and you know most of the other people are crazy. At that point, you stick out your pecker and you do what you know is right. For my family, that was to rent and save money.
So you are holdinig GM? Brave person.
Anyone notice that Lake Forest is getting clobbered? In my daily dealings, I have borne witness to some seriously F’ed B’s there recently. Went to check out a craiglist item at one house, it looked like they were vacating the home. Out of morbid curiosity, I checked them on zillow and was dumbfounded by the amount of money they purchased that home for last year. And found through realtytrac that they have several neighbors in default. Sad, sad stories.
“Wishing for this is similar to homedebtors and their wishing price…. it ain’t going to happen”
I think it more likely that the problem is so big, there is nothing the government can do about it. I think there is a widespread perception our government has real power over asset prices. If they did, they wouldn’t have been left holding the bag in the S&L crisis.
I agree that the government can not stop this mess.
My point is that the government can effect the shape of the bottom.
The government can change policies to make the bottom take much longer to reach and make it a much flatter bottom.
I think this is a bad idea; but I do think it’s human nature.
The discussion I saw on a week or so ago about financial institutions and morality was a bit of a joke. Financial insitituions have a reponsibility to their shareholders to make decisions to minimize loses. Confusing morality with Schadenfreude is a bad idea.
I haven’t lived here long enough to have a reservior of Schadenfreude. So maybe it’s hard for me to understand the emotional baggage some people here are carrying around. At least it’s not bags of debt ! that’s for sure.
what would have happened if that bond fund tanked – if, say, they were overinvested in CDOs?