The big news this week was the implosion of the Treasury market for 10-year Notes. The yield on these has a strong impact on mortgage interest rates. Mr. Mortgage discussed this in his recent entry, 5-28 – Potential Consequences of 5.5% Mortgage Rates. He walks you through all the implications of the mortgage meltdown. He then followed up with 5-29 – ‘The Day After’ the Interest Rate Spike. The bond markets rallied and the spike may be reversed, or this may be the end of low interest rates. The next two weeks will be critical.
You can find IrvineRenter on Twitter. I figured out how to get the IHB posts to automatically feed into it. So if you are into Twitter, you can follow the IHB there as well.
Happy Anniversary — The Flintstones
Tomorrow is our ninth Wedding Anniversary, so I want to wish my wife a happy anniversary. I love you.
The chart below is one of the more interesting I saw this week. It is hard to deny there was a real estate bubble in Las Vegas. Look at the trajectory of the line; you have to suspect there will be some downside overshoot.
Check out the carnage in Riverside County. The median home price there is now $179,000. There is no way Orange County in general and Irvine in particular can sustain its prices when substitute housing is that much cheaper in Riverside County. The historic price differential between Riverside County and Orange County will re-establish itself, it is only a matter of time. I doubt it will happen by a large increase in prices in Riverside County.
It is hard to deny there was a real estate bubble in Las Vegas.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/03/07/MNGOTBLIIR1.DTL&type=printable
Monday, March 7, 2005
Las Vegas’ lucky number last year was 52 — as in 52 percent. That’s how much real estate prices jumped in the nation’s fastest-growing city in one year, as a housing shortage set off a wave of speculation by investors from California and other states.
But as any gambler knows, Lady Luck eventually turns a cold shoulder. Las Vegans wanted to cash in, too, and so many put their houses up for sale that they flooded the market. By the end of the year, some homebuilders were slashing prices.
For investors from states like California where prices seem to move in only one direction — up — it was a stark example of a deflating bubble.
“When you lose money in real estate, you really feel it,” said Igor Doncov, a software engineer in Half Moon Bay who bought two new houses in Las Vegas early in 2004 but sold them at a loss after his builder, Pulte Homes, cut prices on its new models by $180,000.
“I thought I couldn’t lose,” he said in a telephone interview. “But it turned into a total disaster.”
Housing analysts don’t think Las Vegas’ slowdown is a sign that prices will soften soon in other fast-appreciating regions. But they say it is a warning of what could happen in the Bay Area as interest rates go up — particularly for people trying to “flip” houses for a quick profit.
“Everyone is watching Las Vegas with its price appreciation and flipping, ” said John Karevoll, an analyst at DataQuick, the La Jolla real estate research firm. “If something weird happens, it’ll happen there first.”
For years, Las Vegas real estate was cheap. Myrna Kingham, president of the Greater Las Vegas Association of Realtors, remembers not-so-distant days of driving around in a pickup wearing high heels and showing clients dusty 5- acre parcels listed for $20,000.
But as the population of Las Vegas and surrounding Clark County grew 81 percent in the 1990s, adding 621,160 people, housing prices caught up, matching the national median of $145,000 in 2001.
Then last year, the market caught fire, boosted by healthy job gains, a growing stream of retirees, Californians drawn to lower home prices and an influx of investor money.
Builders, faced with a shortage of workers, had trouble keeping up. Add rock-bottom interest rates, and the scene resembled the go-go days of the Bay Area’s tech boom. Hundreds of would-be buyers descended on open houses, and home prices seemed to increase as quickly as the progressive jackpots in the slot machines on the Strip.
This article shows just how much ignorance, misinformation and denial is still present in the MSM:
“as a housing shortage set off a wave of speculation”
There never was a housing shortgage. Prices went up because the Option ARM loan was introduced.
“Las Vegans wanted to cash in, too, and so many put their houses up for sale that they flooded the market.”
The bubble had nothing to do with supply and demand as this article suggests, it was completely a finance driven rise and fall.
“I thought I couldn’t lose,” he said in a telephone interview. “But it turned into a total disaster.”
What a dumb ass.
“Housing analysts don’t think Las Vegas’ slowdown is a sign that prices will soften soon in other fast-appreciating regions.”
Bullshit. The only housing analysts who are not predicting a collapse in fast-appreciating markets are the shills of the NAR. This is a note of denial thrown in for the residents of the Bay area where this article is published.
“Then last year, the market caught fire, boosted by healthy job gains, a growing stream of retirees,”
Those factors had absolutely nothing to do with the increase in prices.
This reporter does have a rudimentary understanding of supply and demand, and she attempts to explain what happened in those terms. Unfortunately, she is completely wrong. I suspect she is a homeowner in denial herself, or she wouldn’t have put in the part about how the Bay area is different.
“This reporter does have a rudimentary understanding of supply and demand, and she attempts to explain what happened in those terms. Unfortunately, she is completely wrong. I suspect she is a homeowner in denial herself”
I think you are giving her too much credit. Too many Americans are complete idiots, don’t you watch Jay Leno’s man on the street interview’s. My money says she’s just an idiot like everyone else.
I think that 5 years from now, 95% of Americans will have no clue what the housing bubble was all about. And one only has to listen to the statements of most of our representatives in DC on the issue to realize they don’t understand what happened either. I used to be relatively optimistic that this bubble was so huge that it’s aftermath would bring some real systemic change to prevent another. But more and more I’m starting to think that all of this is bound to happen again. And from a selfish point of view that is probably a good thing; now that I know I can spot housing bubbles and that 95% of others can’t, I plan to take full advantage if another comes along.
The politicians have the connections to get real advice. They can also invite or subpoena anyone they would like to come testify to Congress.
If they don’t understand, it’s because they don’t want to understand. Or, it’s because their largest campaign donors don’t want them to understand.
In all fairness, that article was from March 2005, back when very few of us truly understood the demons running amok in the housing/mortgage and financial markets. IR, you might have been onto their game by then, and there were others, but I wasn’t fully aware of what was going on. By mid-2006, I knew that there were people all around me earning $40K/yr, living in 3K sq ft houses, and driving 2 brand new Beemers, but I just thought that they had invested well or had wealthy parents or something. I was newly back in the States after 6 years living in Europe, and I figured that I just needed some more time to establish myself before I’d be living high on the hog like those people. After all, if they could do that with $40K/yr, think of what I could do with my salary! 🙂
So, the short answer is that I wouldn’t excoriate this reporter too harshly for not being fully up to speed on the dangers of exotic mortgages, HELOC abuse, mortgage-backed securities, and credit default swaps back in March 2005.
-Darth
Hi there, these are fabulous posts. I am a regular reader of these as I work in Sales Tax department. I am working part time on the methods of John Beck for several years. These methods are quite helpful to me.
It was this article that told me the bubble was going to pop, as Las Vegas has always been a growing concern, so to speak.
One little correction: The article was printed over 4 years ago, but it was this article that told me that the bubble was ready to pop.
The increase in rates from 4.5% to 5.5% needs a 10% drop in selling price to make the same monthly payments (loan payment plus taxes at 1%). I don’t hear the NAR say “drop sales price or bid less!”
If the Alt-A and opt-ARM holders can’t afford the house at 1% to 3%, I don’t see them affording the house with an ARM 1/3 at 4.5% and/or 30y fixed at 5.5%. The same goes for the interest only loans.
Best way of avoiding being crushed by a falling house. Get out from under it. Don’t ask the taxpayer to lift it (bailout plan) or toss someone else under it for support (new bubble plan and greater fool plan).
The housing demand is created by 1) people needing a place to live and 2) speculation fueled by imbalance and by bad lending practices (i.e., negative downpayments, negative amortization, subprime, Alt-A, and other ARM’s). Housing as a social policy is to bring stability. With bad lending is bring boom, bust and then stability of deep recession.
Irvine has too much demand for homes. This is most likely the bottom for prices in Irvine. I know this because I have been looking for over a year and prices have not dropped. The only thing that will have a negative impact on prices is interest rates and this is not up anytime soon. The asians governments and the US will not let this happen.
Hahahahahahahaha.
No….really….HAHAHAHA.
The Asian govenments can’t do shit.
We made the Asians bag-holders in the late 80’s boom.
Pebble Beach anyone?
If Asians didn’t care so much about “face” they wouldn’t be such easy targets.
If you don’t know what “face” means, ask an Asian friend.
I’ve got nothing against Asians but financially, they are absolute idiots. It has been the case before and will be the same this time.
So much for intelligent discussion. And the thread was going so well.
While I’m here though, I want to address the original, intelligent post by ak.
The are a few contributors to falling home prices. Certainly one is the availability of cheaper housing as IR mentioned.
Another is HELOC abuse, where houses weren’t exaclty flipped, but people rode the wave to ruin.
And then you have the churn of the flippers.
During the bubble you had areas with a lot of “churn” much flipping and many houses for sale. These areas are in distress now because all of the houses in the area followed the booom. The owners were not “real neighbors”, just owners looking to sell to someone else. These owners have no real investment in the area and as we’ve seen many have simply walked away.
Now imagine an area where people were established in their homes and there was not so much turnover in the area. Yes, flippers were everywhere and even in the best areas there will be foreclosures, but in some areas people were content to live in the houses they had purchased before the bubble.
So, I think a case can be made that some areas might be more immune to downturn than others simply because the neighbors did not refi themselves into oblivion nor sell to make easy money.
I kinda fear that may be the case with some of the single family homes here in Woodbridge. I have been renting a condo here since about 2005 and the condos certainly went up with the bubble, but I don’t remember seeing a lot of churn in the SFR.
As an aside, Woodbridge has this silly practice of forcing sellers to use special “Woodbridge” for sale signs that are brown and don’t really stand out. Somebody should do a study and see if by chance this stupid little rule (which actually does make it harder to sell your home, since if you are not from the area you don’t really notice them) was some kind of antibiotic to the kool-aiditis germ.
Houses are a commodity. Just because Neighborhood X is mostly made up of people who have stable home loans does not mean the price of houses in Neighborhood X is more stable than the surrounding community. Don’t believe me? Put your home on the market for 20% more than a similar home and see how long it takes to sell.
Here’s a hint…it won’t sell. In places like CA and FL and NV, there are no “special areas”. No one is immune.
Dan: I’m reasonably familiar with the Florida market from the Treasure Coast area to Miami-Dade. There seems to be resistance to price drops in the established several-hundred-acre gate-guarded communities along the coast compared to the surrounding community individual homes. Is that not the situation in the Jacksonville area?
(somehow this got misplaced further down in the postings).
I can’t speak for Jax since I’m not up to speed on the individual communities there. But once equilibrium is reached, even the rich communities will come back to earth. Housing is a commodity. No reason to think that similar neighborhoods, even the rich ones, should be immune.
There’s a difference between where prices are, and where they are going.
DESIRE IS NOT DEMAND. The economic concept of “demand” requires an ability to pay for the item. Housing is still not generally affordable in Irvine, so prices must continue to drop, or incomes must rise, and I don’t see the latter as being terribly likely in this economic climate.
If incomes rise in the next couple of years, it is because of inflation.
However, discretionary incomes may be going up. If rent or mortgage payments drop, people will have more to spend on other things.
I know, based on the grammar alone, that this post is a troll, but I can’t resist…
You obviously haven’t done your homework AK. Demand is down everywhere, supply is increasing, and home prices are not stabilizing. The fed can only do so much to contain interest rates before they shoot up. Maybe the fed could keep the interest rate at 7% for 18 months or more, if they wanted, but keeping rates at 4.5% for any large period of time is damn near impossible. China and Japan have nothing to do with it.
By the way, the US is the largest buyer of treasuries. Not China.
Have you guys even looked for a home to buy in Irvine. Anything that is priced between $800-$850K with 2,750 sf to 3,000 sf is in escrow within days. There is no inventory for these types of homes in Irvine. If you don’t believe me go check out Redfin and search in any neighborhood (northpark, woodbury, portola springs, oak creek, woodbridge, etc.) If you find a home not already escrow, please let me know. There is pent up demand in Irvine.
ak,
I don’t think you are a troll, and I see your frustration with the current market conditions. Inventory is very tight right now. However, you are failing to see the big picture. The reasons you gave for the market staying at these high prices are nonsense. There are many owners who will default then their ARM loans recast, there are many current defaults that have not yet been foreclosed, and there are many foreclosures not yet on the market. In short, these conditions are temporary, and prices will fall when these conditions change.
You can choose to believe the people here or not. If you buy now, you will be underwater soon, and you will remain there for a very long time. Buy at your own risk.
IrvineRenter,
I agree with you that there will be more defaults. However, the banks are very savvy and will not unload their inventory of REO’s in mass numbers. Rather, the banks will release each REO slowly and methodically so that the real estate market will not materially deteriorate. In the City of Irvine, there will be very few defaults and the banks know that demand for an Irvine home is fierce.
Don’t get me wrong. I am just as frustrated as everyone on this blog. I want to buy as house in Irvine, but there is just too much demand. Like I said before, the only possible thing that can make price go down is if interest rates go up and I don’t see this happening anytime soon as the U.S. and Asian governments will do everything to keep home prices up. I’m starting to think the Irvine will be the next Newport Coast and regular people like us here on this blog will be priced out soon. I hope I am wrong, but it doesn’t look like it. Just look at Woodbury, new homes by Lennar are still priced at over $1MM (hasn’t gone down at all since 2006).
Has anyone noticed that here is Quail Hill, the house vacancy rate is at about 10%. Just be a peeping tom to find out. Somehow, these vacant homes are not showing up as inventories.
Dan: I’m reasonably familiar with the Florida market from the Treasure Coast area to Miami-Dade. There seems to be resistance to price drops in the established several-hundred-acre gate-guarded communities along the coast compared to the surrounding community individual homes. Is that not the situation in the Jacksonville area?
AK: I agree with IR that prices will continue to fall. Do you think the large majority of owners whose homes priced in the $700k range and above could afford them now if they were to buy them now with 10 or 20% down. Who is going to buy those homes when the recasts occur and the homes go back to the banks or up for sale. Think about it. Patience; it will more than pay-off.
Like I said if people can’t afford an interest rate of 2% on $x now, they can’t afford an interest rate of 4.5% ARM or 5.5% 30y fixed on $X. If the interest rate is 7%, they won’t be able to afford the house at $x. The house price needs to be lowered by 10% from 4.5% to 5.5% interest rate, by ~21% for 4.5% to 7.0% interest rate. That’s just to keep payments the same. That’s not counting decline markets, bubble being popped, lower wages, unemployment and other negative factors.
IR, on the LV Case-Shiller chart is the overshoot of the base at 100 or 65?
AK, What does the govt, NAR and the banks expect? Housing expenses to be 50% or more of gross income? That level can’t be substained — The people will be slaves to the banks and house.
Please don’t get me wrong. I believe home prices are still over priced by at least 15% to 20%. However, the people buying homes in Irvine now are mostly wealthy, well to do families from the far east. Just take a look at Northpark, Woodbury, Quail Hill, Portola Springs. Homes there are still selling at $350/sf or more. I personally believe $250/sf is fair value, but people buying currently don’t care about this type of analysis, only the people on this blog do.
There are some $250/sf Irvine houses. Unfortunately they’re mostly condos 🙁
ak: “Irvine has too much demand for homes…prices have not dropped” in “..over a year”
You have GOT to be joking!!! I’ve been looking for nearly 18 months in Irvine, and I’ve seen prices drop radically in that short time! Radically! I don’t want to seem overly dramatic, but it’s difficult to overstate the change in pricing, and perhaps more importantly, the MOOD of the market in Irvine. At the beginning of 2008, sellers were just starting to consider that they might not be able to sell any old SFR in Woodbridge for $800K+. My wife and I have fallen in love with Woodbridge as a place to live (we rent there now), and I think that Orangetree will be one of the first neighborhoods to reach cashflow investor pricing, so I’m very familiar with those 2 neighborhoods, especiall the 2- and 3-BR condos.
For some anecdotal evidence, take a look at the Woodland/Tanglewood/Pebblewood neighborhood of Woodbridge just outside the loop near the Culver/Barranca intersection. Two properties there, #13 and #10 Pebblewood, have similar list prices ($525K & $529K). #13 last sold in June 2005 for $680K. If it were to sell for its current list price, that would be a price decline of 23%, but it won’t get anywhere near that asking price. #15 Woodland is a comparable property, and either was sold or reverted to the bank (hard to tell just from the Redfin listing) at a value of $484K.
Jump inside the loop to #2 Alderberry, which is a beautifully upgraded 3/2 that sold several weeks ago for $545K (still a knifecatcher price). It sold in June 2004 (well short of the peak) for $612K. That’s an 11% decline for a previous sale that was well short of the peak and a recent sale well short of the bottom, and that’s a fully-upgraded 3/2 with attached garage only steps from the lake. So, it’s not only the 2005/2006 buyers that are getting hammered by these price declines. People that bought early in this decade are also losing money on their houses.
Some of the newer neighborhoods (e.g. Woodbury & Turtle Ridge) _WERE_ holding their pricing better simply because they have been built so recently. But now the defaults are rolling into those neighborhoods too, and prices are dropping fast (see recent article by IR on Turtle Ridge). We might see places like Orangetree bottom out in 2010 and then plateau for the next decade, but Irvine as a whole is going to keep falling well into 2012 if not beyond.
-Darth
Darth, like AK and yourself, I too have been looking into Irvine for more than a year now. I do agree that the prices are still falling and they should fall further.
However, there are lot of idiots out there who are either impatient and are tired of waiting or, simply stupid. Like AK mentioned earlier, these people have been pouncing on anything that they find “affordable” even if it is not worth the asking price. I recently saw a detached condo in Walnut area and I liked it. I was thinking of putting an offer which was about 50K below the asking price. Before I could do so, I was told by the agent (and validated by a friend who happens to know the new (stupid) buyer) that the seller got an offer for 20K above asking price!!
IMO, with Fed’s intervention and with such idiots around, especially in Irvine, the desire has been becoming the demand which is keeping the prices from falling sharply.
I highly respect IR and his views but for Irvine, it could be a very slow decline, almost like a fake bottom right now and we’ll see the real bottom later than 2011….unless the interest rates shoot up drastically! :coolsmirk:
The stupid ones are the ones who didn’t get to enjoy the HELOC abuses and now are bitching about it here in this blog.
The smart ones (i.e. the Madoffs but without the prison) are the ones that are laughing all the way to the…..um…..forget it.
Where are all these buyers with 10-20% down and sufficient annual income to qualify for the much more restrictive loans at current prices going to come from?
Patience. And keep reading Irvine Housing Blog. btw, did you see the excellent discussion by Mr Mortgage in the link posted elsewhere in this blog:
http://moremortgagemeltdown.com/download/pdf/T2_Partners_presentation_on_the_mortgage_crisis.pdf
“Two properties there, #13 and #10 Pebblewood, have similar list prices ($525K & $529K). #13 last sold in June 2005 for $680K. If it were to sell for its current list price, that would be a price decline of 23%”
Like AK, I’d like to see a 23% from 2008 or early this year.
IR,
See pages 62-64 of this outstanding analysis. All of it is good stuff.
http://moremortgagemeltdown.com/download/pdf/T2_Partners_presentation_on_the_mortgage_crisis.pdf
“Mark Hansen” seems to think the upper end will soon see their come-uppance. Hope that includes Irvine.
I’m working with a few folks looking at buying a home in Irvine. Most of the decent properties that we’ve seen are short sales with HUGE debt loads on them. Sure, there isn’t much inventory out there but there is a lot of stress out there (in terms of people who are now delinquent on their mortgages). Quail Hill and Woodbury were built out and sold at the peak of the bubble and will suffer. It’s just a matter of time before we see some big drops in prices. No way will the same home in Corona sell for 70-75% less than an Irvine home in the long term.
I sincerely hope that happens.. but people who are looking to buy in Irvine (and if they’re desperate) they won’t go and start looking in Corona or anywhere in IE just because it is cheaper. There are people who are ready to pay the premium if they can get a loan whose monthly payment is within their (stretched) budget.
I’m sure the desire to buy in Irvine is much higher than the actual number of people who can afford to do so based upon their income and DITI levels. I personally think that the strong knife catchers have already entered the market and the folks on the sidelines are not that strong financially or don’t want to pay the current WTF prices.