Irvine Housing Blog

You can rent million dollar homes in Coto for $3500 a month - homes you can’t buy for $600K.

We live in Indiana, make above median income and was not quite prepared to send to children to college. So, we refinanced - our home value has dropped 20% and our monthly payment is $1430 1st/ $375 2nd….you mean I could be living in a million dollar home in Coto?..... We are still trying to decide if we should walk. The stress of it all is taking a toll on our health , what if 2 years from now we wish we would have walked!?

One more things.  We are getting there on the devalued currency already.

IR, thanks for the link.  I just got around to rereading these posts, and will read the article.

BTW, to answer your speculation, I was indeed alive during the Volcker… though I was only 5 at the outset, and not much concerned with macroeconomics.

Thanks for the valuation CK.  I really like my particular place, especially so because it’s one of few units not in a quad, i.e. no common auto-court.  My garage opens up to a single-loaded firelane.  With lots of kids on my “street”, it’s like having a 500ft. asphalt playground.  I’m ready for a real driveway and more square footage though… 

I’d have to say the construction quality was poor, but the service from Cal Pac has been great.  I got up on the extension ladder to repaint the decorative shutters next to the 2nd story windows.  Found that 2 of the 4 had dry rot so bad they needed replacement.  The materials they used were pretty shoddy, i.e. particle board vs. hardwood, apparently no sealer, etc.  Had to make the replacements but at least it gave me a reason to get a new chop saw.

I had a couple of hinges with stress cracks/breaks recently and Cal Pac hooked me up with the outfit that did the cabinets and they overnighted me a big ole bag of replacement hinges.  Had a problem with my shower door, got replacement parts ASAP with zero hassle as well.  Not bad to be tapping customer service / warranty after almost seven years of ownership without any fuss.

...And as you have a vested interest in San Simeon IPO—- I will tell you that as an IHB reader but one that would actually buy one of these if I thought it was the right price, today I would do:

67 Arcata (Plan 3) - $525k
36 Arcata (Plan 4) - $575k

So apparentely I am pretty far from where the market is today if 36 Arcata went into escrow at ~$680-700k.

ipo—I actually toured that one (67 Arcata) as well….waaaayyyy back around summer 2006.  It was priced at $775k at the time.  I remember asking the realtor how motivated they were, and her reply was that they were very “firm” on the price.  I owe them a favor for being so firm back then, because in summer 06 I might have been dumb enough to buy this at $700k.  That said, 67 Arcata is really nicely done, the yard is as nice as any San Simeon I have seen in NP.  I bet if they priced it right (maybe $625k?) they would find a knife catcher pretty quick.

I think it’s possible the 40 year mortgage could permanently alter the “affordability” calculation, albeit by only about 10%.

The 40 yr mortgage could gain traction if:

1.  It is used widely to bail out ARM debtors;

2.  Fatigue sets in after years of waiting for prices to match historical norms.  I think some data indicates prices peaking in 2005, which means if prices don’t hit historical norms within a couple of years, people may have waited five+ years for the “right time.“  Many people (myself included) would rather risk paying a premium of 15%+ rather than risk waiting several years (plus the risk of inflation, the intangibles of enjoying my home during that time, etc.)  Several years is a big chunk of my life; and

3.  People get over the mental hurdle of a 40 year mortgage.  My guess is that for many people, 30 years is so far away anyway, or it’s meaningless because it exceeds their life expectation, that they would choose “quality of life” during their lifetime.  These could be conservative people opting for the stability of a fixed rate. 

I happen to agree with the fundamental premise that prices have far exceeded “inherent value,“ which is why I’m waiting too.  However, I wonder if the support (permanent or long-term) will find itself 10%+ higher than historical norms given the 40 yr mortgagen at least for several years.

I believe this bubble will burst more quickly than prior bubbles, because many ARM debtors will immediately be forced to sell, as opposed to fixed rate payers of the past.  I think we have already witnessed that - many of us have been surprised at the rate of the price drops.

Personally, I am ready to pounce in about 12 months.

Aha!  The “Realtor” is the suffix you enjoy most CL?

“little correction”

Little correction indeed.

And frankly, arguing that something has been ingrained for a very long time isn’t really the same thing as arguing it makes sense.

Just saying.

And one more that found a buyer within the last week as well:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1290136

Nice to see a realtor and seller bring a property on at a list below what they paid for it.  That attention to market reality is likely what got this place sold/near sold IMO.  Only took one price drop and got escrow in less than 60 days, during the holiday season no less! 

Likely in escrow for 13-14% less than what they bought it for in 2005.  Puts it into mid 2004 pricing territory I think.  Sound about right as mine has rolled back to early 2004 pricing…

And yet another recent escrow entrant…

http://www.redfin.com/stingray/do/printable-listing?listing-id=1151455

Pretty nice looking older, but updated home in what would appear to be a nice location.  Nice lot size as well.

Yeah CK, I was surprised.  I thought they’d have to drop into the $600s to move it.  My guess, they took something like $685ish and were smart to do it.  We’ll see once it closes.  The same model here in West Irvine (Wisteria Plan 4) last sold for $660K a few months back.  That one was against the tollroad though but pretty nice inside.  The one previous to that, which closed in the summer, went for $710K.

Always amazes me the premium that people pay to buy in NP.  I like it there, but not enough to fork over an extra $50-100K for the same-same and pay double the HOA dues.

If this San Simeon bad boy, which is just like mine here in West Irvine, can find a KC to pay north of $650K, I’ll be ecstatic:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1045848

Nice staging job on this one IMO.  Should have put some furniture into the bedrooms though for the pics…

None of my posts are showing up. Well, here goes nothing.

A GRM of 230 here = a yearly rent:buy ratio of 19.2. Compared to the charts above, that’s pretty decent.

CL:

Lets assume Fannie and Freddie pull off the caps…....

Debt Sercive (IO) $600K @ 6.5% = 3250
Property Tax $600K @2% = 1000
Insurance $600K = 100
HOA/Mello Roos = Extra

Now you get to qualify a borrower for $4350 a month just to rent the place (we haven’t paid the principal yet).  We haven’t gotten to maintance.  You can rent million dollar homes in Coto for $3500 a month - homes you can’t buy for $600K.  Why am I lusting to be a homeowner again?

Even if you yank the caps, nobody can afford the stroke.  Game over.

Ipo:

Ask any mortgage banker - those customers are lined up AROUND THE BLOCK because thier lobbies are full of customers just like that.  Oh wait they aren’t.  Hmmnnnn…...

Geez IPO—- I looked at that one on an open house.  It was nice enough, but is just a detached San Simeon condo. Decada Plan 4 (Portola Springs) is only $628k brand new, and its overpriced at that. My wife and I agreed that while a sucka would probably bite on this for $650k, we would not give it another look until it got to $600k (and we are far from the biggest bears in the woods).  If they got something near their asking price ($400+ sq ft) kudos to the seller.  And whoever paid $700k+ for this needs to pull their head out of their azz….

Charts are always interesting - I use them to make money in the stock market.  What your chart says since 1975 we have always corrected to the mean.  What if your chart went back over 100 years.  What happen in the 1930’s.  What just recently happen in Japan.  Even your chart shows that we go under the mean first.
I only point this out, because housing can go way below the mean before it comes back to the mean.
I don’t know the future - We are all trying to figure it out.  However, what we do know is the banks are hurting - they are hording cash - CD’s pay more than treasuries - when was the last time that happen (anyone know).
We just have gone through the largest credit expansion since the 1920’s and we know how that ended.

Deed prices can and will be inflated with sellers giving ‘rebates’ and whatnot to keep the sales price artificially high. If the closing statement was actually filed instead of a BS deed, we’d be in better shape.

Prices will correct to mean, inflation.

http://www.housingbubblebust.com/OFHEO/Major/SoCal.html

Are you familiar with elliot wave theory. 
In housing we just had a blowoff top - typical of 5th wave.
After a 5th wave you do not just correct for the last wave up,
but for the last 3 waves up.
2003 prices are our first support level.
After that the prior wave high -  equivalent to 1998-1999 prices.

Yes, I did read it.  I find it quite interesting that our current head of the FED is an expert on the Great Depression.
He said allowing the banks to fail was why the Great Depression lasted so long.
Our current problem in banking is not liquidity, but solvency.
The banks are going to continue to take losses for all of 2008.
Maybe 2009 too.  If housing crashes fast, many banks will go under.  Including some Big Banks. 
I don’t believe Country Wide can be saved.  FHA loaned Country Wide 50+Billion on Subprime mortgages.  If/When Country Wide has to take those mortgages back they are insolvent.  I suppose they would just declare bankruptcy and then the goverment would have to bail out FHA.
I’m currently watching to see if Fannie Mae and Freddie Mac can survive this.
Also it looks like the bond insurers are not going to get bailed out. 
Rather than bail them out, they are going to let Warren Buffet be a bond insurer.

“If you think the GSE’s are raising caps, you’re really smoking the good stuff. Both Fannie and Freddie’s guidance boards are 100% in agreement - NO THANKS we don’t want the caps removed.“

Both Congress and the White House are pushing for this.  If they can agree on the terms, it’s a done deal.

The main impediment at this point is that the President wants more oversight, and any serious audit is going to end with indictments.

“Plus, even they aren’t immune to bad debt.“

Have you forgotten about the implicit government guarantee?

Why do you think the GSE loans are 100 basis points lower than the jumbos, and so much easier to obtain?  Hint: it’s not because the GSEs are somehow more efficient than the thousands of private banks they compete with.

Did you ever read the paper Bernanke wrote on Japan?

http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf

He argued the central bank in Japan was not powerless, they were just unwilling to do what was necessary to devalue their currency and create inflation. It is an interesting read. I think you would enjoy it.

BTW, you don’t sound like you were around to experience the pain of the Volcker recession. You make is sound easy and comfortable. Japan chose deflation rather than a Volcker type recession. It was a choice, and one can argue the merits of it, but that is what the Japanese chose. The recession of the early 80s is nothing I want to see again.

If you don’t include the most recent bubble, house price appreciation locally has only kept up with inflation. Check back again in 5 years after prices crash, and we will be right back there again.

According to the mortgage guys I keep up with, with 15-20% down and a 720, you can get those stated rates, which are now 6.625-6.75 at the low end on a jumbo.  Definitely need doc income and they aren’t going to underwrite for stretch DTIs like they used to.

“The one common theme throughout CL’s posts is this idea that real estate is something everyone wants all the time.“

Of course it is (with very few exceptions).

Like the car you drive, the home you live in is a direct reflection on your social status.  Even if it’s a really lousy investment, people feel good about it.  Owning a home in a desirable area connotes success and makes you more attractive to the ladies; renting, not so much.

Students of American history will recall that in the early days of the Republic, only land owners were allowed to vote.  The strong preference for owning over renting has been ingrained in our culture since the very beginning, and is unlikely to change on account of a little correction.

True, I currently rent - and would like to own a home before I retire as a hedge against inflation.
I would like to buy soon - but it does not make sense.  And I fear with goverment intervention housing will suffer a slow death rather than a quick one.  Based on what I have seen so far, I fear we are going the route of Japan.  Japan housing went up from 1984-1994 and down 1994-2004.  Yikes, the median price of house in Japan in 2004 was equivalent to 1984.

http://www.redfin.com/stingray/do/printable-listing?listing-id=1266206

Recent escrow entrant.  I think this one is going to sell for a GRM of 230 or so…

CL,

Once again, you’re wrong.  We could look at the Wilshire 5000 if you want, but the NASDAQ in the 1990’s was strictly a tech index and is immaterial to the argument if we’re talking about “the market” - which, to me, is the S&P 500 or maybe the Wilshire 5000 (their PE/s trade pretty close, but you probablly already know that). 

If you think the GSE’s are raising caps, you’re really smoking the good stuff.  Both Fannie and Freddie’s guidance boards are 100% in agreement - NO THANKS we don’t want the caps removed.  Plus, even they aren’t immune to bad debt.  If their capitalization gets much worse, they are going to TIGHTEN WAY UP because they will have to.

But why let the data confuse the issue when we have conjecture and innuendo and your crystal ball to guide the way?

Ipo:

I know they are quoting jumbos at 6.75%, but ask Lending Maestro how many of them are actually getting written.  I think to qualify at that rate you have to have documented income, 25% down minimum, and a FICO score of 720.

Over on Lasner’s blog I’ve seen a couple of Mortgage Brokers claim quoted rates for customers with 650 FICO’s, $650K, 5% down and cash back at closing over 10% w/ income documentation.  18 months ago this person was super prime.  Not anymore.

And I’m taking the worst of it by assuming I can get this loan funded!  Quoting is one thing, approving is another, and getting somebody through underwriting is still another - ask Lawyerliz.

“You mention the Fed being willing to inflate our way out of this mess. That is a valid theory… but while I do worry that inflation will get out of hand, I don’t think that is going to fix things in the eyes of many banks and borrowers. Current and variable interest rates will always outpace inflation… No bank is going to be willing to loan current $ and get paid back less in real inflation adjusted terms.“

I agree.  Hyperinflation is not a panacea for the banks and borrowers who got themselves caught up in the mess, and it does negatively impact anybody who is a net saver (not that anybody cares about this constituency).

As you stated, banks will not be willing to grant loans at low interest rates in an inflationary environment.  However, the government can and will.  They have every incentive to try to prevent the house of cards from falling down.

I disagree.  The 500k tax-free works when housing goes up - and did help propel the recent flipper nation.  However, if you sell a house for a loss - that is a real loss and cannot be offset with any gains.  That tax law change created a housing crash in the 80’.
Also for those who care - I searched the IRS web site:
If someone walks from away from their house, non-recourse loans are not consider a forgivable debt.  ie.  No tax consequence on a non-recourse loan.

The Chicken Little formula:

stereotype+generalism=market fact

Example: “After getting a taste of the good life, lower-class individuals might be more inclined to move farther out or take on additional roommates to preserve their ability to own property.“

And, as IR pointed out, they might be if it made sense, if they could swing it financially.

The one common theme throughout CL’s posts is this idea that real estate is something everyone wants all the time.  And it’s true but it’s much more of a narrow point than CL ever really states.  A lot of renters (even some of those lower class Starbucks employees) understand that renting is generally easier, cheaper and allows them vastly more freedom of movement than owning.  Ask these same people if they “want” to own a house I’d bet their answer would be , “sure!“  Wanting and actually doing it, being able to do it are different things.

The one thing history shows us that there are times, many times, when real estate is a pretty mediocre investment.  Arguably, if you can or do hold onto it long enough, it evens out but that’s still not an argument that real estate is “always” a good idea.  The only people who think otherwise generally append “Realtor” or “Mortgage Banker” to their name.

“Chicken Littles comments on stock market PE’s earlier rising were/are dead ass wrong. I don’t think CL’s sentament is incorrect, but CL’s statements are woefully in conflict with the facts. Plus, it’s not 1998 anymore where the S&P was trading at a PE of about 30. Interest rates are lower and the S&P PE is now about 16 last time I checked.“

You MIGHT have a point if you’re willing to ignore minor details like the small caps, all of NASDAQ, etc.

“You can’t get a jumbo done now at a reasonable price.“

But you will be able to get a jumbo from the GSE of your choice when the government raises the conforming loan limit to $1MM.

Do you really believe this will not have an effect on the local market?

Yes, people think that since we rent instead of own that we can not afford a house - so that I suppose could be humiliating.  I had to convince my wife that renting was better than owning.  When I showed my wife that rents for the area do not support half of the value of the house and, 
when I showed her that we could put the money we received for selling the house in the bank, and the interest would pay for our rent - she agreed.  Since then, the house we sold has dropped at least 20%.
And that house is still 40% to 50% overvalued.
Also, since then our landlord did raise our rent - so we moved to a better neighborhood for the same rent.

Home appreciation has approximated inflation NATIONALLY!!! NOT LOCALLY!!! I can’t stand it when these macro arguments slip into micro debates.

Home appreciation in OC has averaged in excess of 10% since 1970.  Inflation over that time period has average ~4%

http://inflationdata.com/inflation/Inflation_Calculators/InflationCalculator.asp#results

Home price appreciation is a local phenomenon heavily influenced by demographics, location, traffic, etc. etc. etc.

“You can’t get a jumbo done now at a reasonable price. Guess where prices are going?“

I consider 6.75% on a 30-year fixed jumbo pretty reasonable given the history of mortgage rates.  I’d guess that a 30-year conventional has probably averaged slightly more than that over the past 15 years…

I have posted about the Fed ad nauseum.  They are indeed going to risk inflation in order to stave of a deflationary spiral.  Why you ask?  Because Volcker proved we can tame inflation, while Japan proved that Deflation is unmanageable.  Interest rates can only go to zero. If rates are at zero and the economy is still flatlining, the Fed is powerless.

“No, the lenders will determine the direction the market moves!“

Thats one of the few posts today I agree with.

Some of you all have a much different view of reality than I do.  Before anybody tosses me under the bus, remember: I did workouts for a commercial bank in the early 1990s.

Your property is only worth what someone will pay for it (which means what some bank is willing to lend on it).

Chicken Littles comments on stock market PE’s earlier rising were/are dead ass wrong.  I don’t think CL’s sentament is incorrect, but CL’s statements are woefully in conflict with the facts.  Plus, it’s not 1998 anymore where the S&P was trading at a PE of about 30.  Interest rates are lower and the S&P PE is now about 16 last time I checked.  This is not the only glaring ommission CL made but it’s the most obvious.

BTW, Image consciousness has nothing to do with it if they can’t make the payment (demanded by the lack of exotic financing).  You can’t get a jumbo done now at a reasonable price.  Guess where prices are going?

“...when the barrier to entry is very low, the stigma for the have-nots is even higher.“

This is an interesting statement.  For me the stigma means nothing.  However, for the general population it might.

“...they may change their minds”

And that is why people are willing to pay a premium to own.

I"m in an IAC apartment, I quite like it.  Having owned and rented before, I like this the best.

Unsupervised screaming kids are everywhere, it was much worse in my house with the unsupervised kids destroying my front yard and the neighbour’s dog crapping on my lawn every day until I finally sicced animal control on them.  Here, it’s quieter (actually, I think foreigners are more likely to be out supervising their kids rather than just kick them out to play from what I’ve seen), and I don’t care about dog poo - that’s the IAC’s problem, and any seems to get cleaned up quickly when they mow the immaculate lawns.

The construction quality seems pretty good, I can’t hear my neighbours at all (except when I go in the garage, when I can finally hear them playing instruments and singing - otherwise I never hear them at all).

Certainly, when my hot water tank started splurting water, it was awesome to just call them up and have them come over and fix it the same day.  And not care at all about water damage on the wall while waiting on them, as it’s not my wall anymore.

Chicken Little,
You make some good arguments, and if this was late 2005 or 2006, they might be more convincing.  But to believe them now, one has to ignore the current happenings in the market.

Financially unsavvy home buyers may still be willing to overextend themselves, but you will need supposedly financially savvy investors and banks willing to again take the risk of extending unsustainable loans in order for those buyers to afford the inflated prices.

And financially unsavvy consumers tend to remember being burned by an asset class, and stay away from it for a while.

You mention the Fed being willing to inflate our way out of this mess.  That is a valid theory… but while I do worry that inflation will get out of hand, I don’t think that is going to fix things in the eyes of many banks and borrowers.  Current and variable interest rates will always outpace inflation… No bank is going to be willing to loan current $ and get paid back less in real inflation adjusted terms.  People who currently have fixed rate loans will make out ok, but as inflation goes up, so will interest rates, which will act as a brake to home values going up.  Your chart showing interest rates still at historically low levels is dependant on inflation also remaining at historically low levels.

But like IrvineRenter said, its great to have another viewpoint here, especially one that is posting in a civil manner.

Even if that were true - when you are 60 there is no reason you have to retire in a high rent/tax area as you no longer have to commute to work.

Plenty of cheap rents in the middle of nowhere.

Yes, the growth rate of housing costs cannot outpace the growth rate of wages indefinitely.  However, just because this is true does not necessarily result in lower home prices.  The disparity can also be rectified by:
1) an increase in overall wages.
2) an increase in local wages relative to the housing market in question.
3) Increase in fundamental value of location as a result of traffic pressure (Who wants to live in Ladera or Corona?)

I am not saying these are likely mind you.  I think wage growth is held down by cheap labor from the emerging markets, and a decline in productivity gains.

I think it is possible that the demographics of areas can move upscale, movement along the demand curve to a higher price equilibrium.  We could check this by measure the pace of Irvine Median Income growth over some time period…

I also think the population growth places pressure on infrastructure.  There are countless studies of the impact of traffic and commute times to employment centers and the impact on housing prices.  OCs population will not fall in the next 25 years. I’ll bet anyone any amount of money that I’m right on that one!

Actually the long term PE average on equities is eithe 14 or 16 depending on whether one is using a geometric or arithmetic mean.

http://en.wikipedia.org/wiki/PE_ratio

Awgee, agreed that good tenants are valuable and some landlords will even accept below market rent to secure a good tenant. 

That said there is a cost to move.  If this cost is more than the marginal increase in rent, and rational renter will stay in place.  Landlords know this.

PH,

I commented on this earlier - Almost 2003 on IHB 1/2/2008. In NPB and LB, the agents are using listing price as sale price. The OC Clerk Recorder has the real final price. It’s a must if you are looking for true comps. I don’t think this is info is online though.

I actually agree with both Chicken Little and awgee. I could not care less what others think about me or my lifestyle choices, but me and like-minded individuals are small in number in OC and our behavior does not move the market. Of course, Major Shadenfreude is correct too that the lenders ultimately say how high or low the market will go.

I appreciate your posts. You have a great understanding of the subject, and your clear thought processes come through in your writings. I hope you become a regular poster.

“So you are not image-conscious. News flash: almost everybody else in OC is.

They will determine what direction the market moves in; you will not.“

No, the lenders will determine the direction the market moves!

Me neither!  (But let’s keep it a secret!)

They will only think less of you until they see you going on the grand vacations to Hawaii, you buying the nice new cars and you able to send your kids to Harvard - in the meantime who really cares what they think - not me.

Makes me think of the scene from the preview to the new movie the Bucket list.

Jack Nickolson says to his son “no one give a dam what you think”

So you are not image-conscious.  News flash: almost everybody else in OC is.

They will determine what direction the market moves in; you will not.

votes with his feet… choses Newport over Irvine

another reason why I can’t understand how those sky-high asking rents are sustainable.

“When you tell people you’re still renting, they will think less of you than they would have 10 years ago.“
And why would we care what they will think?  I am making money.  “They” are losing equity.  And I care what “they” think?
It is hilarious that some assume re will appreciate in either real or nominal dollars because of inflation.
I hope the fantasy thinkers can remember what they have written here in a few years.

Alright, I prefer to own when…

The answer is…

I own free and clear, no mortgage, just me and property tax and insurance.

Everything else, the bank owns and you just have a lease with the bank.

Few buyers are in that situation, so my advice.

Buy lottery tickets!

And some of you thnk the denial stage has passed?

When you don’t have an argument, build a strawman.

“Every idiot knows that their landlord has the right and the motivation to raise rent whenever possible. “
Idiocy is not presenting the whole story.  If you have ever been a landlord you would know that the motivation to keep a good tenant far outweighs any motivation to raise the rent.  And a tenant has the right to pay less rent or move.

“This has been the one surprise I have witnessed during this correction. After witnessing the recession of the early 80s, I never thought the FED would allow inflation to run rampant again in my lifetime.“

Their real fear is ending up in a deflationary spiral like Japan.  They couldn’t care less about preventing inflation.  In fact, inflation is great for tax revenue, and makes it less painful to service the national debt.

The individuals who benefit from asset price deflation are few, and generally lack clout.  The powers that be are not working in your favor.

Home appreciation has historically approximated inflation, rent increases have historically approximated inflation, and interest rates have historically approximated inflation. That is why the ratio of home prices to rents have stayed approximately the same.

Why?

Buying a home makes more sense than renting when inflation is high, but when inflation is high, interest rates are also high. So they essentially cancel each other out.

Chicken Little brings up two points that would make that ratio change. But are they true and would they have that much of an impact?

So, unless the desirability of owning vs. renting changed significantly, I don’t see any reason for the ratio to change. Was there some fundamental shift in people’s attitude…other than you were “stupid” for not buying? I just don’t see it. The only advantages for home ownership is a hedge against inflation and the ability to do what you want to the property…and what has changed about this? A taste of freedom? As if this is more valuable now than it was for my parents? I don’t think so.

As for credit being easier. In the 80’s it was easy to get a 5% down loan. You paided extra for it, but it was possible. So what’s the difference between a 0 and a 5% down loan with respect to the price? Not very much. However, it is a big difference in the willingness to bet on the appreciation. Do I risk nothing for the chance of making 6 figures or risk 5 figures for making 6? The former is an easy yes for most people, the latter is not so easy.

If you followed the home buying statistics, what really spiked was the number of purchases of secondary homes and investor owned homes. Prices are set at the margin, so this spike in extra demand easily drives up prices to the point where nobody is making any extraordinary profits from buying a home.

But what are the profits based on? If they are not based on renting the home out (i.e. some reasonable GRM), then they must be based on future expectations of the home price (i.e. speculation). If you think that prices will increase 10% or more a year (and almost everybody did a few years ago) and you can borrow money at 6%...then you would be “foolish” not to buy as much house as you can…forget about whether or not you can afford it. But this is simply a ponzi scheme, because those home appreciation rates are not sustainable in the long term. Basically everybody was betting that they could go on the ride for a few years and then bail out before everybody else.

So basically, unless there was some serious new value placed on the intangibles of owning a house vs. renting in the last decade, it sure looks like a bubble to me.

“First of all, Irvine has a huge number of apartments, and many of them are quite nice.“

No, they’re quite EXPENSIVE.  Big difference.  You’re paying for the location, not quality.

Maybe if you’re in your 20s you’ll tolerate: unsupervised screaming foreigner kids everywhere, dog crap all over the ground, lousy construction quality, noise, surly and slow customer service, and the numerous other perks of life in IAC.  But sorry, it’s not my scene.

Here’s a typical complex: http://www.apartmentratings.com/rate/CA-Irvine-Harvard-And-Cornell-Court.html

14% approval.  Wow, where do I sign up?

I think eventually most of the holdouts will eventually break down and buy a “depreciating asset,“ just to restore a tolerable quality of life.  There will never be a point where renting is actually preferable to owning.

“They would rather destroy the currency than allow RE valuations to revert to IR’s “historical norms.”“

This has been the one surprise I have witnessed during this correction. After witnessing the recession of the early 80s, I never thought the FED would allow inflation to run rampant again in my lifetime. Eventually we will have to tame that beast, and when we do, it will be through another devastating recession.

“The draw to home ownership is a hedge against inflation in housing prices, period. “

This is a true statement. This is why it is a good idea to buy when the cost of rental and the cost of ownership are at parity. Over time inflation will work in your favor. Unfortunately, when ownership costs far exceed rental costs, as is the case in todays market, you need skyrocketing inflation for an extended period just to get you back to breakeven.

Honestly, I “hope” so too.  The economy thrives when the business environment remains stable and predictable.  Prudent investment, not speculation, is what drives long-term growth.

However, the historical numbers suggest that you may not get your wish:

Mortgage interest rates remain near record lows, despite rampant inflation and a dramatically increased risk of default.  This is largely the result of government intervention.  They would rather destroy the currency than allow RE valuations to revert to IR’s “historical norms.“

“It still beats having to put up with a crappy landlord who jacks up the rent every year, walks into your home when he pleases, and gouges you on the damage deposit.“

That statement is true. There are, however, good landlords out there. My landlord has told me I can stay as long as I like for the same rent (they may change their minds,) and they gave Christmas gifts to my children. I would be willing to wager my rent is more stable than most people’s housing payments with so many on adjustable rate mortgages.

The draw to home ownership is a hedge against inflation in housing prices, period.  Every idiot knows that their landlord has the right and the motivation to raise rent whenever possible.  Homeownership provides immunity from this threat of increasing costs, thus its appeal.

I have been thinking about risk aversion lately, and how individuals will risk a far larger though less certain loss more readily than a smaller but certain loss.  Applied to housing this could translate as: I would rather own with a uncertain though fairly large potential downside, than continue to rent and be almost assured of increasing costs.

Disagree on point two.  First of all, Irvine has a huge number of apartments, and many of them are quite nice.  Are you saying the *majority* of irvine’s population is ‘losers’? 

Yeah, so anyone who makes less then the median 84k (and therefor must live in an apartment) must be a loser.

Second, this blog seems to have a fair number of people that have both the desire and means to afford a place in Irvine (such as myself), but won’t buy in the near future because I don’t want to sink 100k into a depreciating asset.

I also refuse to pay 400 bucks a square foot unless I get a nice ocean view.

I agree. I stated, “The desire for real estate changes very little. Most people want to own a home.“

“Debt servitude to a bloated mortgage is serfdom. In 3 to 5 years, people will long for the taste of freedom renters have.“

So they’ll just walk away.  A few months after the BK, they’ll be able to apply for credit again (although it will be rough going for a few years).

It still beats having to put up with a crappy landlord who jacks up the rent every year, walks into your home when he pleases, and gouges you on the damage deposit.

“When homes can be purchased by people who lie, cheat and steal, the prestige of home ownership is diminished — no make that eliminated.“

Not quite.  Think of it this way: when the barrier to entry is very low, the stigma for the have-nots is even higher.

What does the average person conclude about people who can’t afford a car?  A TV?  Hot and cold running water?  A few of the people in these situations might have a legitimate reason, or maybe some sort of ideological hangup.  But most are just losers.  Like it or not, that is how the rest of the middle class views renters in this day and age.

Really IR?  Didn’t you start this whole blog because you wanted to own a house, and were unable to buy what you wanted because of the bubble?

I’m not saying theres anything wrong with that, because thats why I’m here and hoping for another 30% decline!

I just don’t think we should kid ourselves into thinking that the desire for home ownership is rare.

“So who’s left over in the apartments? A few contrarians, and a large number of LOSERS. Who wants to live amongst the dregs of society? “

I do!  I would much rather live 1/2 mile from the beach (Newport, that is!) and pay $1300/month to do it, than purchase a townhome that would bankrupt me!

“When you tell people you’re still renting, they will think less of you than they would have 10 years ago.“

Are you kidding!  Up until recently that was the mentality.  However, I’m detecting a change in attitude.  They look at you with a grin that says “you smart, lucky bastard!  I wish I had done that!“  You’ll see this more and more in the future.  Just watch!

“But with uncontrolled inflation, you will be stuck playing catch-up.“

You are right, that would be quite a gamble.

I guess the upshot of the “new economic fundamentals” which are difficult to deny is that one will have to (or should!) wait longer until they can afford the house with the fundamental means which have stood the test of time: 20% down (min), 28-33% DTI on a 30-year fixed.

Lenders will probably (hopefully) revert back to this paradigm as soon as the full impact of its deviation is realized - despite governmental tinkering with the system.

Governmental (state and federal) tinkering such as Prop. 13, 500k tax free for couples every two years, and raising loan limits are, IMO, just ways for the older generation to pile on more dept to the younger generation (of first time homebuyers) - a covert ponzi scheme.  Unfortunately, the lenders, who can control this madness, continually have to “re-learn” what a person can truly afford.

“Mortgage payments take up a bigger percentage of gross income than they used to.“

This is because people will stretch to unsustainable DTIs during a bubble. When house prices crash, people do not stretch to purchase depreciating assets. I suggest you review:

http://www.irvinehousingblog.com/2007/05/14/the-anatomy-of-a-credit-bubble/

“So who’s left over in the apartments? A few contrarians, and a large number of LOSERS. Who wants to live amongst the dregs of society?“

This in inflammatory BS. I suggest you read:

http://www.irvinehousingblog.com/2007/08/27/brio-new-world/

“People who never owned before got a taste of freedom and won’t want to become serfs again. “

Debt servitude to a bloated mortgage is serfdom. In 3 to 5 years, people will long for the taste of freedom renters have.

“But it is naive to simply assume that the market will revert to historical norms, given the very real economic and social changes that occurred during the boom.“

There were no real economic or social changes that occurred during the boom. There was only an unsustainable expansion of credit which will contract to where it started.

I look forward to hearing your comments on Monday’s post where I tackle this issue directly.

You misspelled “speculator.“

If your investments assume inflation, you will get burned if the government does not play along.

The long-term trends are unmistakable:

1. It is EASIER to own than ever before.  Credit is easier and cheaper in the midst of today’s bust than it was during the high points of previous booms.  This is largely due to government meddling, but also somewhat due to technology (e.g. improved credit scoring models).

2. It is MORE DESIRABLE to own than ever before.  People who never owned before got a taste of freedom and won’t want to become serfs again.  The quality of renters has plummeted, since anybody who was even slightly creditworthy could get approved for a 0%-down loan.  So who’s left over in the apartments?  A few contrarians, and a large number of LOSERS.  Who wants to live amongst the dregs of society?  When you tell people you’re still renting, they will think less of you than they would have 10 years ago.  They ask you if you need to open the windows to vent the meth fumes.  There is a real stigma to it now.

Obviously, we are in the midst of a correction.  But it is naive to simply assume that the market will revert to historical norms, given the very real economic and social changes that occurred during the boom.

The rent:income ratio is not fixed.

Mortgage payments take up a bigger percentage of gross income than they used to.

Energy takes up a bigger percentage of gross income than it used to.

Food and health care take up a bigger percentage of gross income than they used to.

Flat screen TVs and other toys take up a smaller percentage of gross income than they used to.

The moral here is that past performance is no guarantee of future performance.

The population is getting larger each day, and the supply of resources is hardly keeping up.

Chicken Little, what you need to understand is that most people here already know that owning your own home is very favorable for a variety of reasons. The debate on weather to own or rent in the long term IS NOT the reason we are here.

The problem we had was that we claimed over the last few years that we were in the middle of the biggest real estate bubble in history. No-one believed us at that time.

Now we have been proven right, and the market is crashing like we knew it would.

So now you come on here and claim that there is a permanent demand for real estate and that prices should stay high. That really has nothing to do with what happened (a real estate bubble), and what the results were (a real estate crash), which was casued by easy credit.

We were proven right in our thesis and now we are witnessing the multi-year crash which is taking place.

YOU will not be able to prevent lending standards from returning to norm. YOU will not be able to prevent the multitude of short-sales and foreclosures.

This crash will take years to reach bottom. I have lived through two previous real estate cycles and it always plays out the same way.

People like you CAN NO LONGER refute what we have been preaching over the last few years. The crash is here.