History of Fundamental Value

Why do I believe there are market fundamentals? And how do I calculate these numbers? Today we will look at the history of Irvine median home prices, IHB Current Cashflow Value, IHB Fundamental Value from 1975 to present.

31 DEER Crk Irvine, CA 92604 kitchen

Irvine Home Address … 31 DEER Crk Irvine, CA 92604
Resale Home Price …… $699,000
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Block Party 11-9-2009

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No Kool Aid Irvine Housing Blog

If you wake up and don’t want to smile,
If it takes just a little while,
Open your eyes and look at the day,
You’ll see things in a different way.

Don’t stop, thinking about tomorrow,
Don’t stop, it’ll soon be here,
It’ll be, better than before,
Yesterday’s gone, yesterday’s gone.

Why not think about times to come,
And not about the things that you’ve done,
If your life was bad to you,
Just think what tomorrow will do.

Don’t Stop — Fleetwood Mac

Why do we spend so much energy thinking about tomorrow’s house prices? Well, Timing Does Matter.

I have felt an angst about how current cashflow value suggests prices are in a stable range when we know that real fundamental value is significantly lower. Also, Shevy recently challenged me with feedback he has been receiving about our reports. When we are showing people IHB Current Cashflow Value, we have been calling it IHB Fundamental Value. People were upset that perhaps we were taking advantage of interest rate manipulation by the FED to suggest prices were a good value. Shevy was upset with me because he said it is not who we are, and he felt our reports were not accurately reflecting our opinion of Fundamental Value. He was right.

In today’s post, I am going to fix this problem by parsing terms of value, and I will demonstrate the power of these analytical tools by examining the long history of home prices and fundamental value since 1975. Also, I will show two updated pages of our IHB Reports.

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IHB Value

To better understand the distinctions in value I am making today, I need to clean up and define some terms for you.

  • Base Payment is current rent (or 31% of income) minus expenses of ownership. Base Payment is the amount of debt service available to repay a loan.
  • IHB Current Cashflow Value is the value of the property derived from Base Payment applying current interest rates.
  • IHB Fundamental Value is the value of the property derived from Base Payment applying a long term average of interest rates. The number I am using is 8.99%, the average interest rate since 1971.

For instance, (31 Deer Creek — IHB Fundamental Value Report for Owner Occupant.pdf) if the current rent (IHB reports use comparable leases from the MLS) is $2,850, the Base Payment yields a IHB Current Cashflow Value of $690,000 and IHB Fundamental Value of $516,300. The difference between the value at a 5% interest rate and a 9% interest rate is remarkable.

History of Home Price and Value

The long history of home prices and values is a harmonic dance with the measures tethered in an ever more volatile relationship. It begins in the mid 1970s during a rough time for the economy, but a stable time for the relationship between Median Home Price, IHB Current Cashflow Value and IHB Fundamental Value.

Irvine, California, has endured three real estate bubbles since
1975. The first occurred from 1978 to 1981 when prices skyrocketed in an
inflationary spiral. As usual, lenders were willing to fuel the fire.
Prices stabilized briefly in the mid 80s before taking flight again.
Valuations declined below Current cashflow value and bottomed at
Fundamental Value in the late 90s. The fact that prices bottomed here for so long suggests there is durable market support at this price level.

Besides the statistical accuracy of Fundamental Value, I favor it because
there is concrete reasoning for this level to be so strong — owning is
less expensive than renting on a stable cashflow basis. There is an
identifiable microeconomic event creating the macroeconomic effect we are looking for — bottoming activity.

(There is much information in the notes on the charts below, so examine them carefully.)

In 1978, inflation was running 14% per year. Lets say you borrowed
with an astronomical 60% debt-to-income ratio. That first year, you
would be eating Rice-a-Roni, but since you would be getting a 10% raise
next year, and the year after that, and so on, your debt-to-income
ratio is falling rapidly. By 1982 your income is 50% higher, and your
DTI is now down to a very manageable 30%. This was the inflation
calculus of yesteryear.

This big inflation hurdle explains why so many people think it is
wise to really stretch to get into that first house. Back in 1978, that
stretch meant three to five years of pain because inflation bailed
everyone out. Now, if you stretch like that, you have 20 years or more
of indentured servitude waiting for you. Just ask some Japanese
landowners from their bubble how much fun that is. All those people
working years to clean up the mess a number of foolish bankers made 30
years ago. We are traveling the same road.

The market bottomed after the first bubble from 1985 to 1987 when prices traded below both the Current Cashflow Value and the Fundamental Value. Prices took flight again in the summer of 1987, and they went up about 50% by summer of 1990 when prices became very high relative to cashflow measures. This rally was almost entirely psychological. People feared being priced out. The market bottom again from 1994 to 1999, while prices traded below Current Cashflow Value and at Fundamental Value for several years. Is that our future?

In examining these charts, I noticed something interesting that does have value for today’s market. From 1975 to 1999, market pricing fell below current cashflow value on three different occasions — just as it is doing today. The first time was 1985, and the intersection occurred while pricing was also below fundamental valuation. The time of crossover represented a bend in market direction; in 1985 it went from flat to up.

When prices went cashflow positive again in 1992, the market was heading downward steeply, and once it became less expensive to own, the rate of price decline slowed just as it has in today’s market. The market did not bottom in 1992 because prices were still elevated from fundamentals. Interest rates went up in 1994 bringing cashflow value down again. When cashflow value went positive again later that year, the market bottomed and began creeping higher. No real estate recovery has begun with rapid appreciation.

Prices matched Fundamental Value very closely from 1994 to 1999, then conditions changed, and we inflated The Great Housing Bubble.

Comparison of home prices and value - Irvine California - 1997-2009

The precipitating factor for the housing bubble was the lowering of interest rates to combat the 2000-2001 recession. As interest rates went down, prices went up to match the new financing available. This increase in prices was rapid enough to excite irrational exuberance and already inflated prices went much higher. Lenders enabled the next push higher by eliminating loan qualification standards and peddling Option ARMs far and wide. The rest can be read in our library.

What is interesting for today is the current relationship between prices, Current Cashflow Value and Fundamental Value. We are at a price level that nearly matches Current Cashflow Value of $561,837 but is well elevated from the Fundamental Value of $375,885 — which is the bottoming value I am most recently credited with predicting. The current market pricing intersecting with Cashflow Value is what has
caused prices to fall more slowly or even tick up a bit this summer. As long as the Federal Reserve continues to backstop interest rates and keeps current cashflow values high, prices will hold at current levels pending the timing and quantity of future inventory processing and release.

Will the FED ease off and give us a protracted decline in a very wide “U” shape typical of housing market bottoms? Will inflation force the FED to allow interest rates to go higher? These are titanic forces beyond my ability to comprehend much less foresee. For now, it looks like a protracted “U” shape bottom perhaps at price levels above previous fundamental valuations. I will revise my projections as more data comes in.

Hedging is no fun. It was easier when the market gave unambiguous bearish signals….

IHB Fundamental Value Reports Revisited

With that lengthy preamble, I introduce a new page to our report and a new front cover.

31 Deer Creek -- IHB Fundamental Value Report for Owner Occupant-1

Notice at the bottom in our summary area, we now have the Current Cashflow Value and the IHB Fundamental Value. My concern is that the report is becoming a mess of confusing numbers, but for those with that want to get into the financial details, it is all there including…

31 Deer Creek -- IHB Fundamental Value Report for Owner Occupant-5

We have also added two new sections taking up a full page to show the impact interest rates will have on resale value and a comparison of FHA versus conventional financing as these are the most commonly requested scenarios. People are generally surprised that it is more expensive to own through FHA. Equity is cheaper than debt, so borrowing 96.5% is maximizing your expensive interest costs to minimize your inexpensive opportunity costs.

31 Deer Creek — IHB Fundamental Value Report for Owner Occupant.pdf

31 DEER Crk Irvine, CA 92604 kitchen

Irvine Home Address … 31 DEER Crk Irvine, CA 92604

Resale Home Price … $699,000

Income Requirement ……. $131,598
Downpayment Needed … $139,800

Home Purchase Price … $266,500
Home Purchase Date …. 11/25/1997

Net Gain (Loss) ………. $390,560
Percent Change ………. 162.3%
Annual Appreciation … 13.2%

Mortgage Interest Rate ………. 5.20%
Monthly Mortgage Payment … $3,071
Monthly Cash Outlays ………… $3,780
Monthly Cost of Ownership … $2,810

Property Details for 31 DEER Crk Irvine, CA 92604

Beds 4
Baths 1 full 1 part baths
Size 2,125 sq ft
($329 / sq ft)
Lot Size 5,400 sq ft
Year Built 1976
Days on Market 211
Listing Updated 11/4/2009
MLS Number S570571
Property Type Single Family, Residential
Community El Camino Real
Tract Dc

MODEL PERFECT FAMILY HOME WITH CUSTOM FEATURES AND UPGRADES THROUGHOUT. CUL-DE-SAC LOCATION WITH PRIVACY AND SPACE. NEW PAINT, CROWN MOLDING, WOOD FLOORS, NEW DUAL-PANE WINDOWS, NEW SOLID DOORS, NEW MASTER BATH, BRAND NEW SECOND BATH, NEW FRONT PORCH, NEW GARAGE DOOR AND OPENER. CORIAN KITCHEN COUNTERS AND MAPLE CABINETS. LARGE 15X30 STORAGE AREA ABOVE GARAGE WITH PULL-DOWN LADDER. THIS HOME HAS OVER $150K IN UPGRADES AND IS READY TO MOVE IN TO AND ENJOY!

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I hope you find these enhancements to our reports, and I hope the
interesting look at the history of home prices and values gives you
insights into how this will all play out. The collective wisdom of the
IHB community will come to the correct answer. I am in awe of power of
astute observations to widen and deepen the conversation. So where do
you think prices are heading? Are fundamental values still a market
bedrock?

I want to invite you to our IHB Block Party from
6:30-10:00 tonight at JT Schmids at the District.

Block Party 11-9-2009

64 thoughts on “History of Fundamental Value”

  1. Why not just take the 1997 price and add 3% annually for inflation?

    That certainly isn’t a $690,000 home let alone a $519,000 home.

    1. The house is worth what somebody is willing to pay for it, period. It is now under contract, so, yes, it is a $699,000 house. It’s clear that plenty of people are willing to pay more than fundamental value for houses, at least in Irvine.

      Part of the problem of using the fundamental value is that interest rates have been below 9% for a decade or two. They almost certain will not rise above that number any time soon (due to the government not wanting them to). That is, that statstic is obsolete.

      1. Typical Geotpf Kool-Aid.

        You have to love how these members of the REIC spin that ‘It is worth what someone is willing to pay’ canard in order to pressure their clients into accepting ever higher debt leverage.

        We are not talking about a cash market you fool. You purposely obfuscate by using the word ‘pay’. The non-idiot among us know that ‘pay’ is your cute little code language for ‘borrow’.

        You say it is a 699K house simply because somebody was foolish enough to sign a piece of paper for some bank and pledge to eventually pay 699K (which we all know they are not going to do).

        You would have most likely called this same house a million dollar house several years ago even though we all know that it was never really worth that while people were ‘paying’ those amounts.

        Your propaganda is growing old.

      2. The house is worth what somebody is willing to pay for it, period.

        What a crock of bullshit! A house IS NOT worth what a buyer is willing to pay, but rather, what a lender is willing to loan a buyer to pay! Get it in your head.

        1. Hi,

          I think you guys are missing the point here.
          Yes, this is true, that proprety (or anything else) worth as much as somebody willing to pay for it.

          And, yes, the lender is willing to lend no more then this property will be appraised for.

          This deal may be easily closed as long as buyer can cover the difference with hefty downpayment.

          I would say, $699K is not a limit as long as there lots of idiots out there with tons of money burning their pockets.

          1. Don’t even get started with the Mickey Mouse So Easy A Caveman could do it appraisal system.

            IrvineDick paid 699K next door. IrvineChump paid 699K across the street so mine is now worth that to.

            Whatever! Put it up on the auction block if you want to find out what it is really worth. Our ‘appraisal’ system is nothing but a Cartel for these neighborhoods allowing debtors to try to fix prices around the area.

          2. “I would say, $699K is not a limit as long as there lots of idiots out there with tons of money burning their pockets.”

            There aren’t.

        2. That is certainly a factor, of course, but some people do pay for houses with cash, believe it or don’t. Also, people buy things other than houses on credit (cars, furniture, appliances, ten dollar toys at Kmart). Houses are not unique in that the existance of financing increases demand.

          1. Of course some people pay cash for houses – cash that has come into existence by a first time buyer stretching to climb the housing period. You seriously think someone is going to save up 699K to buy this house? Of course not. The buyer of this house will pay using the debt that someone else borrowed to bail him out of the house he lived in before and most likely still owes a pile of money on.

            It’s called paying with OPMs (Other Peoples Money). If people paid with their own money then all of a sudden they wouldn’t be willing to pay these stupid prices.

            So your hogwash about being worth what someone will pay is a lousy attempt to obfuscate what the biggest chump will borrow.

          2. “That is certainly a factor, of course, but some people do pay for houses with cash, believe it or don’t.”

            If we were paying cash for our homes, comps across every neighborhood in the country would shrink significantly. There would be a premium on cash, and a major discount on vastly overpriced assets, like this house. There are not enough cash buyers to support existing prices.

          3. 30 year fixed rate mortgages have been common for at least fifty years-there’s nothing new about paying with other people’s money. Now, at times, interest rates have been really high (usually during times of equally high inflation, like during the 1970’s and 1980’s). But during times of low inflation and/or high unemployment, interest rates are usually low.

            Also, you misunderstand my meaning when I point out that prices reflect demand. I am merely stating a fact. I am NOT saying that buying a house in Irvine is a good deal-it is not. Renting is almost always a better deal in a high price area like Irvine, unless you plan on being in the same house for decades.

            What I am saying is that saying that a house that sold for $699,000 isn’t worth $699,000 is false. Somebody (and their bank) paid that much for it-so, at this moment, it’s worth that much, by defintion.

            I also don’t expect massive price declines any time soon. I don’t expect massive price increases, either.

          4. That’s right mortgages have been around awhile now and every year these hustlers come up with a new scheme to tilt the balance of a debtor’s upfront costs to near zero in order to keep it almost exclusively OPM.

            How about we go back to 50% down payments and bring some balance into the system. One cash dollar per Countrywide Credit Dollar. Sounds perfectly fair and reasonable to me.

          5. you are correct in that the number of transactions would go down – significantly – but the prices would not go down by the degree you might think.

            In the pre 1930s world of 30 year motgages, alternative types of financing were used – 5 year baloons – installment sales contracts, seller financing etc. Take a look at case shiller prices pre 1930 – surprisingly they were not really any cheaper when 30 year mortgages were not in existence.

          6. Fine with me. As long as the buyer has 50% skin in the game I don’t care what kind of Voodoo is applied to the loan.

            In the current environment, prices would be pummled if banks started requiring 50% down – no doubt about it.

          7. “you are correct in that the number of transactions would go down – significantly – but the prices would not go down by the degree you might think.”

            You’re probably right. Prices would likely remain high. :gulp: I think we’re selling about 35,000 homes a year now Orange County, and I’m sure enough of them could just pull out the check book and write one for $500,000 TO $1M. Sure, there’s enough cash buyers to support today’s pricing. LoL

            sarcasm turned off.

            Some communities were the multiple between income and housing price is small, like Texas or Oklahoma would not be as impacted as California. Hell, they’re prices may only go down $75,000 to $100,000 dollars, or about half of what they cost today. Just think, you could move in with mom and work 1 year, and possibly pay cash for your house in Dallas. Here in Orange County, we’re buying homes at 7 to 10 times the average income, NOT 2 to 3 times average income.

            Who the hell are you kidding. If we were forced to pay cash for our homes, Orange County pricing would get crushed. I think home sales would decline by about 90% overnite, and wouldn’t increase until prices reached a level that could be supported by cash buyers. The forced sales caused by foreclosure, illness, divorce, job transfer and death would kill prices. Forced sales would likely end up in some kind of elaborate trading market. I would be willing to bet that the average price per sq foot would be slashed in half within 18 months. There probably ain’t enough cash buyers to support 1989 pricing, much less 2009 pricing.

          8. “As long as the buyer has 50% skin in the game I don’t care what kind of Voodoo is applied to the loan.”

            What a grand experiment that would be. I could come in with $250,000 cash (PIF), and lowball some pretender with $25,000 cash, but approved for a $720,000 mortgage.

            That would be an angelic day.

          9. What happpens when the renimbi/dollar peg blows and homes in the OC are 2/3 the price they used to be from a Chinese perspective? Already from the perspective of foreigners in flexible exchange rate regimes, homes are now not only half their value, but even lower given the currency effect…. is the next wave of investors coming from overseas as the dollar provides them a cheap second home/matress in which to stuff cash?

          10. You are looking at it exactly backward: because those balloon payments were crushing the market, the 30 year was introduced to PROP UP the market. Actually, I think the original term was much shorter.

            It is no different than what the fed is trying to do now.

          11. You’re probably right. Prices would likely remain high. I think we’re selling about 35,000 homes a year now Orange County, and I’m sure enough of them could just pull out the check book and write one for $500,000 TO $1M. Sure, there’s enough cash buyers to support today’s pricing. LoL

            sarcasm turned off.”

            Dont argue with me – argue the point with case shiller. I used to be on your side – assuming if 30 years went away, prices plummeted. Then I got bitchslapped by David Stiff @ case shiller who pointed out that wasnt true. Take it up with him youseslf if you are so inclined dstiff@fiservcs.com

      3. “That is, that statstic is obsolete.”

        “It’s different now.”

        Geez, have you people no shame?

        “They almost certain will not rise above that number any time soon (due to the government not wanting them to).”

        If you bothered to think about it (is that asking too much?), you’d realize the Fed can’t necessarily hold down rates for long. If they can, it would only be because of the continuing decay of the economy. Going forward, a healthy economy and a low-rate environment are mutually exclusive, even with manipulation by the Central Committee (oh, I mean the Fed).

      4. Geotpf,

        I admire the courage of your convictions. I think people are surprised you are not a realtor with the way you think about the market.

        I won’t pile on, but I don’t think it is realistic to believe interest rates have reached a new permanently low plateau or that we have entered an era of infinitely low interest rates, particularly when the current mortgage rate structure is completely controlled by the Federal Reserve.

        1. I don’t buy it. HeSheIt has some form of interest in real estate. If not then incredibly dense, naive, stupid, or all of the above.

        2. The government might allow rates to rise once it’s clear that the economy has recovered and unemployment has dropped to at least 6-7%, but not before then. I would not expect significant interest rate increases until at least 2012-2013, since the Fed is predicting unemployment will be above 9% until 2011. Inflation is also low.

          http://dealbook.blogs.nytimes.com/2009/11/05/fed-sees-no-need-to-raise-interest-rates-soon/

          Even after the economy recovers fully, I doubt that interest rates on 30 year fixed loans will ever reach an average of 9% again. Saying that the average interest rate has been 9% since 1971 ignores the fact that interest rates have been below 9% since early 1995. They have been below 7.5% since late 2000.

          http://mortgage-x.com/trends.htm

          My guess would be that interest rates on 30 year fixed rate loans will remain around 4.5-5.5% until 2012 or so, and then rise to 6-7% from 2013 onwards. Using 9% as a baseline simply does not respresent modern trends at all.

          1. “I doubt that interest rates on 30 year fixed loans will ever reach an average of 9% again.”

            Ever is a long time. I’d take the other side of that bet. ;-)

          2. Geotpf is right on this – inflation is the LEAST of our worries right now. Read Paul Krugman and look at Japan’s Lost Decade(s) – interest rates at 0 or below are sustainable for a long time once a housing bubble has popped.

          3. OK, so you can’t have interest rates below 0 – unless you have someone paying you to borrow money. Can we say that our bailout of the financial system is something like that?

          4. An effective negative interest rate is the current Fed model. Inflation is high with the current printing of money and the devaluation against other currency. So the net interest rate is negative for the banks (0.25% to buy stocks and other assets less the payback with cheap dollars, so possible -5% interest rate now).

            However, we have wage deflation, because the money is not producing real goods, but only profits in shuffling money around, i.e., just a transfer of wealth to those that can borrow at 0.25% and lead the market.

    2. I made an ‘inflation’ mortgage calculator (it doesnt account for taxes though):
      http://nothinbutnetworks.com/calc.html

      they bought the house in 11/1997 for $266,000 ($53,200 down, $212,800 loan)
      their orig mortgage payment was: $1,457 (at 7.29%)
      inflation adjusted that’d be: $1,924
      $1,924 at 7.29% is a purchase of: $351,219
      $1,924 at 5.25% is a purchase of: $435,612

      (my calc rounds to the nearest thousand, so PP was calculated at $266k instead of $266.5k)
      It looks as if this house is FAR overpriced if you base on inflation *and* rates alone. I would bet that Irvine has become wealthier in the last decade+.

      1. I disagree 100% with these calls that you take 1997 and assume 3% interest per year. This assumes that incomes have increased along with inflation.

        It is obvious that incomes have been stagnant for the last decade and have not kept up.

        3% inflation is just a historical average. There is no policy anywhere that says ‘we shall increase the money supply 3% every year’. You could have low inflation for awhile and then a sudden spike when year that averages out to 3% over the long run.

        You can’t apply this inflation factor to housing until incomes have risen to match (which they have not).

        I see no reason why 1997 prices could not be reached by the time this is over. It all depends on how the big the governments money bomb inflates incomes over the next few years. So far, it looks like all we have to show for it are a few more real-estate transactions, makework road projects, and increased wall street casino earnings. Not a whole lot making its way into productive business ventures.

        1. actually, the national income statistics indicate that between 1999 and 2007, wages increased 2.69% per year.

          and in fact, for Irvine in particular, MHI went from ~$80k to ~$100k over the period, which is ~2.5%/yr, no?

          I look forward to seeing what has happened in the past few years, I suspect some decrease, but if you want to argue wages, you have to go with census data.

          1. I don’t buy these statistics when you factor in the stock bubbles, tech bubbles, real estate bubbles that took place during this time period where pizza delivery guys slung mortgages for six figures.

            Our entire economy has been a big charade for the last 10 years so any statistics about wages are certainly just as much garbage as the data used to compute them.

            I believe that wages for the wealthy certainly increased, but the average Joe is still pulling in about the same.

            Also look at how prices on everythinh from health care to college tuition have ballooned. Middle class has lost big ground. Net effect: stagnant wages.

  2. The long history of home prices and values is a harmonic dance with the measures tethered in an ever more volatile relationship.

    What an elegant turn of phrase!

    1. Yes!

      150K in over-the-top, overpriced, bubblicious upgrades! Aren’t you excited!?

      I sure am.

      Where do I sign up to inherit this house debtor’s spending spree?

  3. What do you think of the value of the interest rate hedge that FHA loans represent? Back in the 80s all loans were assumable, and having a 7%(or whatever) loan attached to your house was a great tool for getting it sold. Since conventional mortgages now require the loan to be paid in full upon sale, while FHA still allows assumption, using an FHA loan may be a really good idea right now, if you are determined to buy.

    In fact, you would want to put down as little money as possible in this low interest rate environment, money is cheap right now, houses are expensive. This way, if mortgage rates on conventional loans get up above your higher FHA rate, then you’ll be in a better position to sell, and you’ll want to be able to offer as close to full financing as possible. (hence the low-down payment now).

    Given the extraordinarily high percentage of FHA loans at the moment, one might even argue you’re putting yourself at a comparitive disadvantage down the line by not having an assumable loan.

    1. If there is an inflation spike in the medium term, taking on a huge debt will become less painful — assuming of course that inflation also has wage inflation.

      I don’t believe there are any assumable loans left in the marketplace (lenders please correct me if I am wrong). Lenders do not want long-term debt on their books at low interest rates, so they count on people selling and paying off the low-rate debt in order to make money. Banks don’t want loans to be assumable for the very reason you do; the value to you obtain comes at their expense. So you would be at a competitive disadvantage to someone with an assumable loan, but since banks aren’t writing those loans, there is no competition using them. Besides, if they were to write an assumable loan, they would put in a higher up-front interest rate to compensate them for the interest rate risk and it would not be as useful.

      1. FHA and VA loans are by definition assumable. With no reappraisal even. They do have a higher up-front interest rate in addition to the mortgage insurance. It’s a question of whether they priced that correctly or under or overpriced it.

        1. wow, can other mortgage pros comment on this?

          my online quicky search yields conflicting answers:

          I was trolling the Internet and came across a just-written article which discussed the benefits of FHA mortgages. This was interesting, given that the FHA last allowed freely-assumable loans two decades ago. Specifically, FHA mortgages have not been freely assumable since December 15, 1989.

          http://www.fhaloanpros.com/2009/07/do-we-need-assumable-fha-mortgages/

          Assumption of FHA and VA loans closed after the dates shown above requires approval of the buyer by the lender, or the agencies. The process is much the same as it would be for a new borrower. Upon approval of the buyer and sale of the property, the seller is relieved of liability. FHA allows lenders to charge a $500 assumption fee and a fee for the credit report. VA allows a $255 processing fee and a $45 closing fee, and the VA itself receives a funding fee of ½ of 1% of the loan balance.

          http://www.mtgprofessor.com/A – Options/are_assumptions_a_good_deal.htm

          FHA Mortgages Are Assumable.
          All FHA loans are assumable when processed using HUD’s guidelines. However, mortgages closed on or after December 15, 1989 require credit qualification of those borrowers wishing to assume the mortgage. See FHA Handbook 4155.1 REV 5, Sections 4-1 and 4-4 and Handbook 4330.1 REV 5, Section 6-6.

          http://www.myfhamortgageblog.com/2009/09/fha-mortgages-are-assumable/

          1. Hmm, a more reputable source would be good, but those aren’t actually conflicting answers, just different definitions of “assumable”. If by that you mean “freely assumable by any joe blow” then yes, only loans pre-1989 are “assumable”, if you mean are assumable by any buyer who qualifies for an FHA or VA mortgage for the loan amount, and is willing to pay a very minimal $500 fee, then, they are still assumable.

            The question is, whether the first one that claims that the lender’s won’t approve the assumption has any merit to its claim.

  4. Ever consider making the reports more widely available in other areas?

    I can see people using this like Kelley’s Blue Book value for automobile resale price.

    Someone walks into a home that’s for sale, shows the IHB Valuation Report and says that’s what he/she wants to pay.

    I was thinking you could talk to redfin and have them do the work or get funding from a VC(venture capitalist). But they’d probably just steal your idea.

    1. Yes, there is very little in the report that someone who is good with Excel could not figure out how to duplicate on their own. MalibuRenter is an expert on financial patents, and I might be able to patent parts of the report, calculations, presentation, and so on, but then I would have to spend the time and money to defend it. Plus, I am philosophically opposed to restricting access to any data or learning, so I don’t think I want to go the litigation route. I won’t let people copy my work, but if someone flatters me by duplicating my work on their own, more power to them.

      We are working on a business plan to take our ideas to other markets by working with other real estate bloggers and agents, but there is much to think through and coordinate. For now, we can prepare reports anywhere we have MLS access.

      1. Just because you get protection, doesn’t mean you have to restrict access across the board. Obtaining patent protection would let you steer the tools away from ne’er-do-wells (e.g., the NAR) and into the hands of consumers for free.

        Otherwise, everyone will just tweak or refine your idea and then get their own protection. Unless, of course, they have to license from you as the broader rights holder and you hold their feet to the fire by requiring them to open source.

        So, I would say that you’re giving short shrift to the idea of getting patent protection.

  5. It appears to back to a school. Not my idea of a good location for the ~700k price tag. Notice how close the baseball field is.

    1. That would be a deal-breaker for me. I used to live across from a park where the local junior softball league would play on Saturday mornings and practice every Tuesday and Thursday evening. Forget sleeping in on Saturdays. And when they had a night game, my relaxation was shot by the screams of the kids and the sound of balls being smacked by aluminum bats. If they’d been aiming in the direction of my apartment, I might have moved sooner than I did.

  6. There are some fools who think buying when the interest rates are low is a good idea. These guys will weep and cry in years to come. Also I feel this crisis is gonna hit CA real hard as govt buys increasingly expensive “Time”.

    I believe they are paying tens of billions of dollars if not hundreds of billions every month for this “Time” they are buying.

    1. Notice how they are now requiring down payments ?

      Gee, I wonder why that is. Could be because the banks are planning on stripping them to help cover their losses?

      They are pretending that they have changed their ways and are now making good loans to gain the confidence of fence sitters so that they can pillage the downpayment monies people spend for the next few years.

      Only thing that has changed is that government has taken over the subprime lending business.

    1. I don’t think that is an error. I put a duplicate formula in the b3 column so people could copy it over to “erase” their own manually input number. The spreadsheet calculates based on the numbers in second column.

      1. Sorry I wasn’t very clear.

        Currently MonthlyRentAt31% is always $2,583 regardless of what I set GrossAnnualIncome to.

        Here’s the existing equation:
        B3=100000/12*0.31

        But I think it would be better to change it to:
        B3=B2/12*0.31

        Where:
        B3 is Monthly Rent at 31%
        B2 is Gross Annual Income

        This way if I change Gross Annual Income(B2), then Monthly Rent at 31%(B3) will be automatically updated.

        1. I see. I think I was having problems with iteration (EditGrid does not support iteration the way Excel does). I changed the formula as you suggested, and it seems to be working OK. Let me know if you have any other problems, and thanks for pointing out the error.

          1. Thanks, it looks good.

            The only small point is that the default value for B2, which used to be $100k, is now empty.

  7. I am absolutely in shock that the govt has been this successful in re-inflating equities and commodities. I knew the Fed had the ability to create money at whatever pace necessary, and I knew the chairman was a willing participant, but I still cannot believe that they’ve done it, while avoiding all the pitfalls … and they’ve done while unemployment has been rising.

    They’ve done a masterful job at the expense of future tax payers. I wonder how long it’ll last.

    1. I completely agree. While I am frustrated and concerned with the lengths the fed is going to re-inflate prices, I am impressed with big Ben’s creativity in coming up with all kinds of new facilities to leverage.

      Now lets see if he is able to stay on the tightrope all the way to the other side of the canyon. He has double dip on one side and inflation on the other. If he falls, we all get hurt. That is unless you can see what is coming and make the right bet before hand. I am trying…

  8. IrvineRenter,
    Good to see that you’ve reassessed some items and are optimizing your model. Your service is valuable in educating the public to avoid huge loss if they honor their debt obligations.

    One can see the non-sense of only looking at monthly payment to assess value. Say interest drops to 0.25%, will houses be worth 3.1 times more (2%+5%)/(2%+0.25%)? Only if you willing to sell at 68% plus loss when the interest rates go back normal.

    The more people get educated in finance, the less they are willing to put up their own money for the property. Most in business are putting other people’s money instead (investors’ or the banks’), so there’ll be lots of bubbles and burstings. The leaders get a cut from the top, so they really don’t care as longs as there is activity in the market.

    Right now, the average American is indirectly encouraged to buy at almost any market price. FHA has 3.5% down with 1.5% fees. Total 5% to get the house. With the time for FC, there’s really no skin in the game. The cost to the psuedo owner will be 5% less (# months free rent*1%). Assuming at least 11 months of free rent, buying, not paying for 11 months and later getting FC’ed will give a return of 6% with a low FICO score. Draw out the FC to 16 months and the return will be 11%. Assuming one doesn’t pay more than 120% current market prices. Your tax dollars at work!

  9. I really like the valuation reports and appreciate that there is someone willing to provide it for free. (I have access to paid valuation models…and it is one of the reasons i did not buy in Irvine, there are very few listed homes that are worth the listed price.)

    My problem with valuation models is that it they are useful for banks and appraisers and not for buyers (in Irvine, i guess). My offers will never be accepted because i always get overbid by people who dont care about valuations.

    Consider a home listed by IR2 for 725k (i picked this up because it was mentioned in the forums). It is a very good house and will sell within a week near about the listing price…is the listing price the close to the valuation..probably not but it will sell for sure. Supply/Demand creates its on intrinsic price point.

    I still think that this is not a good time to buy but people waiting on the sidelines see low inventory, increase in the listing prices and a manageable monthly nut will jump at a good house. Plus the fact that the government is hell bent on doing what it thinks is right. Only time will tell..

  10. Here is an epic HELOC abuse story:

    Even the Rich Are Treating Their Houses Like Piggy Banks

    LOS ANGELES — In recent years, millions of Americans looked at their houses and saw big, fat piggy banks. And it occurred to them to take out big, fat new mortgages.

    Few did it on the scale of Ronald Burkle.

    Mr. Burkle, the grocery-store billionaire, has $56 million in loans against two houses, including $9 million added last year. One is his iconic Beverly Hills mansion, “Green Acres,” a 44-room Italian Renaissance palazzo built in the 1920s by silent-film star Harold Lloyd that more recently was a favorite overnight rest stop for Mr. Burkle’s buddy, Bill Clinton.

    Mr. Burkle declined to say how he is using the money. There is no indication he needs it to pay the water bill.

    Traditionally, the super-rich didn’t really bother with mortgages. Home loans were for people who carry lunch buckets, not captains of industry.

    That changed in the boom years — and it is still going on. Recent big-time home borrowers include fashion entrepreneurs, hedge-fund titans and baseball-team magnates.

    Home loans “are a really good source of cheap capital,” says Robert Maguire, a real-estate tycoon who built some of the tallest officer towers in L.A. He has borrowed some $50 million against several properties, including his beach house, which features huge picture windows framing the Pacific near Santa Barbara, Calif.

    He has been raising money with an eye toward regaining control of his property firm, Maguire Properties Inc., which he lost during the real-estate bust. Even as he borrows against his beach retreat, Mr. Maguire is trying to sell it for $29 million.

  11. Chickens coming home to rouse.

    http://www.calculatedriskblog.com/2009/11/default-notices-movin-on-up.html

    From Carolyn Said at the San Francisco Chronicle: Default notices rising in upper echelon ZIPs (ht Hymn)

    In upscale communities such as Los Altos, Greenbrae and Alamo, where median prices top $1 million, about twice as many households received default notices from January to September as in the same period in 2008, according to recorders’ office data compiled by MDA DataQuick, a San Diego real estate research firm.

    Any data for Irvine, NB, HB and CM?

  12. IR…

    According to your calculations, you are ahead $15,000 by taking the FHA note…

    Multiple the difference $261 x 360 months = $93,960 vs. the $108,900 additional down needed for the conventional loan.

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