Will the housing market bottom in Irvine in 2011? What about nationally? Today's post is a review of the current conditions favoring a housing market bottom this year.
Irvine Home Address … 25 RIDGEVIEW Irvine, CA 92603
Resale Home Price …… $3,999,000
It's been a long, cold, lonely winter
It feels like years since it's been here
Here comes the sun
Here comes the sun, and I say
The Beatles — Here Comes the Sun
Are we at the dawn of a new bull market in residential real estate? Is the bottom close at hand? The double dip recently became official, both nationally and in Irvine (see below), so perhaps it is premature to call the bottom just yet. The current trend is decidedly down. The price plot intersects the bottom right corner of the two-year chart reflecting the worst possible market condition.
It always looks very dark at the bottom, and after a little more weakness, we should see the seasonal pattern take over and the first of many seasonal rallies will mark the bottoming of prices in the $300/SF to $360SF range over the next three years, perhaps five. This next bottom may not be our last. If interest rates remain low while jobs and incomes recover, prices may bottom this spring. However, if interest rates begin a multi-year or multi-decade climb, higher financing costs will be a constant market headwind.
As for the Irvine housing market, in my Predictions for 2011, I stated the following:
Basically, my outlook for 2011 is unchanged from 2010. (1) Inventory will go up. (2) Properties selling at or below rental parity will be the norm. (3) Sales volumes will increase. (4) Prices in Irvine will fall 2% to 5% in 2011.
Whatever the result, the leg down in pricing from the double-dip will be the last move down in this market cycle. The housing market will bottom at different times in different market tiers. I think the biggest discounts will be at the high end going forward. The lowest tier of the housing market may have already hit bottom. If not, it will bottom first. With low end support producing the first wave of move-up equity buyers, the slow grinding declines of higher price points can finally cease, perhaps in 2014. During the next three years, expect a range-bound housing market with a slightly lower bias.
FEBRUARY 27, 2011 — By SIMON CONSTABLE
There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.
We might have good news? The bad news could stop? There is a man who is hedging his predictions before he even makes them.
Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.
It may be a welcome relief to some, but higher house prices are not a relief to future buyers. I guess they don't count.
For sure, last week we learned the widely watched S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. The index tracks 20 major markets.
But that figure belies real reasons to be optimistic, according to some experts. If they are right, it might make sense to jump into real estate. The trick is avoiding getting burned again, and it doesn't necessarily mean owning a home.
First, let's recap the economic signs a bottom is close.
Houses Are a Good Deal
Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.
Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally.
When a market is at the bottom, despair is widespread. The homebuilders show this classic signal. They rate affordability an A+ while volumes and inventory earn Fs. Builder sentiment indicators are at historic lows. That is the dynamic at the market bottom.
At the peak, midway through the last decade, a home in Los Angeles cost the equivalent of 4.5 years' pay. The average price has since fallen to just over two years' income now. That's well below its pre-bubble average of 2.6 years. This means average Los Angeles homes are cheaper in “real terms” than they were typically during the period 1989 through 2003.
The opposite is true around the Washington beltway, where it will take 26 months of pay to buy a home, versus the historical norm of 22 months.
The opposite is true here in Irvine as well, but affordability is improving as evidenced by the daily posts where nicer and nicer properties are starting to appear at rental parity.
In the end, it will be affordability that will drive people to buy homes.
“Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own,” says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.
I have stated repeatedly for four years that a bottom is formed when it is cheaper to own than to rent. Once that condition is in place, then supply and demand issues predominate. For instance, affordability is not the problem in Las Vegas. Prices are 30% to 40% below their historic relationship between the cost of rental and the cost of ownership, yet there is little chance of appreciation until the overhang of supply is processed.
It is definitely bullish. But what about timing?
“Housing prices will probably bottom in 2011,” says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.
Mr. Simon says prices might dip another 5%. Still, in the scheme of things, that's small. Consider this: In some markets, home prices have fallen by half or more since 2006.
For instance, in once-hot Miami you can snap up an average house for under $166,000, according to recent data from the National Association of Realtors. That's down from $371,000 in 2006. Another 5% drop would take it to $158,000.
Many of the properties I look at each day in Las Vegas have already declined 70% from the peak. Another 5% is a rounding error compared to the decline that already occurred. If the property is being purchased at a significant discount to rental parity, any temporary declines in value can be partially offset by the monthly savings.
Properties locally will likely decline another 5%, but this too is not so significant as to be a major reason for worry. The slow decline followed by a tepid rally will leave most buyers over the next few years unable to sell without losing money — which is a good reason not to buy.
With no savings over renting, there is no compelling reason to buy; however, with the likelihood of another 30% decline being remote, unlike four years ago, there is no compelling reason to rent either.
Investors Stepping Up
Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.
Take Miami again. Last year, more than half of all transactions were made entirely in cash, according to a recent report in The Wall Street Journal. That compares with 13% of deals in the last quarter of 2006, the height of the bubble. Similarly, in Phoenix 42% of sales in 2010 went to all-cash buyers, up threefold since 2008.
Cash buyers are required to take up the slack in areas where the indigenous population cannot qualify for loans. Sales volumes remain so low partly because unemployment is high, but partly because so many in the buyer pool now have bad credit and are unable to buy.
It's a sign that these investors are betting on a rebound. Investors buying at current prices are looking for deals, or so-called bottom fishing. They typically like to pay entirely in cash (or with a relatively small loan) to speed up transactions. That can be vital for an investor wishing to lock in a deal fast.
If this is a turn in the market, then it might make sense to go out and buy a home. But, warns Pimco's Mr. Simon, “buy in areas you really know.”
Plan to Stay Put
Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.
Over the next several years, we will see many bear rally buyers price their homes at 6% more than they paid and pray that a greater fool comes along. It will be a property profile you will tire of seeing.
The plethora of semi-discretionary sellers holding out for purchase price plus commissions will create the downward stickiness usually associated with real estate markets. It will create an environment of low sales rates for many years to come as buyers cannot afford to pay the prices sellers require to sell.
The level of debt distress will be less in this new housing market. Many will still maximize their debts to play the Ponzi scheme, but they will be doing so with stable amortizing mortgages, hopefully with fixed rates.
Sellers have a high discretionary price because they don't want to take a loss. Therefore, transaction volume depends on how much demand can be generated at preset price points. If many people go back to work and earn large wages, then transaction volumes will pick up as buyers can meet the high asking prices. However, if unemployment lingers and wage growth is tepid, real estate prices and transaction volumes will remain depressed, and the market will take years to clear out.
Perhaps they will come up with some innovative loan programs….
Also remember that borrowing money to buy a house can still be risky. If you pay for a $100,000 property with $20,000 cash and borrow the rest, a dip in the value of $20,000 would leave you with zero equity. On top of that, you'd have to pay to maintain and repair the property, something not necessary when renting.
The flip-side of that transaction is to wait and save 20% and buy when prices are cheaper. That's what I told everyone to do four years ago. Now, I don't think prices will drop far enough to worry about or to wait for. Although, I don't think they will roaring upward any time soon either.
Home Buying Without a House
There are other ways to benefit from a real-estate rebound than directly buying a house. Such investments include stocks, mutual funds or exchange-traded funds. Unlike homes, which typically cost tens of thousands of dollars, these financial investments can be made in smaller amounts and typically are easy to sell.
Weiss Research's Mr. Larson says although new homes are oversupplied, home builders might benefit from a rebound as the situation rights itself.
Rather than pick individual stocks, he says, it probably makes sense for small investors to pick broader investments that hold many different stocks. In particular, he points to the SPDR S&P Homebuilders ETF (XHB), which tracks a basket of home-builder stocks.
Mr. Larson also highlights specialized mutual funds such as the Fidelity Select Construction & Housing fund (FSHOX), which tracks home builders as well as home-improvement retailers like Home Depot and Lowes that would also likely benefit from a housing recovery.
With homebuilding activity at historic lows, buying ETFs that will benefit from increased residential investment is a good value play depending on your timeframe.
Now, how about that elusive market bottom….
Peak Ponzi, big loss
Today's featured property was originally purchased on 12/22/2006 for $3,953,500. The owner used a $2,912,449 Option ARM!
Now think about this: they aren't giving out $2,912,449 Option ARM loans anymore. The number of people who are willing and able to qualify to take on that kind of debt are few and far between. That's why the high end pricing must come down.
The owner also used a $250,000 HELOC and put down $791,051. That's a lot of money to walk away from.
Recording Date: 06/05/2008
Document Type: Notice of Sale
Recording Date: 02/27/2008
Document Type: Notice of Default
The bank took this property back on 1/22/2009 for $3,206,666 where it remained in shadow inventory — you know, that inventory everyone denies is there. Now it is for sale, and the bank honestly believes they will get peak pricing. Perhaps they will underwrite a new option ARM with a 1% teaser rate? It's the only way they will get their price.
Irvine Home Address … 25 RIDGEVIEW Irvine, CA 92603
Resale Home Price … $3,999,000
Home Purchase Price … $3,206,000
Home Purchase Date …. 1/22/09
Net Gain (Loss) ………. $553,060
Percent Change ………. 17.3%
Annual Appreciation … 10.2%
Cost of Ownership
$3,999,000 ………. Asking Price
$799,800 ………. 20% Down Conventional
4.25% …………… Mortgage Interest Rate
$3,199,200 ………. 30-Year Mortgage
$758,803 ………. Income Requirement
$15,738 ………. Monthly Mortgage Payment
$3466 ………. Property Tax
$585 ………. Special Taxes and Levies (Mello Roos)
$667 ………. Homeowners Insurance
$495 ………. Homeowners Association Fees
$20,950 ………. Monthly Cash Outlays
-$1962 ………. Tax Savings (% of Interest and Property Tax)
-$4408 ………. Equity Hidden in Payment
$1222 ………. Lost Income to Down Payment (net of taxes)
$500 ………. Maintenance and Replacement Reserves
$16,303 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$39,990 ………. Furnishing and Move In @1%
$39,990 ………. Closing Costs @1%
$31,992 ………… Interest Points @1% of Loan
$799,800 ………. Down Payment
$911,772 ………. Total Cash Costs
$249,900 ………… Emergency Cash Reserves
$1,161,672 ………. Total Savings Needed
Sq. Ft.: 6055
Lot Size: 0.53 Acres
Property Type: Residential, Single Family
Style: Two Level, Mediterranean
View: Bay, City Lights, City, Coastline, Mountain, Ocean, Panoramic
Year Built: 2006
Community: Turtle Ridge
At the very top of Turte Ridge, this is the ONLY Plan 3 that's hit the market and worth the wait. Highly sought after, this property is the largest of the LACima plan homes, with over 6,055 of living space on a huge lot at over 23,000 square feet at the end of a very quiet cul-de-sac. Absolutely no view obstructions. You can see all the way from the ocean to the Saddleback mountains with no roofs! Upgrades throughout the interior including faux wall painting, additional fireplaces and highly upgraded bathrooms. Wait till you see the view from the master bedroom!! This home is priced to sell.