The Irvine Housing Blog is being featured in the print edition of the Irvine World News this weekend. For any new visitors that found us from this article, I like to say welcome.
The Irvine Housing Blog is a blog devoted to real estate in Irvine, California. As such, we analyze local and national issues that impact prices in our housing market. Since its inception in September of 2006, we have been bearish on real estate in Irvine. The reasons for our bearishness can be found in great detail in the analysis posts found both in the sidebar and on the analysis tab above. These posts are organized into the book, The Great Housing Bubble. We are not a bubble blog, and though we are often referred to as part of that community, we will only be bearish as long as prices are elevated above fundamental valuations and market conditions point to continued deterioration in prices. At some point, we will turn bullish.
In early 2007, we published a series of predictions for Irvine median house prices. The red line in the chart above is the original prediction, and the green line represents what happened through April of this year. As you can see, we have a reasonable record with respect to forecasting future median home prices.
We are a vibrant community of more than 3,000 daily visitors. Our forums have over 1,500 members and over 78,000 posts. Many Irvine residents come to our forums looking for information on Irvine housing, discussions about the economy, politics, or just to hang out and be part of the community. The forums are free to join, and everyone is welcome to participate.
In a typical post, we examine a property for sale in Irvine in our own irreverent, snarky style. There is usually a featured song for everyone's entertainment, a preamble with discussion or analysis of market issues often with a tie-in to the featured song. After there is a presentation of the featured property with two pictures (if available,) and a breakdown of the asking price, the income requirement and downpayment requirement based on traditional financing, the monthly equity burn (the amount the buyer will lose each month assuming prices drop 10% a year for the next 2 years), the original purchase price, the date of purchase, and the address with a link to the listing on Redfin. Below the fold, there is more detailed property information from Redfin and the MLS including the property description. The quality of the writing on MLS listings is often horrendous, and we will ridicule this descriptions just for the fun of it. Then we go in to detail on the mortgage debt on the property showing how much each of the parties to the transaction is going to lose in the eventual sale. The stories the property records reveal are often quite illuminating and instructive -- instructive on what not to do.
If you are new to the site, we encourage you to look around, and please join in the fun by adding your own "astute observation" to the post below. Welcome.
For those of you who are regulars to the site, go check out the article in the Irvine World News print edition. We will also be featured in the OC Register on Wednesday. As a reminder, out IHB get together and book signing will be this Wednesday, November 12, at 6:30 PM at JT Schmids at the District. Everyone is welcome to attend.
It has been almost 7 months since our last call for lurkers to come out of the shadows. For all you readers out there who have never posted before, please say
hello. We know you are out there. This is another chance to break the
ice...
Welcome to the jungle We got fun 'n' games We got everything you want Honey we know the names We are the people that can find Whatever you may need If you got the money honey We got your disease In the jungle Welcome to the jungle Watch it bring you to your shun knees, knees I wanna watch you bleed
Welcome to the jungle We take it day by day If you want it you're gonna bleed But it's the price you pay And you're a very sexy girl That's very hard to please You can taste the bright lights But you won't get them for free In the jungle Welcome to the jungle Feel my, my, my serpentine I, I wanna hear you scream
Welcome to the jungle It gets worse here everyday Ya learn ta live like an animal In the jungle where we play If you got a hunger for what you see You'll take it eventually You can have anything you want But you better not take it from me Welcome to the Jungle -- Guns n' Rose
Real estate always goes up. I will pay back this loan. Stated Income is OK. The market will recover to peak prices soon. There is a huge pent up demand. They are running out of land. Buy now or be priced out forever.
You all recognize the lies of The Great Housing Bubble. I imagine you could compile a longer list than I can. A great many people believed these lies (and many still do) because they wanted to. As long as prices were going up, any reason to buy seemed like a good one. There is one lie that everyone who buys real estate believes: prices will go up from here. Yes, there are people who claim they know prices will drop further, but nobody who buys think this will be very much or for very long.
I remember reading an article last year where a knife catcher was buying in a suburb of Los Angeles because prices had dropped about 10%. He said in the article that prices might drop 1%, 2% at most. Of course, prices have dropped 30% since then. It has been fascinating to me to watch knife catchers buy properties during this decline. I had always wondered what was going through people's minds when they bought while prices are dropping. From what I have witnessed, they all believe they are buying the bottom.
Close my, close my, close my eyes
There will come a time when prices are still dropping that I may buy. I will do so because the purchase will save me money versus renting. At that price level, there is another valid economic reason to buy. Appreciation does not matter if a purchase has another economic benefit. Today's knife catchers do not have that benefit. They are getting the worst of both worlds. They have equity evaporation, and they have a negative cashflow as compared to renting. It takes blind faith in the lies of the bubble and baptismal acceptance of kool aid to buy in this market.
Today's featured property is actually one of the better deals I have seen. It is still above rental parity, but it is quickly approaching that threshold.
Everyone is wondering when the market will bottom and at what price. For prices to stabilize, they must reach levels of affordability where people can make the payments with a reasonable percentage of their income. These levels are almost completely dependant upon income and financing terms. During The Great Housing Bubble, credit was very loose, and people were able to finance huge sums based on both their real and imagined income. The only limits to prices were imposed by people's dreams and their willingness to lie on loan applications.
Now that the loose financing has resulted in unprecedented default rates and foreclosures, lenders are tightening credit in the hope of not losing even more money. The tightening of credit will continue. This will result in a continued decrease in the amounts lenders are willing to loan which in turn will lower the amounts buyers are able to bid. Prices will continue to fall.
The first signs of market stabilization will be when prices reach levels of affordability commensurate with historical norms. Prices are still far elevated from these levels. When we get to the bottom, prices at the low end of the market will stabilize first. The bottom tier of the market is the foundation of market stability. It is not until these prices stabilize and begin to rise that will people have equity to move up to larger homes. People who are buying more expensive properties today are not taking their equity from less expensive properties to finance a move up. There is little no equity in these low-end properties, and their continued price decline is making an equity transfer to a more expensive property much more difficult. The ongoing erosion of the equity positions of low-end properties coupled with tightening financing is going to continue to put pressure on high-end homes.
Many low-end properties in the most beaten down markets are nearing rental parity. There has been a dramatic increase in sales volumes of low-end properties where prices are at rental parity. Those markets are beginning the price stabilization process. The same is not true of Irvine. Our low-end properties still have further to fall as they have not yet reached rental parity for an owner-occupant. Many of the least desirable will likely fall below rental parity to price levels where investors can generate a positive cashflow. In short, we are nowhere near the bottom.
Today's featured property is a typical low-end foreclosure in Irvine. The buyers used 100% financing about 1 year before the peak, and with prices plummeting and the cost of ownership being double the cost of a similar rental, the owners stopped making payments and allowed the property to go to auction in foreclosure. It is a familiar story, and it is one we will see more of here in Irvine over the next few years.
Topaz is a beautiful and somewhat rare mineral that comes in a variety of colors. Our housing market also has its somewhat rare counterpart: a 2003 rollback. We will see many, many more of these before this crisis has past, but for now, each one is duly noted as another milestone on our way to the bottom. If any of you have been following ocrenter's blog at Bubble Market's Inventory Tracking, you know he has been consistently calling for 2001 pricing at the bottom. Many properties in San Diego County are already at this price level. They were a year ahead of us on the way up, and they are also a year ahead of us on the way down. Assuming we do not have a collapse of incomes and rents in the upcoming recession, pricing in Irvine should bottom out at 2001/2002 price levels. There are downside risks if interest rates rise dramatically, or if foreclosures balloon out-of-control. We have been resting on price support at 2004 price levels for months now, but with the recession deepening, and the prime selling season behind us, prices may resume their downward decent.
Today's featured property is owned by a HELOC abuser who borrowed every penny of equity as quickly as it accumulated. As many before him, he is leaving the bills for someone else to pay off.
But then they're not crazy they're just high on kool-aid
Evidence of kool aid intoxication can be found in nearly every property I examine. Everyone in the ownership chain began extracting home equity starting in 2000-2001 and continuing up through 2007 when the lenders cut everyone off. Our society in California has become completely dependent upon ever-increasing home prices to permit mortgage equity withdrawal to fuel our economy. This borrowed money flowed into cars, boats, trips, home remodels, and many consumer goods, but it also flowed into business start ups, commercial rents, computers, phone systems, employee salaries and many beneficial uses as well. Unfortunately, none of it was sustainable. It was all built on a Ponzi scheme of debt structures and false insurance which has now come crashing down.
At this point, the residents of California are as addicted as any opium addict. In fact, OPM, or other people's money, is the drug everyone craves. The conventional wisdom, if there is such a thing, in California right now is that house prices will go up again because demand is high, but people just can't get loans. There is a certain truth to this as people proved during the bubble that they are kool aid intoxicated enough to take on any loan offered to them; however, the lenders are not going to make these loans available again. Making toxic loans at extreme property valuations is what caused them to lose so much money. The days of lenders enabling this behavior are over.
Today's featured property shows the pattern of mortgage equity withdrawal and ever-increasing loan balances with previous owners of the property. The final owner was the bagholder who used 100% financing and passed the losses on to the lender (who incidentally is Fannie Mae/Freddie Mac which is now us).
The election is coming up in a few days. Has all the bull$hit being thrown around left you dazed and confused? I got a call from Robo-Bill Clinton today. I felt so special. I am planning to sit down with my California General Election voter information guide this weekend and make up my mind on how I plan to vote on the various initiatives. Since the topic of the weekend is politics, I thought it would be good to explore some of the politics of the housing bubble.
There are many ideas floating around the blogosphere regarding what can and should be done about the housing crisis. I have received a couple of emails recently from people with ideas on changes to our current system. One is from a local realtor named Shevy Akason who is championing legislation that would help the flagging housing market and get it on more solid ground (His blog is here). This isn't a bailout, and although I think there are some issues, it is a proposal worth examining:
The proposed bill adds provisions to the current IRS code that allows for SEP IRA deductions outlined in IRS Publication 560 to be expanded to cover HEA (Home Equity Accounts). The bill will allow prospective homeowners to put money into a designated HEA (Home equity account). This money must be used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 50% equity to place money into an HEA account designated for homes they purchased after January 1, 2000 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2000 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions.
Above is merely the summary. The PDF contains more information. It is an interesting proposal. Personally, I like the idea of a tax advantaged savings account for downpayments. However, I don't believe expanding our subsidization of real estate through the tax code is a good idea. We already oversubsidize real estate with the home mortgage interest deduction. Encouraging debt in this way is part of the problem. I do like how the proposal encourages saving and paying down mortgage debt. I do think this program would not do much for those on the margins who are likely to go into foreclosure. The problem these people have is too much debt and too little income. To qualify for the program as outlined, people would need to refinance into a fixed-rate mortgage. I like that idea, but very few marginal borrowers can afford to do this, and those who are distressed are underwater and could not obtain fixed-rate financing even if they could afford it. Basically, this proposal would help those who need it least.
The proposal is not a fix for the foreclosure crisis. There is no fix. It does address the problem of saving for a house and the use of exotic financing, and I like that.
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