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  That is, that statstic is obsolete.

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!

over $150,000 in upgrades and only one full bath for a 4-bedroom home? For $700,000?  Wow.

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.

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.

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+.

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.

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.

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.

Cell b3 on the calculator is broken again: http://www.irvinehousingblog.com/calculator

It’s using a hard coded value of $100k instead of using b2.

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.

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.

“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).

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?

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.

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.

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!

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.

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.

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.

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.

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.

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…

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.

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..

::chuckle:: I’m glad to see I’m not the only one admiring the occasionally graceful writing here.

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.

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.

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.

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/

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.

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.

http://www.hud.gov/offices/hsg/sfh/nsc/faqassum.cfm

sheds a bit of light, but not on the whether this process is a given for qualified purchasers or whether it’s at the whim of the loan holder.

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.

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.

I just wish I could do it more often…

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.

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.

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.

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.

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.

Well, the second bath is a three quarter, so it at least has a shower.  Still, that is pretty weaksauce.

“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.

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.

“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.

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.

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.

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.

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?

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.

“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.    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.

“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.

“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.

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.

It’s posts like this that made the IHB, thanks!

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?

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.

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?

Thanks, it looks good.

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

Again was too strong a word.  I should have said within a decade or two.

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.

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.

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