It is true that move-up equity feels like found money, that also probably explains why people don’t mind spending it like income.
For your hypothesis to be true, the homeowner would have had to pay off a mortgage at some point and/or move down. If they made $1,000,000 on a $2,000,000 home and put the profits into a smaller home to avoid a mortgage, then your hypothesis makes sense. Empty nesters often do this when they claim their one-time capital gains exemption. There will also be some people doing this who sold at the peak and bought back in when prices dropped.
Posted by lee in irvine on 05/15/07 at 07:02 AM
Last summer there were no homes listed for less than 2005 prices in Irvine. ——-
Posted by squareround on 05/15/07 at 07:24 AM
Hi, Irvinerenter,
Can you help me find out something about this house:
916 N Redondo Ave, Manhattan Beach, CA 90266
It was only 310K in 1999. Now it was just sold at 1625K. How much down by the current owner? Thank you very much in advance.
Posted by Sue on 05/15/07 at 07:37 AM
Getting addicted to housing blogs, found a nice page with some interesting links to various housing blogs. Here is the URL.
To compare owning vs renting in this case, we need to add two year interest on 940K to the loss as well. So the total loss is
94,0944 + 94,000 . 94K is the two years interest on 940K at 5%
Posted by buster on 05/15/07 at 08:58 AM
WiseWithMoney is right on the mark. Whilst some would say that, since there is no mortgage, there is no interest payment that would be wholly incorrect. What could that $940,000 cash purchase have earned, figured extremely conservatively? If they had rented and put the $940,000 into short term treasury bills (by the way, you can buy these direct for as little as $1,000 and a term as short as 91 days at www.treasurydirect.gov) they would have earned just over 5% (no California tax, by the way). So if they had rented they would have earned $47,000 in zero risk interest the first year and $49,000 the second year, total lost earnings $96,000 plus $24,000 in property tax they paid plus $94,000 sales loss plus the insurance and upkeep. Total loss is $214,000. I sure could rent a nice place for the $9,000 per month they spent…..
Posted by squareround on 05/15/07 at 09:02 AM
But you need consider the rent for 2 years too. Maybe it is 60k?
I have a hypothesis that this might have been a “move up” buyer who brought in significant equity from previous house sale(s), who might be justifying his potential loss on this sale as something that he did not have to begin with before his good fortune in making out by selling his previous properties.
Anyone care to blow holes into this hyposthesis?
Posted by fumbling on 05/15/07 at 10:42 AM
you can buy t-bills through schwab or tdameritrade or etrade, a lot safer and more convenient to buy $1million in tbills this way with one order to the broker than spread it among 10 different bank cds. with tbills you don’t need no stinkin’ FDIC insurance…:)
Posted by No_Such_Reality on 05/15/07 at 11:37 AM
He could just as easily spent the money on blow and hookers in Vegas, but he didn’t. Looking at other opportunity costs to calculate his unrealized loss is rather pointless.
More importantly, his loss has nothing to do with what we care about which is the price of the market. That is only 4.3% below his July 2005 purchase (provided it sells).
That price in itself appears to be a tad high compared to his neighbors selling the same time period and roughly same size. So much so that his current asking price may still be above what could be considered reasonable comps for that home in 7/‘05.
Pretty nice house. I think its worth the 2003 price of about 500k.
Neighbor has a nice view into your pool area . I guess you wont be able to do any skinny-dipping or have loud parties out there. Its a deal breaker for me…LOL. I see no way to fix this because the lot is so tight.
Posted by ochomehunter on 05/15/07 at 12:40 PM
Well, to truly assess the loss, why not add delta of monthly payments from what you would have paid while renting. This will add up quickly
Posted by lendingmaestro on 05/15/07 at 12:46 PM
Opportunity cost always needs to be considered. That’s why it makes sense sometimes for banks to unload REOs because they are non-performing assets. Of course we are speculating that he could have invested his money.
I concur with your hypothesis crucialtaunt. You’ve unearthed a major fuel-point in the housing bubble. Trading up. At some point, no matter how much you sell your home for there is a maximum home/mortgage you can afford. This will always cap the market.
Think of why companies have stock splits. A 50 dollar stock price is much more affordable than a 100 dollar stock. The cost is too high for some people. If a consumer can purchase an investment and earn the same ROI % as a high priced investment, they’ll choose the lower price.
In regards to that article it, I can’t stress enough the point I always try to make. These blow-hards on CNBC have no idea of the depth and bredth of the major faults in the lending industry. Unless you are immersed in the business on a daily basis, and are speaking to actual homeowners than you don’t see the true picture. Even the traders who buy and sell CDO’s and MBS don’t have a true grasp of what’s going on.
Posted by SmartMoney on 05/15/07 at 01:04 PM
I would walk over there and give them $600K cash right now if they would take it. It’s worth more than its 2003 price, but only a reasonable appreciation rate (5 or 6 percent per year), not a wild ridiculous one.
One argument you regularly hear from people trying to justify the housing price overvaluing is that Irvine is the greatest place in the world to live and everyone wants to live here. Ergo it is reasonable to expect high double digit price appreciations year after year. The fact of the matter, though, is that all the positives people point to about living here were positives before the run-up, and existed when the price appreciation was in the realms fo the sane five or more years ago. It is the negatives (pervasive fraud, toxic financing, etc.) that only became widespread late in the game.
Normal appreciation (from the prices pre-run-up) is entirely reasonable to expect, but the normal percentage based appreciation from what prices were just a few short years ago accounts for and includes all the premiums for the weather, schools, and desirability. That’s what I don’t get: why do people think the attractions of Irvine are fundamentally different than they were five or ten years ago?
“That’s what I don’t get: why do people think the attractions of Irvine are fundamentally different than they were five or ten years ago?”
Sometimes I wonder if people really believe this BS or if they just spout it to make themselves feel better? All the bullspin was true when the market was in the crapper in 1996. Southern California did not suddenly become the greatest place on earth.
Posted by lendingmaestro on 05/15/07 at 01:14 PM
Irvine hasn’t decreased in the quality of living. It’s more than likely increased which increases the demand to live there
Compare it to other surrounding areas, i.e. santa ana, fountain valley, anywhere in LA, that are becoming more of a shit-hole everyday.
Posted by k.o. on 05/16/07 at 12:30 PM
I could argue that the Irvine of yesteryear, aka about a decade ago, was a lot better than the Irvine today. No insane traffic down Culver during the workweek. Orange groves and their blossoms that permeating the air. More “regular” middle class families that didn’t have 3 beamers for 2 drivers glutting the streets. Less crime and murders (although our crime rate is still extremely low today).
In my opinion, in several different ways the quality of life in Irvine has DECREASED from years past.
Posted by SoCalwatcher on 05/17/07 at 06:04 AM
Excellent article!
Bubble Bloggers= Facts, not fluff
Economists= Cotton candy figures and theories
NAR,RE Agents and MTG Brokers= Full of shit.
Keep going, bloggers. I love the no frills insights and call-it-as-you-see-it attitude.
Posted by IrvineRenter on 05/15/07 at 01:16 PM
It is true that move-up equity feels like found money, that also probably explains why people don’t mind spending it like income.
For your hypothesis to be true, the homeowner would have had to pay off a mortgage at some point and/or move down. If they made $1,000,000 on a $2,000,000 home and put the profits into a smaller home to avoid a mortgage, then your hypothesis makes sense. Empty nesters often do this when they claim their one-time capital gains exemption. There will also be some people doing this who sold at the peak and bought back in when prices dropped.
Posted by lee in irvine on 05/15/07 at 07:02 AM
Last summer there were no homes listed for less than 2005 prices in Irvine.
——-
Posted by squareround on 05/15/07 at 07:24 AM
Hi, Irvinerenter,
Can you help me find out something about this house:
916 N Redondo Ave, Manhattan Beach, CA 90266
It was only 310K in 1999. Now it was just sold at 1625K. How much down by the current owner? Thank you very much in advance.
Posted by Sue on 05/15/07 at 07:37 AM
Getting addicted to housing blogs, found a nice page with some interesting links to various housing blogs. Here is the URL.
http://www.freeerisa.com/Insight/200705si.asp?ref=patrick.net
Posted by WiseWithMoney on 05/15/07 at 08:03 AM
To compare owning vs renting in this case, we need to add two year interest on 940K to the loss as well. So the total loss is
94,0944 + 94,000 . 94K is the two years interest on 940K at 5%
Posted by buster on 05/15/07 at 08:58 AM
WiseWithMoney is right on the mark. Whilst some would say that, since there is no mortgage, there is no interest payment that would be wholly incorrect. What could that $940,000 cash purchase have earned, figured extremely conservatively? If they had rented and put the $940,000 into short term treasury bills (by the way, you can buy these direct for as little as $1,000 and a term as short as 91 days at www.treasurydirect.gov) they would have earned just over 5% (no California tax, by the way). So if they had rented they would have earned $47,000 in zero risk interest the first year and $49,000 the second year, total lost earnings $96,000 plus $24,000 in property tax they paid plus $94,000 sales loss plus the insurance and upkeep. Total loss is $214,000. I sure could rent a nice place for the $9,000 per month they spent…..
Posted by squareround on 05/15/07 at 09:02 AM
But you need consider the rent for 2 years too. Maybe it is 60k?
Posted by IrvineRenter on 05/15/07 at 09:27 AM
That was a great article, thank you.
Posted by crucialtaunt on 05/15/07 at 09:44 AM
I second that… Thanks Sue for the valuable link.
Posted by crucialtaunt on 05/15/07 at 09:48 AM
I have a hypothesis that this might have been a “move up” buyer who brought in significant equity from previous house sale(s), who might be justifying his potential loss on this sale as something that he did not have to begin with before his good fortune in making out by selling his previous properties.
Anyone care to blow holes into this hyposthesis?
Posted by fumbling on 05/15/07 at 10:42 AM
you can buy t-bills through schwab or tdameritrade or etrade, a lot safer and more convenient to buy $1million in tbills this way with one order to the broker than spread it among 10 different bank cds. with tbills you don’t need no stinkin’ FDIC insurance…:)
Posted by No_Such_Reality on 05/15/07 at 11:37 AM
He could just as easily spent the money on blow and hookers in Vegas, but he didn’t. Looking at other opportunity costs to calculate his unrealized loss is rather pointless.
More importantly, his loss has nothing to do with what we care about which is the price of the market. That is only 4.3% below his July 2005 purchase (provided it sells).
That price in itself appears to be a tad high compared to his neighbors selling the same time period and roughly same size. So much so that his current asking price may still be above what could be considered reasonable comps for that home in 7/‘05.
Posted by Mr Vincent on 05/15/07 at 11:38 AM
Pretty nice house. I think its worth the 2003 price of about 500k.
Neighbor has a nice view into your pool area . I guess you wont be able to do any skinny-dipping or have loud parties out there. Its a deal breaker for me…LOL. I see no way to fix this because the lot is so tight.
Posted by ochomehunter on 05/15/07 at 12:40 PM
Well, to truly assess the loss, why not add delta of monthly payments from what you would have paid while renting. This will add up quickly
Posted by lendingmaestro on 05/15/07 at 12:46 PM
Opportunity cost always needs to be considered. That’s why it makes sense sometimes for banks to unload REOs because they are non-performing assets. Of course we are speculating that he could have invested his money.
I concur with your hypothesis crucialtaunt. You’ve unearthed a major fuel-point in the housing bubble. Trading up. At some point, no matter how much you sell your home for there is a maximum home/mortgage you can afford. This will always cap the market.
Think of why companies have stock splits. A 50 dollar stock price is much more affordable than a 100 dollar stock. The cost is too high for some people. If a consumer can purchase an investment and earn the same ROI % as a high priced investment, they’ll choose the lower price.
In regards to that article it, I can’t stress enough the point I always try to make. These blow-hards on CNBC have no idea of the depth and bredth of the major faults in the lending industry. Unless you are immersed in the business on a daily basis, and are speaking to actual homeowners than you don’t see the true picture. Even the traders who buy and sell CDO’s and MBS don’t have a true grasp of what’s going on.
Posted by SmartMoney on 05/15/07 at 01:04 PM
I would walk over there and give them $600K cash right now if they would take it. It’s worth more than its 2003 price, but only a reasonable appreciation rate (5 or 6 percent per year), not a wild ridiculous one.
One argument you regularly hear from people trying to justify the housing price overvaluing is that Irvine is the greatest place in the world to live and everyone wants to live here. Ergo it is reasonable to expect high double digit price appreciations year after year. The fact of the matter, though, is that all the positives people point to about living here were positives before the run-up, and existed when the price appreciation was in the realms fo the sane five or more years ago. It is the negatives (pervasive fraud, toxic financing, etc.) that only became widespread late in the game.
Normal appreciation (from the prices pre-run-up) is entirely reasonable to expect, but the normal percentage based appreciation from what prices were just a few short years ago accounts for and includes all the premiums for the weather, schools, and desirability. That’s what I don’t get: why do people think the attractions of Irvine are fundamentally different than they were five or ten years ago?
Posted by IrvineRenter on 05/15/07 at 01:11 PM
“That’s what I don’t get: why do people think the attractions of Irvine are fundamentally different than they were five or ten years ago?”
Sometimes I wonder if people really believe this BS or if they just spout it to make themselves feel better? All the bullspin was true when the market was in the crapper in 1996. Southern California did not suddenly become the greatest place on earth.
Posted by lendingmaestro on 05/15/07 at 01:14 PM
Irvine hasn’t decreased in the quality of living. It’s more than likely increased which increases the demand to live there
Compare it to other surrounding areas, i.e. santa ana, fountain valley, anywhere in LA, that are becoming more of a shit-hole everyday.
Posted by k.o. on 05/16/07 at 12:30 PM
I could argue that the Irvine of yesteryear, aka about a decade ago, was a lot better than the Irvine today. No insane traffic down Culver during the workweek. Orange groves and their blossoms that permeating the air. More “regular” middle class families that didn’t have 3 beamers for 2 drivers glutting the streets. Less crime and murders (although our crime rate is still extremely low today).
In my opinion, in several different ways the quality of life in Irvine has DECREASED from years past.
Posted by SoCalwatcher on 05/17/07 at 06:04 AM
Excellent article!
Bubble Bloggers= Facts, not fluff
Economists= Cotton candy figures and theories
NAR,RE Agents and MTG Brokers= Full of shit.
Keep going, bloggers. I love the no frills insights and call-it-as-you-see-it attitude.
:D